“There hasn’t ever been a better-used car market, and Carvana failed to make money. They failed to truly improve.”
Steve is the author of Ridiculously Simple Sales Management and Assumptive Selling; as well as a respected automotive industry veteran and founder of Stauning Solutions Group – a leading training & consulting. Steve served in various automotive leadership roles, including as the Asbury Automotive Group’s Director of eCommerce, the Director of the Web Solutions Division of Reynolds & Reynolds, and as the General Manager of Dealer Web Services for Dominion’s Dealer Specialties.
The article cited in this episode is here:
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⏰Highlights:
00:00 Introduction
18:45 Digital Retailing
24:25 Carvana Dealerships?
32:21 ADESA
55:22 Next Five Years
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Full Transcript Below:
Herb Anderson:
What up? Welcome to another episode of the Dealer Talk Podcast. This is your host Herb Anderson. Thank you for tuning in. Charity, what is going on? How are you?
Charity Ann
What is up? Happy Podcast Day.
Herb Anderson:
Podcast? You know, I’m stoked for today’s episode. We’re going to be talking to Steve. Is it stouning
Charity Ann
I haven’t asked him specifically Stauning. That is what I said. We’ll ask him. S-T-A-U-N-I-N-G
Herb Anderson:
I think it’s Stouning. Well, Steve. I’m super excited to talk to this dude, so he wrote an article that we’re going a reference in the show notes back in 2017 about why Carvana will fail. But there’s a whole slew of things that he’s talking about in there that I’m just like super excited about. So Charity, thanks for finding him and thanks for inviting him and all that good stuff. I’m very, very, very, very, very excited.
Charity Ann
Every once in a while, Herb will get these random text messages for me with lots of exclamation points. This was one of them.
Herb Anderson:
Yeah.
Charity Ann
I was like, oh, my gosh, you have to read this article!
Herb Anderson:
There’s so much to unpack here, And it’s not so much that he predicted what was going to happen because it’s not. I mean. Obviously, the Covid thing is really what ramped them up and, at the same time, brought them down.
Charity Ann
But that’s why it’s so cool because he had no idea that Covid was going to happen, and it, like, Yeah,
Herb Anderson:
I’m excited. I’m just excited to see how much of his perspective is changed, if anything, and then he talks there about the peer-to-peer market, which I definitely want to have a conversation about that one because I think that there’s just a lot to unpack, so you should all be as excited as we are. So you know what? We’re so excited. So, excited we’re going to get into it right now. No more wait, Steve. Welcome to the show, sir. How are you doing?
Steve Stauning:
Hello.
Herb Anderson:
First, thank you so much for doing this. We really appreciate it. We kick things off with an intro. So tell us about you.
Steve Stauning:
So, I’m Steve stating; I’ve been in the car business for a number of years. I’ve been consulting and training with dealers, stealer groups, and OEMs since 2009. Prior to that, I was E-Commerce Director for the Asbury Automotive Group.
Herb Anderson:
Oh, right on, very cool. So are you so right now? Currently, you consult right now.
Steve Stauning:
Yes, so I have a number of regular clients, mostly consulting on the sales process but also on service processes and also digital marketing side.
Herb Anderson:
Very very excited. So I was, I was kind of prefacing our conversation with the article that you wrote back in 2017. I just kind of wanted to start with that again for those who haven’t read it. We do have a link in the show note, so go check it out to You can get some context. But fifty thousand views, Steve, has yours? Has your perspective changed from when you wrote that article? How did Covid impact that? If so, do you still hold to that the same thing?
Steve Stauning:
Yeah, I mean, the math doesn’t lie, and that was always their problem. Um, you know, back then, I think the article, I think dealers are taken home about a $132 net profit from every used car unit that they sold, and so, and that was in the data back then. Um, I think the only thing that’s changed is, I’m really surprised that they didn’t take better advantage of, you know, the stimulus checks that went out there, And the market hasn’t changed in the pricing, and you know we’re now getting out of the best-used car market in the history of automotive. I mean, there hasn’t ever been a better-used car market than there was in the last twenty-eight months or so, and Carvana failed to make money during those twenty-eight months Carvana failed to truly improve. I mean, I’ve done my best to dig through their financials, and you know, full disclosure, I’ve made money on the stock going up and made money on the stock going down. But you know they have so many related third-party transactions that I can’t really tell why they can’t take money to the bottom line. But as the article stated, you know, there were no efficiencies to pull out of use car sales in America. I mean, it is, in my opinion, and experience the used car market in America is the most efficient market there is. The. There are tens of thousands of buyers. There are millions of sellers, and these come together in millions of transactions every year in auctions B2B, B2C, and C2C. I mean, it’s, um. This wasn’t books. You know that Amazon was able to create some efficiencies around. Right? Where bookstore had to have three copies of, You know, a hundred thousand different books. You know. Amazon could just put them in a House and ship them cheaply. Um, and then I used Amazon because they were Carvana. It was called the Amazon of car dealers and has been, you know, a lot of times over the last six years or so. But you know Amazon benefited from no sales tax initially, and you know your local bookseller or Ace Hardware didn’t have that advantage. And so, you know, there was nothing that Carvana could take advantage of. They had to go by the same laws in every state that they did business in that required broker licenses or dealer licenses in every state. It’s just not the same kind of market as other goods. There’s a reason Amazon never got into selling cars, used or new, and you know, I mean, it’s a tough business to break into as Carvana is figured out.
