How Carvana’s expansion into new cars could change the US market

After growing to become one of the largest used car dealers in the US, Carvana expanding into the new car market.

The company has quietly bought seven new car franchises since last year’s top sellers StellantisChrysler, Dodge, Jeep and Ram brands, including a store in Arizona that has become the largest volume store in the US.

Dealers and industry experts say they believe the move could significantly disrupt, if not reshape, the 100-year-old auto dealership system.

“Carvana’s entry into the new car dealership business may be one of the most disruptive car sales the U.S. market has seen in decades,” John Murphy, a longtime Wall Street analyst and auto consultant told CNBC.

America’s franchise system — which includes 16,990 dealers that accounted for $1.3 trillion in sales last year, according to the National Automobile Dealers Association — has historically been reluctant to change. However, retailers have increasingly adapted in recent years as a way to survive, including during the pandemic and the rise of publicly traded retail groups.

Carvana’s first Stellantis car dealership in Casa Grande, Arizona, has grown rapidly. It sold more than 700 new cars last month, according to figures Stellantis shared with dealers and provided to CNBC.

That made it the best-selling store nationwide and compared to an average of about 30 to 50 monthly sales the store was doing before Carvana bought it early last year, as first reported by The Wall Street Journal.

Carvana and its CEO Ernie Garcia declined to comment on store sales or business details ahead of a press event this week where the retailer is expected to unveil its plans.

Carvana locations, many of which have large car dealerships, have historically served as pickup and drop-off locations where customers can pick up cars they’ve bought online or open a car to sell to the company. Until last year, those vehicles were used cars, trucks and SUVs delivered mainly to auctions and individual buyers.

Adding a new car business not only provides more revenue for the company, it opens up more ways for Carvana to easily buy used cars from their new car customers and through special auctions open only to franchised dealers.

“That’s a big change in the secondary market,” Murphy said of private auctions. “If that extends to other species, that will be a benefit.”

It also helps Carvana make better use of the complete vehicle cycle. The sales model has four main growth areas: new, used, parts and service, and finance and insurance.

Carvana previously covered used sales and F&I, which included selling consumer car loans from institutional investors and partner banks, such as Ally Financialsaving money. Adding new franchises is expected to bring Carvana to other locations as well.

“After establishing their core business, I think they realized, by looking at the franchise model, that there was a huge amount of revenue and a huge profit opportunity that their business model didn’t even think about,” said Brian Gordon, president of sales consultant and retailer Dave Cantin Group.

Despite the current status of Carvana, which includes a market value of more than $ 70 billion, much higher than that of Stellantis, there are challenges in selling new cars compared to used ones.

Unlike used cars, which Carvana has chosen to sell online, new car sales are highly regulated by country. Franchise owners also serve as business partners for many auto manufacturers operating in the US

In some states, like Michigan, the only way to legally buy a new car is through a franchised dealer — something that’s aimed more at consumers than companies. Tesla again Rivian they have struggled with various consequences.

An annual survey by Cox Automotive, which supports premium auto dealers, found that most consumers don’t want to buy everything online or do a full in-person transaction. They want a combination of online convenience and in-store interaction.

Franchised dealers also have to comply with additional rules and regulations from the car manufacturers. They range from the layout of the showroom and what models they can sell in certain stores to the allocation defined by the car manufacturer and the service and maintenance requirements, which Carvana does not currently offer to customers.

Not all instructions, but many car manufacturers encourage dealers with a car share and financial incentives to provide these services and meet their needs.

Carvana already operates differently than other retailers, as Stellantis has approved it as a certified website provider for the automaker, meaning it doesn’t need to go through an approved third-party company, according to four people familiar with the decision, who asked not to be identified to talk about matters that have not been made public.

“It was driven out of desperation,” said a Stellantis dealer who asked not to be named so he could speak freely about the automaker, which has lost a lot of U.S. market share in recent years. “Carvana has been given the opportunity to enter a new car space.”

Stellantis, in a statement to CNBC, said Carvana acts as a “company 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 reseller partners, and any organization that meets our qualifications is eligible to work as a franchisee,” the company said, adding that Stellantis “guarantees tools and services that will enhance our program and be beneficial to our network. All certified providers must complete a rigorous onboarding process and meet program standards and requirements.”

Carvana’s entry into new vehicles and its rapid growth has been a conversation between current Stellantis dealers and the company, according to Stellantis National Dealer Council Chairman Sean Hogan.

Hogan said competition is always good for the consumer, which is why the franchise model was created, but there are many outstanding questions about Carvana’s new car strategy.

“I’m curious to see what their strategy is and, in the long run, I think competition is good. So, if they do something better than us, we’ll need to adapt, or we’ll be out of business,” said Hogan, vice president of Sierra Auto Group in California.

In JD Power’s annual US Sales Satisfaction Index for franchised dealers that measures the shopping experience, three of Stellantis’ four main brands — Chrysler, Dodge and Ram — were below the industry average.

Although Stellantis said it treats you like other dealerships, Carvana is not a traditional car dealership like other large publicly traded dealerships such as Lithia or AutoNation. Almost exclusively online, it has a large network of virtual resources that support it.

Carvana has built a company that transports and processes similar vehicles Amazon and its back-end operations for processing and shipping consumer goods.

“They have a pre-built infrastructure, digitally, physically, programmatically, that might give them an edge over those big name public companies,” said Larry Dominique, a longtime auto executive turned industry consultant.

Carvana’s business concept is simple: Buy and sell used cars. But the process behind it proved to be complex, labor intensive and expensive.

Carvana puts each car it intends to sell through a lengthy inspection, repair and sales process. It ranges from repairing scratches, dents and other imperfections to working on the engine and powertrain components. There are also significant processing costs and procedures for delivering vehicles to consumers’ homes.

Other new Stellantis Carvana locations in Sacramento and San Diego, California; Dallas; in Atlanta; Cleveland; and Boston. New dealers are coming to more than 100 other Carvana locations, mostly including vending machines and processing centers.

Although major dealers have stores all over the country that they can use to identify used and new cars, they tend to sell regionally to avoid the additional shipping costs and sales and registration issues of selling across state lines.

“Carvana is showing the franchise community how the power of digital can be used to create a direct sales model,” said Dominique. “There’s nothing stopping any retailer in the United States from doing that today.”

The company’s traditional customer areas do not have parts and service departments, like traditional franchised dealers, which represent high profit and customer touch points. That’s one of the main questions surrounding Carvana’s plans: Will they expand into parts and services or leave it to current vendors?

“If they’re going to be the base for new cars, does that change the dynamics of the sales model? Who’s going to be responsible for taking care of the customer after the sale?” Hogan said.

Murphy said he believed Carvana could use ADESA’s facilities, the auction company it bought in 2022, in addition to new buyers to service their cars.

Carvana reported that it has the capacity to repair approximately 1.5 million vehicles per year. That compares to its sales of less than 600,000 vehicles last year.

“They have a lot of repair capacity, which may increase their level of service in a way that other major manufacturers don’t,” Murphy said. “I think that problem can be cured.”