Reading this link made me think of a passage I recently read in a book called The Black Swan, by Nassim Nicholas Taleb. He wrote a section talking about how to accumulate wealth. He said it is obviously better to build something once and sell millions of copies, than having to build the same thing over and over again. His example is an author who writes a book one time and then sells millions of copies compared with say a plumber who learns his skills and then has to repeat his effort time and time again.
So Carvana has to build physical structure for the cars. Even if show rooms are few, the inventory has to be stored somewhere. If you live within 100 miles of a showroom, Carvana will deliver the car of your choice to your front door. If after an hour of driving you don’t like it they will take it back. If after six days of driving you don’t like it a truck will return and take the car back. Sounds like a lot of moving pieces. But they have the ability to purchase your trade-in cheaply. (and of course your car has to be made showroom ready.) Lots of moving pieces, people and capital investment.
Cars are becoming more and more similar. With quality going higher and higher, cars are becoming a commodity. two years ago I bought a car via e-bay. I shopped Carvanna and visited local dealerships to test drive the cars I was interested in. In the end, I saved thousands of dollars buying a car off e-bay. I thought the Carvana process terrific, but in the end, my wallet won. My car was a Hyundai Genesis and was then and still is under new car warranty. Now, for a car not under warranty, perhaps the results would have been different.
As I understand it, Carvanna makes money three ways: selling the car, making a loan, and buying inventory (think trade-ins) cheaply.
So, having said all this, I am still thinking build once and selling millions of copies, as in software, has to produce higher margins than buying and selling individual cars, regardless of projected revenue growth.