Herb Anderson:
Going back to what you just said right now about the States and the regulation and all that stuff, do you think that it’s even possible to achieve the level that that they were trying that they were aiming for without having this incredible DMV network connection because it’s done differently in different states and all these things, I man. That’s why they have all these title problems. What are your thoughts on that aspect of it alone?
Steve Stauning:
Yeah, I mean the title problems. That’s of their own making. Every dealer in America sells, and every dealer I know in America sells and buys across state lines. And so you know, generally, it’s only three other states that I deal with, right? I happen to live in North Idaho. And so the dealers here deal with Washington, Oregon, Idaho, Montana, maybe Wyoming, maybe occasionally Utah. You know, but they and they deal across states.
Herb Anderson:
Woot! Woot! Utah. Charity lives in Utah.
Charity Ann
I was thinking only of Utah when you guys steal our customers.
Steve Stauning:
<laughs> the point is that you know your local mom-and-pop dealers figured out a way to make the title work. The title now changes, and acquiring titles and titling, vehicles and registering vehicles, And I think Carvana just cut corners there that they didn’t need to cut or shouldn’t have cut. So you know that’s part of their issues with regulation, and you know where they’re not able to comply, And it’s not as if the system, you know, it’s not like used cars are not like the franchise dealers system, the new car system where state laws protect the local dealers right, Just like you know, franchise laws can protect the local McDonald’s owner from McDonald’s corporation, And they, you know, the state franchise laws keep OEM’s at arm’s length, but there you know. There’s nothing to stop someone from creating a nationwide network of used car sellers and used car locations and selling across state lines. And in fact, dealers have been doing it for a long time. CarMax, you know, has been very successful. Lithia Motors has its Driveway division. They’ve been very successful. Sonic has Echo Park, but you know Carvana, I don’t think Carvana was ever built… I don’t want to use hyperbole here, but I don’t think they were ever built to make money. I think they were built to sell stock, and you know, I don’t know that that’s in their secret corporate charter or anything like that, but you know it was never. Um, the math on used cars just doesn’t there’s. There are not those efficiencies. And they built in their own inefficiencies. Do you know what their initial plan was and what they would do? They would deliver vehicles five hundred miles away without a charge. And they built these glass towers that. Now some people say those were silly. I think those were pretty good market ploys because every time they built, every time they built a glass tower, every new station in the city would cover it, and they get you to know the free marketing, free local advertising, but that, but you know, car dealers may have some inefficiencies if you will work with the salesperson, and you know the cost of that, but they also don’t have the inefficiencies of having to get all of their inventory from virtually all of their inventory from outside their trade-ins. And you know, in Carvana, it was just I tried to make it pencil, and it just wasn’t going to, And I think that the postmortem for Carvana because I think the Carvana brand will be around a long time after the shareholders wiped out, and I believe they will be.
Herb Anderson:
Yeah, from a marketing standpoint. Do you think you think bankruptcy?
Steve Stauning:
Um, I think the post mort. Yeah, I don’t. I mean, we’re looking at, gosh, we will hear about it, their earnings, I think, or next week, but you know they’re approaching eight billion dollars in debt in a rising, you know, in a rising interest rate environment. I don’t know that they could borrow anymore because they already have a lot of senior debt holders, And so the next loans that they get, those people won’t be senior. I think the bonds are trading at about fifty-six cents on the dollar right now, so that means that the bond market is saying there’s a real chance of default on these bonds, and those bonds are going to get paid before anybody. And you know, other than Ally, probably Ally getting the inventory that they’ve loaned on, Um. And so I think bankruptcy is the only way forward but a post-bankruptcy. You know, I see Carvana with Uh, you know, with lots with like CarMax, and you know, continuing to beat the dealer. You know, the traditional dealer down in their marketing. I think that plays with consumers, and you know, but, but the data is pretty clear about nine out of ten buyers, even today, say that the test drive was the most influential research in their decision, and so even given me a seven day free, you know test drive, there’s always complications with turning something back in.
Charity Ann
Well, I always, I always think that that’s funny when people like Amazon. Well, you can try it for seven days, and then you can send it back And then I would love to see the statistics on the average amount of people who actually send things back. Are there like? Like well of us, Twenty-seven bucks are not worth it To send it back. I think that that logic plays out in the same way on a larger scale with that kind of. Oh, If I, if I turned it back in, then I have to deal with all of this stuff work, I could just keep the car. It wasn’t like it was that bad. Like.
Steve Stauning:
And think about things that would turn you off in a test drive; right, you would be turned off by. You know the way the lumbar felt, or you know the way the seat belt came across your body, or the way your hands felt on the steering wheel or the dash, the way it’s laid out. Things like that. You might say Yeah, this isn’t the car for me, and move on, major. You know, major issues. If I got a car from Carvana and had a major issue, Yeah, I’m sending it back, no problem. But if the seats are a little uncomfortable, you’re right, An why would I? It’s a big hustle, and so I think people end up accepting things that they’re not completely happy with.
Herb Anderson:
I talked on the show that I always said that it was too soon to determine that because it’s not whether a customer will buy the car once. I think the novelty of that is attractive enough to get people to use it just to see what that experience is like. But is that person going to buy all their cars from that point forward through that process? Because that’s really what determines success, right if I do it once and never do it again? How successful is it, really?
Steve Stauning:
Right? Yeah, and that was, and that was one of the inefficiencies I pointed out about Carvana. As you know, without physical locations that are on a major now motor mile, they’re out of people’s consideration set unless they continue to spend heavily on marketing.
