Carmax

CIRCUIT CITY-Selling used cars like stereos

ByChaitanya BansalDiwakar KumarPankaj Pandey

G.RevathiShashwati Sen

Siddhesh Bhatewara

Introduction

• Circuit city is a company that has succeeded in selling electronic items through its 650 retail superstores in 45 states.

• In 1993 Richard Sharp, the head of Circuit City and W. Austin Ligon, Senior Vice President (Corporate Planning) came up with the idea of applying the “Big Box” retail concept to the selling of used cars.

Contd…

• The company's stores typically contain roughly 500 used cars not more than six years old.

• CarMax operates 80 used car superstores and 17 new car franchises.

Contd…• This led to the birth of

CarMax, the Auto Superstore.

• CarMax operates a chain of used car lots and new car franchises.

• CarMax's used car lots are patterned after the mass-merchandising business model of Circuit City Stores, Inc., operating as "superstores."

Industry Analysis

CARMAX

• Statistics: Public Company Incorporated: 1993 as CarMax Group Employees: 5,910 Sales: $3.2 billion (2002) Stock Exchanges: New York Ticker Symbol: KMX NAIC: 441120 Used Car Dealers

Why “CARMAX”???

• Opposing management consultants advice of “sticking to their knitting” Circuit city came up with their idea of CarMax……

• The reasons are as follows:

New car prices

Abundant supply of used cars

Consistent demand

Unsophisticated Management Practices

Used CarMax Sales Stable

The Growth Story…• The first store opened in October 1993 in Richmond,

Virginia.

• The store had:

1)500 cars on display, not more than 5 years old and each with not more than 70000 miles on its odometer.

2) A service shop and sales people offering a refreshing approach to used car sales.

3)Computer kiosks delineating the lots inventory and particular details about each vehicle.

Contd…

• By October 1995, recording $77 million in sales for the previous fiscal year.

• New superstore openings had lifted CarMax's unit count to four lots, with two superstores in Atlanta and one in Raleigh, North Carolina, having joined the fold.

CarMax Results : (1997-2002)

2001-2007

Revenue

7466

66485924

52934752

3202

2501

0

1000

2000

3000

4000

5000

6000

7000

8000

2001 2002 2003 2004 2005 2006 2007

Year

Re

ve

nu

e i

n m

illi

on

$

CarMax Superstores

2933 33 34

4046

53

62

0

10

20

30

40

50

60

70

1999 2000 2001 2002 2003E 2004E 2005E 2006E

no

. of s

up

erst

ore

Year

Superstore

Series1

2001-2007

Super Stores

77

66

53

47

39

3336

0

10

20

30

40

50

60

70

80

90

2001 2002 2003 2004 2005 2006 2007

No. of stores

Ye

ars

Strategies

• Developing a process to monitor inventory (make, model, colour) and pricing.

• The strategy centered on: Broad selection of merchandise. High volumes business. Economies of scale. Sharply honed management methods. No Haggling Policy.

Contd…

• By the end of the company's 1995 fiscal year, sales had increased substantially, soaring from $77 million to $304 million, which exceeded analysts' estimates of between $200 million and $278 million.

• CarMax's robust sales growth was pocked by a $7 million loss for the year, however, perpetuating speculation that the mass-merchandising approach to used car sales was not a sound business model.

Contd…• The company opened its fifth and sixth lots

in 1996 and announced ambitious expansion plans.

• The markets slated for expansion included Miami, Tampa, Dallas, Houston, Washington, D.C., Baltimore, Chicago, Los Angeles, San Francisco, and Tidewater, Virginia.

• The company projected an 80- to 90 unit chain by 2001.

Sacramento

Los Angeles

San Antonio

Houston

Tampa

Jacksonville

Va. Beach

Raleigh

Charlotte

Greensboro

CharlotteGreenville

Las Vegas

Fresno

Fresno

Tucson

Large markets (9)Mid-sized markets (28)Small markets (1)

Store Growth:•FY07  10 stores  +15% •FY08  13 stores  +17% (Est.)

Tucson

San Diego

Los Angeles (2)

Modesto

Newport News

Baltimore

Charlotte

)Atlanta

•FY08  13 stores

• By the mid-1990s,the company acquired its first new car franchise in 1996, a Chrysler-Plymouth-Jeep store located in Atlanta.

• Although Circuit City had contributed to CarMax's startup, the company's financial assistance to CarMax essentially ended there.

• At the end of 1996, the pair announced that Circuit City would sell a portion of the CarMax subsidiary to the public.

New Car

• The initial proposal called for offering between 15 and 20 percent of CarMax to the public, a stake that was expected to raise as much as $300 million.

