Carvana’s new sales strategy turns sales into a ‘level playing field’

DALLAS – Carvana intends to bring its online used car sales strategy to new car and truck sales.

But don’t expect the company to sell you a car for one of its seven Stellantis franchised dealerships.

Instead, the online car retailer said it intends to use those franchised locations as service centers, drive-through centers and potential “playgrounds” for consumers to decide which car they’d like to buy through Carvana’s online platforms, marking a stark contrast to how traditional franchised dealers handle new products.

“Every car we sell, whether it’s used or new, is online,” Tom Taira, Carvana’s president of special projects who leads the new car operation, told CNBC during an interview at its business in Texas. “That’s a natural difference. Even if you go into a store, you buy it online, and that’s a big difference in how people think about it.”

With its used car sales, Carvana has become the most important car dealer in the US with a market capitalization of over $70 billion. Carvana’s goal with the new car business is to increase market share and customer base as well as facilitate the sale of used cars through trade-ins and other means, according to Taira.

If the company succeeds, the strategy could have a negative impact on the entire U.S. dealership model, which the National Automobile Dealers Association reports covers 16,990 dealers that generated $1.3 trillion in sales last year.

This week is the first time Carvana is talking publicly about its new car plans since it bought its first Chrysler-Dodge-Jeep-Ram dealership in Stellantis early last year in Arizona. Its network has grown to include other popular Carvana markets in Sacramento and San Diego, California; Dallas; in Atlanta; Cleveland; and Boston.

“When we got into new cars, we said the only way we’re going to do this is to make sure we’re going the Carvana way. That we’re actually selling cars the same way we do to used car customers,” Taira said during a press event at his Dallas location. “Why did you break something that already works?”

Carvana has spent about $171 million on new Stellantis car dealerships, excluding its most recent acquisition of a dealership in Ohio, according to public filings. The company declined to disclose any retail investment to implement its strategy.

Taira and the company declined to disclose Carvana’s new car sales to date or its future expansion plans for additional brands or other Stellantis dealerships. Previously, CNBC confirmed that the company has rapidly increased the purchase of its new cars, including the place in Arizona that sells the most in the country of Stellantis.

“We believe that this was right for us, as long as we can go out and increase the share and increase the pie,” said Taira. He declined to comment on whether the new car business is profitable.

In order to integrate its new car sales into its current website, as first reported by CNBC, Carvana has been approved as a certified website provider for Stellantis instead of using third-party approved companies. Several franchised dealers say they believe that is Carvana’s unique advantage.

Stellantis, in a statement to CNBC, said Carvana acts as a “business owner” of its products, similar to other large publicly traded companies such as Lithia again AutoNation.

“We apply the same consistent standards to all our dealer partners, and any organization that meets our qualifications is eligible to work as a franchisee,” the automaker said, adding that Stellantis “verifies the tools and services that will enhance our program and be beneficial to our network. All certified suppliers must complete a rigorous onboarding process and meet the program’s standards.”

Carvana is using the Dallas location as a test center to get into new car sales. The center looks like a regular Stellantis store from the outside, but the process of buying a car for customers and the responsibilities of its staff are unprecedented.

Sofas and chairs are replacing cubicles and sales offices. There are no finance and insurance departments, and instead of an army of commission workers, the agency has hourly associates to help customers – if they want help.

The experience is intended to be as self-directed as the customer wants. By scanning QR codes located on 10-by-10-foot screens inside the building or on vehicles displayed outside, shoppers can customize a vehicle, learn about product features and take test drives before deciding to buy anything. When they decide to buy something, it’s online and not from a sales person, the company says.

The “playground” has about 50 cars divided by type, each with a theme. Jeep has an off-road show. Dodge has race tracks, including a Carvana-themed Charger speed car and a section of the common fence. Chrysler’s minivans have a football net and Ram’s place is in the middle of the truck.

Carvana has not committed to expanding the specific experience to its other franchised dealer locations, but Taira told CNBC that the entire process of online sales, vehicle inspections and service is expected to be consistent across locations.

“I think the business case and the case for more stores comes out of this area first,” he told CNBC, adding that he built the store in weeks. “Is it important that we introduce a second? No, I think the important thing is that we get this right. … There is no big plan to build testing centers everywhere.”

If a customer decides to test drive or buy a car locally, the process can be even more complicated, depending on what model the buyer is looking for.

Taira said that the company chose to buy Stellantis dealerships so that there would be a wide range of the car manufacturing company’s products and a variety of its products, which can be a double-edged sword when it comes to consumers actually finding the car they want to test drive or buy.

Unlike a traditional dealership that collects cars for customers to test drive before buying, at the Texas facility, Carvana has about 50 display vehicles in its “playground,” complete with twin cars for test drives. There were about 3,000 new cars sold nationwide compared to more than 60,000 used models as of Wednesday morning, according to its website.

This means that the customer may not be able to test drive the exact car or model they are buying, but the online process tries to match the test car as best as possible to the one they are looking for. It also explains what is the same and what is different.

Looking at the Texas-area system for vehicles like the $87,000 Ram 1500 RHO performance model, the closest thing on the test drive site was the $61,000 Ram 1500 Big Horn with the same interior and four-door configuration but no other features, including its performance engine.

That’s why traditional car dealers have a large inventory of vehicles, especially trucks with a range of build options and a wide bandwidth of performance specifications.

Taira said Carvana continues to learn from its year’s experience and sell new cars in its day-to-day operations. He said the company is learning which cars to keep in stock and working to ensure customers know they are buying a new car rather than a used one.

“We’re going through all this technology. This is brand new,” Taira said. “All of these things are working, which means a number of improvements we will make over the coming days to weeks to months.”

Taira said the company prioritizes selling new cars to local customers, as it does used cars, to avoid additional costs, but uses a nationwide transportation network and more than 100 US Carvana locations when needed.

A big question for Stellantis dealers and Wall Street analysts before Carvana unveils its car plans is how the company plans to service the new products it’s selling.

Taira said the company will, for now, operate its service departments like a regular retailer, but with its guiding strategy of transparent, haggling-free pricing and a “hassle-free” customer experience.

“As it relates to how you actually do the service, they’re traditional. It’s a traditional setup that way,” he told CNBC. “In that way, what we do … in terms of service, we believe in the same principles that we have in selling cars.”

At the end of the day, selling cars is Carvana’s core business, but servicing cars has historically been a very lucrative market for franchised dealers, and customer financing, which Carvana has always focused on in its business.

Like used cars, Carvana currently only accepts cash or offers financing through the company itself, including selling consumer car loans from institutional investors and partner banks, such as Ally Financialsaving money.

Taira did not rule out the possibility of Carvana offering to lease or use Stellantis’ financial services, which have been very profitable for automakers, but said the offerings would need to integrate seamlessly into its current online sales platform.

“One thing that makes this good, this incident, is what we already know. What we know is the plan we have,” he said. “That doesn’t mean integration isn’t going to be part of our learning and testing going forward.”