Herb Anderson:
Right? That’s a good point.
Charity Ann
Well, and then if they make the entire process easier for the customer, like, and then that goes back to the titling, and Herb and I talked about this on a different episode, but I think if you, if you make it ridiculously convenient, then people go back to it over and over again Like we were just talking about. Buy-here-pay- here. People go back to buy-here-pay-here because it’s what they know. It’s what they’re comfortable with. Not because they necessarily need it. Carvana could have played into that so well, but then they made it so much more difficult with the titling issues, and then they just made customers angry. And then they got that reputation, and that’s when people aren’t going to come back to you.
Steve Stauning:
That’s a great point, and you know, if you think, if you consider Carvana a say, Zappos, and I hate to again compare them to anything Amazon. But you know Zappos was the first one that knew you. Now You don’t like to choose. Send them back, you know, and just made it so stupidly easy that people would constantly buy things that. You know. If you had asked me before Zappos, would you ever buy pair of shoes online? I would say well, no way I got to try him, right. Um, and yeah, they. It’s interesting that you mentioned that because it does have to be so stupidly easy and so convenient. Yeah, that’s the only way I’ll come back. You know, loyalty and automotive have really it was declining pre-pandemic, But the chip shortage is nothing to people who were lifelong Silverado buyers and are now driving a Ram or an f. one fifty, or vice versa. And, um, it really shook up the loyalty and automotive. But that also doesn’t necessarily play into Carvana Um benefit because Carvana is going to deal with that same sort of issue right, because there’ll be a new Carvana when I’m ready to buy in two years, and every dealer in America you can buy online, so I mean that’s you know. Their first advantage, if you will, is gone. I don’t think they should spend a lot to advertise that, other than how it affects the local market. You know,
Herb Anderson:
Let’s talk about that because I’m curious about your perspective, so I started on the service side, so I made it all the way to service manager before I went on to the vendor side of things, and let’s see, I left the store in 2008. So at that time, we were selling cars online like it wasn’t like we weren’t doing these things. I think the problem, and not even the problem, Dealers have never promoted that service because they don’t want to. They want the customer to come in. But if any dealer can go out there and promote like buy online, you know what I mean. Like we have all these widgets, as you mentioned in your article back then, like the auto-fi’s and the roadsters, or whatever that can allow the customer to do their transaction online, right? The problem with those widgets is that they claim to be a Carvana-esque type of deal, And they’re not because they don’t deliver the customer to you to your house, but you can do everything else on there, and then you just shift the car to the customer. That’s not new. Like dealers have been doing that for years, but they don’t want to promote that message. They don’t spend money advertising that. I mean, what are your thoughts?
Steve Stauning:
I think Rick Riker, early on with the autofi tool, did a great job with telling his market that you can you know you can buy from your couch or something like that, You know, and the ads had somebody in their pajamas and hundred percent transparent a hundred percent online. All of this and that message actually drove me walking because, Oh, this is somebody I can trust. I could buy a hundred percent online, which I don’t want to do that, but I know they’re hundred percent transparent, and so I can go on down there, and I think that’s the extent of it. You know, the Thing that Carvana sort of screwed up. A lot of people have been writing their obituaries and talking about all these things we learn from Carvana.
Herb Anderson:
I love that.
Steve Stauning:
Um, we didn’t learn anything from Carvana. Know the things that they allege that we learned. You know we’ve already known and things like buying online. I mean, we’ve been doing it for more than twenty years. You could buy a hundred percent online. But what Carvana did to the industry was it accelerated this rush to online buying. And that’s, I think, unfortunate because I think the OEMs. Most of them put way too much focus On online buying with their digital retailing versus using digital retailing to create a great customer experience In-store. You know where I’ve seen real successes with digital retailing. It’s where they have a tablet. You know, the salesperson or product specials as a tablet. To walk the customer through and turn the tablet around. Hand it to the customer. Let them self-select, and F& I add on Self-select. You know, accessories for their vehicle, things like that, and just a Quicker process in general, And you know, we were already going there. The Problem with Carvana, and I think you know a lot to do with a pandemic, is that everybody rushed to push the focus to a hundred percent online buying, which appeals to a small percentage of people, but not enough. Not enough to warrant the investment. I think
Herb Anderson:
Yeah, that’s the other thing that I kind of mentioned here. If really, if the consumers really wanted that, we would have woken up during Covid, and fifty percent of the business was being done that way. It’s not like it would have been gradual. No, like literally fifty percent of the business overnight would have been done that way. So
Steve Stauning:
And by the way, my dealers, who sold a lot, you know, quoted unquote a lot online. Uh, during Covid, those were all just out-of-state deals. They happened to be the only dealer with that new charger or that only dealer with that new Ford Explorer.
Herb Anderson:
Right.
Steve Stauning:
And you know, maybe they were just a few thousand above MSRP, so I’m willing to go get it. You know, five hundred miles or a thousand miles away. Because, because of that, but when inventory normalizes, Why? Why would you Hop across state lines for a vehicle?
Charity Ann
Well, that’s a really good point Because a lot of times when you’re talking to customers on the I came up through business development, so most of my conversations with customers are on the phone, but the conversation is, Hey, I’m not around here, but you’ve got exactly what I want. Um, color leather. All of the things, but there’s one just like it that doesn’t have the color that. I want this down here at the dealership, so I’m going to go test drive that And decide if it’s want is what I want, and anybody in knows that it’s game over as soon as they get in front of a good sales guy. You know. It’s the same thing if it’s if there’s anything even remotely close to what you want nearby versus any inconvenience of getting it shipped to yourself. Any inconvenience at all. It has to be easier than walking into the dealership next door.
