CarMax 2014 Annual Report Download - page 13

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vehicle’s information sticker, on carmax.com and on applicable online classified sites on which they are listed. We
extend our no-haggle philosophy to every component of the vehicle transaction, including vehicle appraisal offers,
financing rates and ESP and GAP pricing.
Wholesale Auctions. Vehicles purchased through our in-store appraisal process that do not meet our retail standards
are sold through on-site wholesale auctions. As of February 28, 2014, wholesale auctions were conducted at 60 of
our 131 superstores and were generally held on a weekly or bi-weekly basis. Auction frequency at a given
superstore is determined by the number of vehicles to be auctioned, which depends on the number of stores in that
market and the consumer awareness of CarMax and our in-store appraisal offer. The typical wholesale vehicle is
approximately 10 years old and has more than 100,000 miles. Participants in CarMax auctions must be licensed
automobile dealers, who are required to register with our centralized auction support group. The majority of the
participants are independent automobile dealers. We provide condition disclosures on each vehicle, including those
for vehicles with major mechanical issues, possible frame or flood damage, branded titles, salvage history and
unknown true mileage. Professional, licensed auctioneers conduct our auctions. The average auction sales rate was
97% in fiscal 2014. Dealers pay a fee to us based on the sales price of the vehicles they purchase.
Extended Service Plans and Guaranteed Asset Protection. At the time of the sale, we offer the customer an ESP.
We sell these plans on behalf of unrelated third parties that are the primary obligors. We have no contractual
liability to the customer for claims under the service agreements. The ESPs we offer on all used vehicles provide
coverage up to 72 months (subject to mileage limitations) and include multiple mileage and deductible options,
depending on the vehicle odometer reading, make and model. We offer ESPs at competitive, fixed prices, which
take into consideration the historical repair record of the vehicle make and model, the mileage option selected and
the deductible chosen. All ESPs that we sell (other than manufacturer programs) have been designed to our
specifications and are administered by the third parties through private-label arrangements. Periodically, we may
receive additional commissions based upon the level of underwriting profits of the third parties who administer the
products. In fiscal 2014, more than 60% of the customers who purchased a used vehicle also purchased an ESP.
Our ESP customers have access to vehicle repair service at each CarMax store and at thousands of independent and
franchised service providers. We believe that the quality of the services provided by this network, as well as the
broad scope of our ESPs, helps promote customer satisfaction and loyalty, and thus increases the likelihood of repeat
and referral business.
We also offer GAP at the time of the sale. GAP is a product that will pay the difference between the customer’s
insurance settlement and the finance contract payoff amount on their vehicle in the case of a total loss or
unrecovered theft. We sell this product on behalf of an unrelated third party that is the primary obligor. GAP has
been designed to our specifications and is administered by the third party through a private-label arrangement. We
receive a commission from the administrator at the time of sale. In fiscal 2014, more than 25% of customers who
purchased a used vehicle also purchased GAP.
Reconditioning and Service. An integral part of our used car consumer offer is the renewal process used to make
sure every car meets our high standards before it can become a CarMax Quality Certified vehicle. This process
includes a comprehensive CarMax Quality Inspection of the engine and all major systems, including cooling, fuel,
drivetrain, transmission, electronics, suspension, brakes, steering, air conditioning and other equipment, as well as
the interior and exterior of the vehicle. Based on this quality inspection, we determine the reconditioning necessary
to bring the vehicle up to our quality standards. We perform most routine mechanical and minor body repairs in-
house; however, for some reconditioning services, we engage third parties specializing in those services. Many
superstores depend upon nearby, typically larger, superstores for reconditioning, which increases efficiency and
reduces overhead.
All CarMax used car superstores provide vehicle repair service, including repairs of vehicles covered by our ESPs.
We also provide factory-authorized service at all new car franchises. We have developed systems and procedures
that are intended to ensure that our retail repair service is conducted in the same customer-friendly and efficient
manner as our other operations.
We believe that the efficiency of our reconditioning and service operations is enhanced by our modern facilities, our
information systems and our technician training and development process. The training and development process
and our compensation programs are designed to increase the productivity of technicians, identify opportunities for
waste reduction and achieve high-quality repairs. Our information systems allow us to track repair history and
enable trend analysis, which guides our continuous improvement efforts.