• At the time of the offering, the company had seven superstores in operation, which generated nearly $450 million in revenues.

• By mid-1998, there were 23 superstores in operation, enabling the company to record $1.47 billion in sales for fiscal 1998.

Contd…

• When the financial results for fiscal 2000 were announced, the company generated $2.01 billion in revenues and a profit of $1.1 million, the first time CarMax ended a fiscal year in the black.

• The profit total was meager, but it suggested there was financial viability in the “Big Box" used car retailing concept.

Contd…

• As CarMax's 10th anniversary approached, In fiscal 2001, sales leaped to $2.5 billion, but the most impressive gain was achieved in CarMax's profit total, which by far eclipsed the symbolic $1.1 million recorded in 2000.

• Ligon expected to post between $40 million and $43 million in net income in 2001, but the company did better, posting $45.6 million in profits.

• In 2002, the results were equally as sanguine, as revenues swelled 28 percent to $3.2 billion and net income nearly doubled, jumping to $90.8 million.

Contd…

Net earning

45

90 90103

95

123

199

0

50

100

150

200

250

2001 2002 2003 2004 2005 2006 2007

Year

$ in

(m

illio

n)

• In the spring of 2002, Circuit City announced it intended to spin off its CarMax subsidiary into a separate, publicly traded company, part of the consumer electronics chain's plan to focus on its core business.

• The spinoff, completed in October 2002, created CarMax Inc., a corporate entity distinct from Circuit City with Ligon serving as its chief executive officer, a title he gained at the time of the spinoff.

Contd…

Important Dates

• Key Dates: 1993: The first CarMax used car lot opens in Richmond, Virginia. 1996: CarMax acquires its first new car franchise. 1997: A portion of CarMax is sold to the public. 1999: CarMax records its first annual profit. 2002: CarMax is spun off from Circuit City Stores.

Capturing more than 40% of the U.S market

They are aiming to increase the share by 15%-20%.

Therefore are the clear Market leaders. aim at:

Expanding the total market through rigorous geographical expansion strategy (80 stores today in more than 20 states. Increase it by 15%-20%)

DEALING WITH COMPETITON

• Defending the market share through their market differentiators like:

1.No haggling policy.2.125 point inspection system.3.Easy financing.4.Repair and reconditioning of vehicles.5.Guaranteed quality. 6.www.carmax.com.• Continuously expanding the market

share.

• Due to these differentiators CarMax creates a high entry barriers for the new companies to enter into used cars business.

• In the past, AutoNation (NYSE: AN) tried out the superstore-for-cars approach that CarMax has made such a success, but it later ditched the idea. Now comes little Lithia Motors (NYSE: LAD) to take another stab at the concept.

• AutoNation and Penske (NYSE: PAG) may have an edge over CarMax on sales today, but perhaps not for long, the way things are going

Revenue (M)

Profit Margin (12

mos) Employees

Market Cap (M)

Sonic

Automotive,

Inc.

$7,972.1 2.3% 11,200 $992.1

CarMax, Inc $7,465.7 4.5% 13,736 $4,633.5

Copart, Inc. $560.7 38.8% 2,536 $3,349.6

America's

Car-Mart, Inc.

$240.3 1.0% 800 $140.8

Strategy

International

Ins. Group,

Inc.

$5.7 -126.1% 19 $0.4

Auto Nation• AN is America's largest Automotive Retailer.

Headquartered in Fort Lauderdale, Fla., • AutoNation employs approximately 26,000 people at

257 dealership locations representing 331 new vehicle franchises across 16 states.

• With over $19 billion in annual revenue, AutoNation ranked #112 on the 2005 Fortune 500 and is America's "Most Admired Automotive Retailer" five out of the last six years, outselling all other automotive retailers in the U.S. 

• In March 2007, AutoNation sold its 6 millionth vehicle, the only auto retailer to achieve this milestone.

Contd…• Mission

To be America's best run, most profitable automotive retailer.

• ValuesA positive experience for our customers.Rewarding careers for our associates.Industry leading performance for our manufacturer partners.

Superior returns for our shareholders.

United Auto Group,Inc.

• Statistics: Public Company Incorporated: 1990 Employees: 13,000 Sales: $8.67 billion (2004) Stock Exchanges: New York Ticker Symbol: UAG NAIC: 441110 New Car Dealers; 441120 Used Car Dealers

• United Auto Group, Inc., is a leading acquirer, consolidator, and operator of franchised automobile and light-truck dealerships and related companies.