Herb Anderson:
Yeah, but you’re already severe disadvantage because of shipping time; you’re not going to have that car immediately.
Charity Ann
Right
Herb Anderson:
It’s going to take you. I don’t know, seven days or so to get it, and by that point, it’s like I’m really going to sit here and wait seven days to get my new car.
Charity Ann
Right? Well, so here’s another. Herb and I were talking, I want these headphones really bad, and I went down to Best Buy, and they can get them for me in a week, whereas I can go on Amazon and get him in two days. Way more convenient. The same price is just more convenient.
Steve Stauning:
Yep,
Herb Anderson:
I was going to say where do you see Vroom in all of this? Because nobody’s talking about them.
Steve Stauning:
Yeah, Vroom has been a disappointment for me. You know, they bought Texas Direct Auto years ago, and Texas Direct Auto was the biggest Ebay seller. That’s where they started. I think they eventually got up to three thousand cars a month. I know it was more than twenty-five hundred a month. From a single location, They bought the old champion Cheval. In the Houston area, you know where they might have had five hundred cars on the ground at any one time, and I really thought Vroom bought them for their excellent recon procedures, right? They could get a car through recon faster than anybody, and their in-store processes that you know was one price store which everybody should be unused. Silly to negotiate unused today, but you know it’s the one price store that has really solid processes that I don’t know what the average salesperson is, and they’re really Salespeople with the average salesperson sells a month, but I think it’s close to sixty. I don’t know what it is today, but pre-Vroom, and it’s just, you know, looking at their results quarter after quarter there, they’re just chasing Carvana, And it’s you. I just don’t think they’re going to stick around, And it’s too bad because I think that the right, and it’s not gonna. It’s not sixty to Wall street, But I think the right X is, you know, a Carvana, or you know, Vroom shift, whoever, with a big physical location, so people are willing to drive to right, one big one in Denver, one big one in Salt Lake, one big one in Seattle are, and things like that, and you know six hundred seven hundred units on the ground, which is very car max, but also service, but the basic services right. And you need service there because The recon is, you know, you can have huge recon facilities at the ADESA at the ADESA plants that you bought. But what, are you going to ship everything to Adessa and then ship everything back? You’re going to add four days minimum to the recon to send it all in one centralized. Okay, it’s just not going to work. Everything you know should be done regionally, and you know, four or five regional recon centers minimum. I think that’s the Next model. And if you know if I was running the new car bona, that’s the direction I’d take it.
Herb Anderson:
Right on. So you said something interesting that I want to expand on, and you talked about it. So you think Carvana dealerships post-bankruptcy would be the way to go? That be interesting?
Steve Stauning:
Yeah, yeah, because, as I, as I wrote in some article, you know, Um. In the words of Dr. Allen Grant, T-Rex doesn’t want to be fed, T-Rex wants to hunt, and Um, you know Carvana, A sold a lot of cars, but most of them were special finance customers. People don’t like the car buying process, but they love the car shopping process, And you know, you look at different things, Seeing them side by side, all of that And yeah, that’s where I think you know people can poke at CarMax all they want, and right now use cars are a little tough. I don’t know if you saw alternations results that came out this morning, but fourth-quarter Auto Nation, and I’m going to be wrong on the exact numbers, but you know the new car, new car Gross was over five thousand, Almost $6,000 used car gross, I think it was about $1800, and which is just wacke, If you think pre pandemic right, Those you know, New car gross was negative in some instances.
Herb Anderson:
Yeah, that’s true.
Steve Stauning:
But if you use a car, Gross was probably around eighteen hundred. Probably where it is now, and I think that’s where I think that’s, that’s where Carvana is going to struggle this year. The stock price is probably as high as it’s going to be this year, But they’re not going to go out of business, and you know they’re going to manage through that period. And when new car inventory is normalized, then that means the used cars will be normalized, and CarMax will go back to being really efficient. You know, not sexy, but making money on every deal and getting great reviews.
Herb Anderson:
What about ADESA? How does ADESA play into all this? Do you think that that was a smart move or a dumb move? I say it’s the dumbest smartest Thing that Carvana did.
Steve Stauning:
So that’s probably the way to put it. They, uh, uh, it feels like, and I don’t know, but it feels like they did it to show Wall Street how they’re going to gain all these efficiencies that they’re never going to gain right and short of saving $600 auction fee, or whatever the auction fee is, there are no real efficiencies. The ADESA facility, There’s a reason Kar was getting out of the physical option business. It’s not profitable compared to all the online options. Why do you need it? Why does a dealer need to take their vehicle to a physical option? They can still deal with Manheim by keeping it at their dealership, and it’s not shipped to Manheim to the dealership or from dealer to dealer. Um, But for them to be so tone deaf, to not realize there aren’t deals, there aren’t any dealers, Any smart dealers who are going to send their vehicles to an adept action If it’s owned by Carvana. Is it just not going to happen, right? I mean, I’m only going to do it because I happen to be next door to an adept action or I’m desperate. And then, on top of that, you know, we watch Carvana at the actions now. And where are they buying and selling all of theirs? Or do you know where they are selling all of their auction vehicles, Manheim, where they are buying all their action vehicles? Manheim, I mean, that’s what I’m saying, And M., and so I don’t know why they bought a Des. I really don’t. I just scratch my head.
