CarMax 2014 Annual Report Download - page 10

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CarMax Auto Finance: CAF provides financing to qualified customers purchasing vehicles at CarMax. Because the
purchase of a vehicle is generally reliant on the consumer’s ability to obtain on-the-spot financing, it is important to
our business that financing be available to creditworthy customers. CAF offers financing solely to customers
purchasing vehicles at CarMax. CAF offers qualifying customers an array of competitive rates and terms, allowing
them to choose the one that best fits their needs. We believe CAF enables us to capture additional sales, profits and
cash flows while managing our reliance on third-party finance sources. After the effect of 3-day payoffs and vehicle
returns, CAF financed 41% of our retail vehicle unit sales in fiscal 2014. As of February 28, 2014, CAF serviced
approximately 532,000 customer accounts in its $7.18 billion portfolio of managed receivables.
Industry and Competition. CarMax Sales Operations: The U.S. used car marketplace is highly fragmented and
competitive. According to industry sources, as of December 31, 2013, there were approximately 17,900 franchised
automotive dealerships, which sell both new and used vehicles. In addition, used vehicles were sold by
approximately 37,000 independent used vehicle dealers, as well as millions of private individuals. Our primary
retail competitors are the franchised auto dealers, who sell the majority of late-model used vehicles. Independent
used car dealers predominantly sell older, higher mileage cars than we do. The number of franchised and
independent auto dealers has declined over the last decade, in large part due to manufacturers’ franchise and brand
terminations, as well as dealership closures caused by the stress of the recession. Despite this reduction in the
number of dealers, the automotive retail environment remains highly fragmented.
Based on industry data, there were approximately 39 million used cars sold in the U.S. in calendar year 2013, of
which approximately 22 million were estimated to be 0- to 10-year old vehicles. While we are the largest retailer of
used vehicles in the U.S., selling more than two times as many used vehicles as the next largest retailer in calendar
2013, we represented approximately 5% of the 0- to 10-year old used units sold in the markets in which we operate
and less than 3% of the total 0- to 10-year old used units sold nationwide. Over the last several years, competition
has been affected by the increasing use of Internet-based marketing for both used vehicles and vehicle financing.
We seek to distinguish ourselves from traditional dealerships through our consumer offer, sales approach and other
innovative operating strategies.
We believe that our principal competitive advantages in used vehicle retailing include our ability to provide a high
degree of customer satisfaction with the car-buying experience by virtue of our low, no-haggle prices and our
customer-friendly sales process; our breadth of selection of the most popular makes and models available both on
site and via our website, carmax.com; the quality of our vehicles; our proprietary information systems; CAF; and the
locations of our retail superstores. In addition, we believe our willingness to appraise and purchase a customer’s
vehicle, whether or not the customer is buying a car from us, provides us a competitive sourcing advantage for retail
vehicles. Our large volume of appraisal purchases supplies not only a large portion of our retail inventory, but also
provides the scale that enables us to conduct our own wholesale auctions to dispose of vehicles that don’t meet our
retail standards. Upon request by a customer, we will transfer virtually any used vehicle in our nationwide inventory
to a local superstore. Transfer fees may apply, depending on the distance the vehicle needs to travel. In fiscal 2014,
approximately 30% of our vehicles sold were transferred at customer request. Every vehicle we offer for sale is
CarMax Quality Certified and meets our stringent standards. We back every vehicle with a 5-day, money-back
guarantee and at least a 30-day limited warranty. We maintain an ability to offer or arrange customer financing with
competitive terms, and all financing is backed by our 3-day payoff offer. Additionally, we offer comprehensive and
competitively priced ESP and GAP products. We believe that we are competitive in all of these areas and that we
enjoy advantages over competitors that employ traditional high-pressure, negotiation-oriented sales techniques.
Our sales consultants play a significant role in ensuring a customer-friendly sales process. A sales consultant is paid
a commission, generally based on a fixed dollars-per-unit standard, thereby earning the same dollar sales
commission regardless of the gross profit on the vehicle being sold. In addition, sales consultants do not receive
commissions based on the number of credit approvals or the amount a customer finances. This pay structure aligns
our sales associates’ interests with those of our customers, in contrast to other dealerships where sales and finance
personnel may receive higher commissions for negotiating higher prices and interest rates or steering customers to
vehicles with higher gross profits.
In our wholesale auctions, we compete with other automotive auction houses. In contrast with the highly
fragmented used vehicle market, the automotive auction market has two primary competitors, Manheim, a
subsidiary of Cox Enterprises, and KAR Auction Services, Inc., representing an estimated 70% of the U.S. whole
car auction market. These competitors auction vehicles of all ages, while CarMax predominantly sells older, higher
mileage vehicles. We believe the principal competitive advantages of our wholesale auctions include our high
vehicle sales rate, our vehicle condition disclosures and arbitration policies, our broad geographic distribution and
our dealer-friendly practices. Because we own the cars that we auction, we generally sell more than 95% of the