• In terms of total revenues, the company is the second largest publicly traded retailer of new motor vehicles in the United States.

• Mission:

To turn the company's dealerships into supermarkets where customers could buy any car make, new or used, and get any kind of part or service.

• Strategy:

To acquire dealerships in geographic clusters.

• The company owns and operates nearly some 140 franchises in the United States and abroad, many of them focusing on the retail of foreign and luxury automobiles.

• United Auto Group's franchised dealerships include integrated service and parts operations.

• Subsidiaries engage in the purchase, sale, and servicing of automobile loans, as well as in marketing a complete line of aftermarket automotive products and services.

Market Analysis

Marketing Concept

Core concepts

Need/Want/

Demand

Product (goods and services)

Value/cost /

Satisfaction

Exchange/Transaction

Relationship/Network

Private mode

of transport

Sale & purchase

Of used cars&

Selling of New car

Good quality at less price

Luxurious/

Economical

Satisfied customers byHigh quality

service

Purchasing &Selling of cars

for money

ManufacturerFinance

Companies

Establishing strategic business unit

Car max is the divisional level unit of circuit city, the electronic goods retailer and fortune 500 co.

MARKET ORIENTED STRATEGIC PLANNING

Technology used

Customer need

Customer group

Middle and upper middle class Americans

Reliable cars with no haggling over price

110 point inspection system- huge and exhaustive data base for inventory

WHY Plan new business ?????• Opportunity for diversification

growth( according to GE model).• Followed conglomerate diversification.• Diversification opportunity was good because:

(1) Demand consistent: (a) high new car prices (b) New car no more a status symbol.

(2) Supply abundant: From dealers Through auction From individual customers (3) Company possessed the required business

strength. Brand reputation Distribution network Promotion effectiveness Managerial staff Technical knowhow

Consumer buying behaviour

AS

Cars are bought infrequently

Consumer is always at disadvantages while using used cars.

And is speculative….

So

Consumer behaviour tends to be “COMPLEX BUYING BEHAVIOUR”

• To carter to the complex behaviour company provides increased CDV

CDV provided • 110 point inspection and thorough cleaning,

even cleaning the engine.• Repairs made as needed to provide a

flawless car which is durable.• Touch screen computer providing full list of

the cars meeting consumers criteria. This augments easy Learning. (learn)

• All similar vehicles located on the same area ( not haphazardly ). Thus consumers get to see and feel the product. (feel)

• Extra benefits such as 5 day money back guarantee and 30 day comprehensive warranty.

• Finance arrange in 20 minutes.• No haggling over price.• No hidden or extra costs. The above points along with hiking car

prices act as stimulators to force the customer to purchase. (do)

Segmentation

• Identify/ profile distinct buyer group who may require separate product and marketing mix.

• Different levels of segmentation are:1. Mass marketing 2. Segment marketing3. Niche marketing 4. Local marketing5. Individual marketing

Car max followed segment marketing as:

• The company was not willing to customize its product to each individual customer.

• Hence the company tried to isolate some broad segments that make up a market.

• The pattern of segmentation was homogeneous as all customers had roughly similar preferences.

Target segment

• Middle and upper middle class,

• Fullnest {2}, Fullnest{3}

• Fulfillers, Strivers and Makers

Market targeting

• Once the company has identified the market segments and its opportunities it should do market targeting

• The pattern of market targeting can be:Single segment concentration Selective specializationProduct specializationMarket specializationFull market coverage.

• Carmax concentrated on a single product (used cars) that it sells to several segments.

• Therefore it selected the product specialization pattern of targeting its segment.

MktPdt

M1 M2 M3

P1

P2

P3

Positioning

• Once an organization has identified the segments, profiled them and decided which segment to be in (S&T), the next step is to position its product.

• In order to position it is necessary to: differentiate the product/offering from competition.

• Developing/communicating positioning strategy.

Product differentiation

Carmax differentiated its product under two main dimensions

Service differentiation

Over 500 used cars on display Attended child care area Exhaustive data base of all the cars meeting customers criteria Offering 5 day money back guarantee and 30day comprehensive warranty.Financing arranged in 20 minutes.

Personnel differentiation

• The sales associate greets customers and escorts them. (courtesy)

• Associate finds what type of cars, customer want and calls up full listing of all the cars. (responsiveness)

• Mechanics carry out 125 pt inspection. (competence)

Positioning Statement

A unique and sustainable retail

growth story with Defensible competitive advantages

Product

The Marketing Mix: 4 P’s1.Product

Core benefits: Comfortable family transportation at lower cost.

Basic product: Used car at lower rate and good condition, not more than 5 years old.