Herb Anderson:
I think. I think there were two things that I think they were thinking about logistics. I think their logistics was the main push there, and I also think that they thought that. Well, I don’t know if they thought it this way through. But if I was, you know, running it. I would have thought about the assets that come with it. You know what I mean because there’s something there. There’s something tangible. Um, and that’s the Thing
Steve Stauning:
Is it three billion dollars of tangible? Though you know that’s the
Herb Anderson:
Right that hat and that, that’s that. That’s what I don’t know, and I don’t understand. You brought up a great point that I don’t hear a lot of people talking about, And that’s that one of the things that Covid has done for the active processes that taught people how to buy online, where, as you had, a lot of people in the industry that were used to going to the auction and being there physically and they just want, weren’t adapting to the online version. Everybody now is an expert. Well, I don’t. I don’t want to say that, but everybody now is buying cars online, and they’re comfortable with Cars online, and they were forced to do that. So I think that that’s been one of the major shifts. That’s a pre or post covid. Um, I don’t know the advantage, in my opinion, to the industry. So or positive, rather, so, um, but yeah, man, I don’t know. That was weird. That was a weird deal, for sure. The other thing that comes to mind with that is, you mean you talked about their debt ratio? Mathematically speaking, man, it doesn’t make sense like I don’t understand how they haven’t filed already. Do you know what I mean? Like seriously, how are they? How are they? What’s the play here? I don’t get it.
Steve Stauning:
Yes, So you know they’re selling off everything that they have value. You know to pay operating expenses. They’ve laid off a couple of thousand, a few thousand folks, at least, but I think we’re going to find in next week’s earnings just a guest that knows they’re still. They still have negative free cash flow, meaning that they’re not even making enough money to pay expenses today. Everything, everything continued to be negative. I’m not talking about being big profitable. I’m talking about making enough money to have, you know, positive cash flow.
Herb Anderson:
Cover expenses.
Steve Stauning:
Yeah, and so I don’t know. There’s, and I again. I’ve dug through their financials, and they claim to have, I think, two billion dollars in assets that they can sell. I guess they’re talking about the adept Locations, so they could do a sale-leaseback on that. The problem with that and they’ve done the sale-leaseback on all of their towers. They don’t own those towers anymore and haven’t for as long as I know. The problem with the sale-leaseback today is who’s the buyer of the ADESA locations?
Herb Anderson:
Right,
Steve Stauning:
And what are they thinking they’re going to do with them when Carvanaa goes away? Because what they have to think about Is the value of the ADESA Locations. Not how much I can lease them back to Carvana for because I can’t count on Carvana still being around any year. Whom the heck is going to pay me to lease these
Herb Anderson:
Who was going to take that risk?
Steve Stauning:
Yeah, I mean, these are. I mean, these are brownfields. Almost. I mean, I can’t imagine they’re not EPA. You know, the EPA hasn’t shut down a lot of those sites. The ones that I’m familiar with have just seen terrible from an environmental stamp point. And so again, I mean these are not. This is not a Walmart store that goes Out of business in, you know, you know, the suburb of Houston or something? Um, these are, you know, dirty car facilities that have been reckoning vehicles for years painting. You know, oil. I mean, just all of that stuff that I’d never want to deal with.
Herb Anderson:
Yeah, that’s a good point. Do you first see, or can you can? Can you talk about easy? Take over? Was there anybody like I was thinking? Like, maybe an auto nation or a Lithia. Do you think that they would? Would they try to get that business? Is it worth it? Is there a play there for them
Steve Stauning:
So the rumor that I heard from someone who seems to have insight was that eBay was sniffing around and that that’s why Carvana created their poison pill. That doesn’t allow anybody to get If you get more than 5% of the stock. Now if you don’t already have more than five and you get more than 5%, and I’m, you know, I’m explaining it poorly. People need to go read for themselves, but you cannot take the tax loss carryover so, but that does, in effect, stop someone from coming in and buying up more than 5% of the shares, kicking out the existing management team and trying to take it over, Um prebankruptcy. I don’t think it makes sense for anybody to look at them because you’re going to. You’re going to gobble up seven point four billion minimum in debt. You know that you’re gonna be servicing. What could you do if you went out and borrowed seven point four billion? I mean, it wouldn’t cost you a third of that to create what Carvana is today, and you might say well, Steve, you don’t have the name recognition. Well, you know Carvana, only you know. Their name recognition is only as good as the last time I saw Carvona Commercial or Se Carvona Add, And you know, as Charity has said, that you know there.
Herb Anderson:
Right?
Steve Stauning:
Their name recognition doesn’t mean a lot because people are. Have you read the reviews? Right?
Herb Anderson:
Yeah
Steve Stauning:
It would just seem odd to me that anybody would take that debt on. I wrote another article about Carvana back six years ago, maybe five years ago. That I wrote that they’re worth every bit of two billion dollars, and I gave the math to defend why they’re worth two billion dollars. At the time, they were worth the stock. The market cap was six billion, and of course, now, today, the market cap. I don’t know what it was today, but it’s well below two billion, And that includes the ADESA purchase, so technically, they should be worth every bit of four billion, right, but um, they’re not worth 7.4 billion. That’s for sure. And that’s the debt you’d have to eat.
Herb Anderson:
Yeah, it’s interesting. I kind of put a prediction out there about three weeks ago, saying that I foresaw when their next quarter least comes out that, they’re going to announce it. It’s just not. I don’t know, man, I don’t see it. I don’t see how they’re going. A, because they can’t borrow money, they can’t sell assets to make up the difference, so it’s just the next logical step. I think it’s inevitable.
Steve Stauning:
It is the unknown. The unknown is the related third-party transactions, So it’s no secret that the CEO’s father, who’s also the biggest shareholder of Carvana, Ernie Garcia the second owns Drive time. That was the former Ugly Duckling was taken into bankruptcy, or Ernie Garcia bought it up for pennies on the dollar, and drive time has been buying and selling cars from Carvana from the very beginning. Drive time, from my understanding, does the recon Most of the recon for Carvana, And so Carvana pays drive time for that wise service. Um, I think Carvana can keep going for as long as that third-party transaction. Those third-party transactions are profitable to the other related third parties, Because you know, if I can buy and sell and I’m making money over here, right? We’ll try to now. Maybe I’ll buy and sell. Maybe I’ll buy for a little higher from you, Carvana, Ana, and sell to you a little cheaper, Carvana, because I want you to keep going right because it’s still profitable for me the minute those third-party transactions are no longer profitable for the third parties. I think that’s when the, you know, chapter seven or eleven or whatever it is comes out.
Herb Anderson:
That they’re going to do, that’s a good point that you bring up the drive time connection there. Because no matter what these, both of the arcs are going to walk away with cash, right? So yeah, I like to fail that way too, man.
Steve Stauning:
Oh, yeah, they’re already successful. Yeah, that’s somebody you know. Hey, they each have more than a couple of billion dollars. I believe that they’ve already been taken off the table from this. Somebody called them a failure on LinkedIn or something, And I wrote back to them. I said, “Well, if I could take away two billion dollars, yes.”
Charity Ann
I volunteer!
Steve Stauning:
They’ve been extremely successful. That was, and I don’t think that was ever the question. They had very little risk, and Wall Street was pre-pandemic and was overvaluing them; Adam Jonas, one of the craziest analysts Morgan Stanley analysts know, had a four and fifty dollar price target on Carvana. At some point, it still never turned a dime of profit, and a guy that’s supposed to be an analyst and automotive. Yeah, and again, because I can’t understand all their financials. I’d argue that if we got a frantic accountant in there, we find out they didn’t make money that quarter either,
Herb Anderson:
Yeah, right; kind of moving things along here. There is another topic that I wanted to cover with you, and this is one that I personally am dying to get your perspective on, and that is peer-to-peer. Let me expand on that a little bit. Yes, there are a bunch of peer-to-peer websites out there, but they’re awful. The experience is terrible. Don’t you think that there is room for somebody that s not focused on? I mean the issue because, to your point, I agree with you that the markets are already as, probably, as efficient as it’s going to get. But don’t you think that there is an opportunity for somebody to offer a peer-to-peer experience that is superior, and therefore be able to win on that, because still, I mean, the math is 45% or so of all transactions happened consumer to consumer, But where do they go to do this? You know what I mean. What are your thoughts?
Steve Stauning:
Yeah, well, so you bring up a great point because that used to be eBay, and then that doesn’t get enough traffic. And so unless I have a really cool classic car, I’m not going to be able to sell it on eBay. Then it was Craigslist, and frankly, I don’t want to be killed. And so now I’m not going to sell my Craigslist, plus Craigslist now charges $5. And that’s too much for some people to list their car. So then it moved to the marketplace, and the latest from people trying to sell on the marketplace is unbelievably bad.
Herb Anderson:
Right?
Steve Stauning:
It’s people who don’t want to sell anything on marketplace, especially a car. Um, And then you know people are so lazy, and I’m not talking about the seller now; I’m talking about the buyer. Now, If you’ve ever listed anything on the marketplace, we’re trying to buy a marketplace because I guess you know their sellers are lazy. I respond right; I mean, we get on dealers for taking more than an hour to respond to a lead about responding to, you know, I want to buy your car within a week or is it still available, and I respond right away. Yes, and then the Guy ghosts me for the next two weeks, and then he’s mad because I didn’t hold it for him or something; so, you’re right. It’s a. It’s a crappy consumer experience. I see value there, but I remember Beepi being peer-to-peer. In that article, I wrote about They were going to be peer-to-peer. They went through a hundred and fifty million dollars before they went bankrupt.
Herb Anderson:
But they were, weren’t they? That was when I read that I was. I was a little. My recollection of Beepi was that they were doing subscription, and it was like swap-a-lease and stuff like that, or was that after
Steve Stauning:
Oh no, Now in the end, yea, in the end when they realized they couldn’t do anything right with their other early Stuff, But they, now so they would, they would facilitate the sale between the buyer and the seller. The problem is that the buyer had, you know, seven day or nine-day guarantee or whatever. And so just logistically think about that. I’m going to go buy the vehicle from this Guy. We’re actually never going to take ownership as Beepi, But then I’m going to sell it to this Guy, but this Guy has nine days or seven days to tell me he doesn’t want it. Well, the original seller doesn’t want it back. It just didn’t. It didn’t pencil out. I think the peer-to-peer could work if it were on a CarGurus, cars.com AutoTrader type thing, But it would require that used car classified to become brokers and to do all Of the heavy lifting that it takes to benefit from the peer-to-peer fighting insurance.
Herb Anderson:
I imagine a peer-to-peer where it’s not focused on again. We’re not trying to solve the issue in the market. What we’re trying to do is facilitate the experience for people who want to sell directly to the consumer, right? So I don’t know. You get your photos and videos and stuff from the customer, and then you yourself and your company. What it? What does it mean? It does all the marketing for you, and it makes it pretty or whatever, and the customer never touches anything, And then they post the ad Or something like that. Where it’s, it’s more focused on the experience.