Expected product: reliability, durability, fuel efficiency, new tyres and other necessary repair.

Augmented product: financing in 20 min. child care area, more than 500 cars on display which are systematically arranged.

Product hierarchy for Carmax

• Need Family: Family Trasportation• Product Family: Automobiles• Product Class: Four Wheeler• Product Line: Car• Product Type: Used car • Brand: e.g. Mercedes Benz• Stoke keeping unit: Mercedes Benz ‘c’

class

• As the cars are tangible goods that survive main uses and have unique characteristic and brand identification they fall in category of ‘consumer durable specialty goods’.

Branding

• Branding name decision:

The brand name- Car Max. The Auto super store is distinctive, easy to pronounce, recognize

remember and suggests the benefits of the store, that it in a superstore and has ‘maximum’

collection/inventory of automobiles.

2. Price

• As circuit city started CarMax the auto super store (SBU) selling used cars for the first time it needed to set a price for its cars.

• Any Firm decides its product position based on:

o Quality

o Price

• Based on this strategies could be:

High Medium Low

High Premium strategy

High-value strategy

Super-value strategy

Medium Overcharging strategy

Medium- value

strategy

Good value strategy

Low Rip-off strategy

False economy strategy

Economy strategy

Price

Pro

duct

Qua

lity

• Carmax followed the medium value strategy.• The pricing objective of the company was

aimed at maximizing current profit as: Its prices were $500-$1000 lower than avg. retail book value this was done by estimating current profit/cost associated with pricing policies. By keeping its prices fixed it ignored the effect of other marketing mix elements and competition reaction.

Pricing method

• Selected perceived value pricing as its pricing method.

• Buyers perception of value as key to price product.

Promotional pricing

1.Low interest and easy financing

2.‘5’ days money back guarantee

3.’30’ days comprehensive warranty

3.Place • Carmax has adopted:

Vertical Marketing Segments

Owns all outlets

Corporate VMS

Promotion and distribution under single ownership

A typical CarMax store is located on city’s outskirts on a large area, above 9 acre track on a major highway.

A single store serves a market area with 25-40 mile radius. The store has an attractive display room which provides the

ambiences similar to a new car dealership. A specially attended child care area with toys and video

games. The stores located in more than 20 states provide greater

spatial convenienceThe greater assortment breadth (nearly 700 cars on display,

provide a huge product variety to the customers

The add on services like quick financing repair and reconditioning of vehicles etc. provide increased service backup.

Promotion• CarMax operates the CarMax Foundation, which

the company established in 2003.

• Through the CarMax Foundation, the company donates to charities and causes in communities near locations through donations, grants, service projects, and matching gifts.

• In the company's fiscal year 2007, over $1.1 million was donated to various charitable causes.

• CarMax also uses its Grand opening events to host charitable causes.

• Each Grand Opening includes at least one charitable event, such as a CarMax Road Rally where local celebrities compete for donations to their favorite charities, or simply a donation to a local food bank to provide holiday meals for low-income families.

• Local organizations, such as food banks, animal shelters, and boys and girls club have benefited from donations during CarMax Grand Openings.

BENEFITS

• CarMax wanted to provide the ultimate car buying experience.   They felt that providing customers with research, comparison shopping tools, financial services and a robust, continuously updated inventory would help improve customer loyalty and retention while, at the same time, increase their sales revenue.  In order to provide a complete solution to their customers, they needed to overhaul their existing website.

Consumer recognition

25+ consumer awards in the last 2 year

“ Best of” san Anton, Austin sacramento, Columbia, atlanta.

BBB award for Business ethics in Atlanta central Indiana, central north Carolina & others.

2 million cars sold as of December 2006

Answers to Case Study Questions :

• What product –mix pricing strategy do automobile dealers and manufacturers typically follow ?

• Ans : The Product mix pricing strategy which is used is “ Optional Feature Pricing “

What price adjustment strategy do car dealers use ?Answer : Usually the car dealers use

the “Haggle Price Adjustment Strategy “ , where they quote the higher price and during the bargaining with the customer they reduce the price.

How is CarMax changing the used – car industry’s pricing strategies? How have buyers and competitors reacted to these changes ?

• Answer: CarMax used the “No Haggling Pricing Strategy “ where they quote the fixed

price of the product and during selling they doesn’t bargain on the price. Buyers were very

must satisfied with this policy because their reliability on price was more. On the other

hand the competitors were not much sure about the success of this strategy

What marketing recommendations would you make to CarMax ?Answer:

• Franchising their Outlet.• Go for Globalization and mainly

target the developing countries.

Thank you