Steve Stauning:
Yeah, car lots–CarLOTZ did that, and I don’t know if there’s still around. They might have gotten bought up by Shift or Vroom or one of them, but you know they were. They were basically where you could part, you know, park a car at the gas station with for sale sign on its thing. But you know they would. They would take a percentage of the sale. You could. The car was, you know, posted at CarLotz. I don’t know if you could still drive it around. There was never a CarLotz in my market, So I know. I really did a complete deep dive on them. I think there’s money to be made there. I think the problem is that if you’re looking to, you know, go with a venture capital out. Those guys want carvana-like returns with their investments, and I just don’t again. I don’t know that there are enough efficiencies to squeeze out to get the VCs excited. It doesn’t mean I couldn’t, you know. And if they got in and got out at the right times, the VCs could make them, just as many of them did with Carvana. I’m sure.
Herb Anderson:
Yeah, man, I don’t know. I think that that’s the scenario. That is very interesting to me because I see a tremendous amount of deficiencies with the available platforms today, and I think that to your point in your article, Um, if you’re trying to get efficiencies, you’re probably during Covid, but that’s not a realistic state of existing. And when things normalized, you’re going to be back to the same profitability issue. And how much more efficient can you get? But certainly, I mean this. There’s no question in my mind that on the experience side of things, what’s out there for customers for peer-to-peer is just awful, so yeah, um, it would be exciting to see how
Charity Ann
Yeah,
Herb Anderson:
Things how things evolve. You know, but time will tell. Time will tell, Steve. Thank you so much for doing this, man. I really appreciate it. I really enjoyed your article and a lot of your perspectives, and the conversation has been great. There is one question that we ask everybody that comes on the show. But before I ask you what I want, I have one last question for you regarding this whole Carvana, this whole experience. So I’m not a big believer that consumers are ready to transact a hundred percent online. Yet you know I’m forty, and I’ve asked. I’ve interviewed my group of friends for years now on this topic, and I’ve yet to want to have one person in my age group more than my circle. Tell me that they would want to buy that car online. Now one person. Well, I digressed last year one person. But they bought a luxury car, and that’s kind of like a different, like Ferrari. So it’s a kind of a different experience, But other than that, not a single person has ever expressed it. Oh, yeah, I want to do that, but I, Eve, that it’s the future.
Charity Ann
I have a question. Okay, finish, and then I have a question.
Herb Anderson:
Okay, so, um, I lose my train of thought. So, I do believe it’s the future. I think, eventually, we will get that. I think that my kids, genera, my kid’s generation will, because they grew up in the Amazon age and everything is done online and press the button and get the stuff. How do you think that how we’re going to get from where we are today? And if we do, and everybody selling the car online like every dealership, then what’s the? Do you know? What’s the advantage? There is it. Even At that point,
Steve Stauning:
Uh, Well, I mean, I believe it is because the race to the bottom can only go so far, right? And so we get you to know we get. We’ll get price stabilization at some point because if I’m, you know, I’m the one that’s always selling below my cost, Right And there are those folks pre-covid that we’re doing that was making it up in getting trades. They were making it up in finance. They were making it in service. Yeah, and in the box, but the but Where they? But if it’s online and the person doesn’t have a trade, and the person is going to pay cash right, I can’t continue to sell below cost so that you’ll find it, you’ll find its own level, so I’m not concerned about that. You know, when we get there is another story. You know. CDK puts the number at 9% that got fully online. Um, in 2021. And so you? now? Here’s to your point. Why didn’t 50% right buy online? The millennials now make up the plurality of car buyers. Gen-Z’s buying cars now as well. You know. They’re of that age. And so the fact that we’re not in above double digits today tells me that I don’t know. You know if we ever will get not get to double digits, but get to 51%. Let’s say most of the cars sold a hundred percent online, Because again, the shopping experience is, you know, some people kind of enjoy that, and you know, we’ve all gone ahead.
Charity Ann
This goes to my question. Um, Because we talk about a hundred percent online. So you’ve got one friend that bought a Ferrari online? Did they buy it? Did they? Did they have somebody go look at the car for them, Or did they just sit unseen? I’ll pick that one. Click the button and have it delivered to me because I think that that’s crucial. He did. Who bought it just without seeing it, right?
Herb Anderson:
My friend bought it like that. Yeah, and I think luxury cars People that buy luxury cars are a different breed like they don’t
Charity Ann
But my point is that a hundred percent online implies that you just pushed a button, and the car shows up. There was. No. I’m going to have a virtual experience where I do a virtual test drive. I’m going to have. There’s going to be a point at which you experience that vehicle-specific vehicle, And then that’s to Steve’s point. That’s what customers want. They want to be able to experience the vehicle before they just click a button and buy it. You know, and that is the nuance. I think that we miss a lot of time. We just want to be able to send them the car and be like, Hey, peace, So you have a great day, But they want to be able to touch it and feel it. And if they can’t touch it and feel it, then they want somebody that they trust to go out and touch it and feel it and then tell them it was worth it. And if they can’t do that, then you get like the virtual the V R experience, But all of those things are them experiencing the vehicle Before they transact And that that nuance, I think is, that’s the part where I think that we fail to deliver with all of our online retailing tools and everything? That part is right; There is the part that we’re failing to deliver.
Herb Anderson:
And we never will be able to do that a hundred percent virtually because even if it’s a virtual test drive. You’re not driving the car like you’re not actually experiencing it in real life.
Charity Ann
Right, And that’s why not going to get people at 51% purchasing vehicles online one hundred percent because they can’t. If you can’t offer that, then,
Steve Stauning:
And you know I see a future probably long after I’m gone, but you know, twenty. Do you know what are new car sales going to look like? In twenty years, you can talk about five but think about twenty. You know. It feels to me like we’ll have will feel like the auto show, where it will be. One location may be a dead mall. Because who’s going to need them in twenty years, every and one of every make and model new car makes and model in this small. Um, I don’t get to test drive. Just like if I go to a Tesla store right, I don’t get to test drive, but I get to sit in them. I get to learn all about them. You know, there are some interactive displays and things. There are people who can explain things to me, and then I can order them from there. And, depending on my zip code, that local dealer will be the one that delivers it to me and services and all that for me, you know, So I mean, can see that
Herb Anderson:
I experienced something like that. I was in Turkey last year for business invocation, and I did a speaking sort of a deal, and at a group of Fiat dealers, and there, like I walked through this dealership. Where were they? The conference was at, and there were no used cars, and I was like due, This is weird, and they only had. It was a boutique style. Only new cars. No use cars. They close at four o’clock. Every day people come in just to like, look at brokers, or ask questions about the cars. And that’s it. That’s how. That’s how they do their deal right, And the cars are ordered online, and you choose the location where you want to pick it up, and they just send you the car. So and the thing that got my attention about that was like the same guys that are making those decisions, and in other parts of the world, are the same guys that are making the decisions for America, right? So eventually, that stuff is going to bleed into the way that things are structured here. How long will that take? I don’t know but for sure,
Charity Ann
Yeah, but I think that you’re missing car culture. So one of my, one of my really, really good friends is from South Africa, and she is absolutely fascinated with the relationship between cars and Americans, and we don’t want to. It’s unless they’re all as like an iPhone. And you know what you’re getting, no matter if you order it online, Not because they’re all the same thing. Um, we want to be able to, like, have a relationship with our vehicle. We want to be able to have an emotional attachment to it, And that means that we want more than just going in and picking one out and driving away, And I mean even to break down my own iPhone Thing, We still have an emotional, relationship with our phones, and they play. Apple plays off that all the time when they have their once-a-year conference that we all wait for so we can hear about what the new cool thing is. Those are all emotional reactions. You can’t take that away.
Herb Anderson:
But you’re not. You’re still getting that you’re getting that on the new side of the experience.
Charity Ann
In the American culture at I don’t think you can’t sterilize that.
Herb Anderson:
But you’re not. You’re getting that on the new side of the experience is the used car portion, where that’s where that plays differently. But you know the new car. The new car like
Steve Stauning:
You know, And I would let you know. I buy into the relationship with Americans in their cars until I go to a wall. I mean, night; there is no way that more than one out of ten has a relationship with their car because nine out of ten of those cars are getting me from point eight to point B. I’m not talking about breaking down. I’m just talking. I’m talking about, you know, a seven-year-old Minivan, under twenty thousand miles on it. A relationship with that car, right?
Herb Anderson:
That’s a good point.
Steve Stauning:
I mean, So, have you noticed every mid-size SUV Take? Take the badging off every mid-size SUV ever made in the last ten years, challenge yourself to tell me, and forget the year. Just tell me what it is. Yeah, tell me what the make is you do to try to pick the model. Give me to make, But God, you imagine being able to go year make model right. We can look at a ’64 Buick Skylark and say, That’s a ’64 Buick Skylark, right, and it’s different from the sixty ’65 because this is and this right, But you know no offense to Chevy. I’ll just pick on them, but the 2019 Chevy Equinox, you know, describe it tell me what’s different between the 2018 and 2002 Equinox, and there you go.
Charity Ann
Yeah,
Herb Anderson:
Yeah, Steve, there you go. Again, thank you so much for doing this, man. We really, really appreciate it. There is one question that we ask everybody that comes on the show. That question is, where do you see the automotive industry headed in the next five years, And why?
Steve Stauning:
Uh, I think we’re going to see. Uh, um, we’re going to have I come to come to Jesus, meeting with the OEMs and electric vehicles. Um, They’re driving it a little faster than I think the market will be able to adapt to it. There’s no doubt electric vehicles or the future, but there’s also this desire by the OEMs to sell directly to consumers to, you know, whole To one price on these, and where that goes with state dealer franchise laws is going to be interesting. I think I don’t think the market is going to be much different in five years, and it is today. from the standpoint of, You know, we’ll continue to see some consolidation, but you know, assuming we get a recession in the second after this year and it’s a prolonged recession, you know, we may see fewer players just like we did after ’08 and’09, But you know this is a very slow moving industry, and it’s, and that slow movement has served the industry well. I always crack up when someone new to the industry talks about the dinosaurs in automotive, right that, Okay, And you know, the pile of dead. You know, movers and shakers are over there because, you know, it’s been a very profitable industry, a very forgiving industry. You could be a mediocre dealer for years, Years, and even today and still make money. And there’s no reason to go rushing ahead first. Doing a lot of things. I think online buying is going to be about 15%, but not more. I don’t think it’s gonna, you know, get to 25 % for ten years or more. So think five years is gonna look a lot like today. That’s my short answer.
Herb Anderson:
Right on there, you have it, folks. So that is all the time we have for today, and as usual, we’ll talk later.
