CarMax - The Biggest Pivot Story Nobody's Ever Heard?
January 13, 2019
CarMax is a monster. They’re a Fortune 500 company. They sell more used cars than any other company in the US. They also average a very nice profit per unit, $2,147 in the first quarter of 2018. That works out to somewhere north of $1.2bn in gross profit for 2018; not too shabby.
And they were spun out of CircuitCity.
WAT? Yeah, my reaction too. CircuitCity for me is a name forever correlated to boring, behind-the-times 1990s consumer interaction. How on earth did a 21st century behemoth like CarMax get spun out of them?
I started poking around to see if I could find out a bit more about the story. And I found.. surprisingly little. The New York Times has an article online from 1993 about the opening. There’s also a nice executive summary on the history of CarMax on FundingUniverse. Here’s a few interesting snippets.
The creation of the concept was the work of Richard Sharp and W. Austin Ligon. The corporate entity behind the formation of CarMax was Circuit City Stores, Inc. A 375-store, consumer electronics chain with $7 billion in sales during the early 1990s, Circuit City was led by Sharp. Ligon worked under Sharp, serving as Circuit City’s senior vice-president of corporate planning. Together, the pair developed the CarMax concept, a business approach that drew its inspiration from the sprawling Circuit City chain and its “big-box” retail concept.
To be clear, the two people that spawned the CarMax concept were the CEO (Richard Sharp) and VP of Corporate Planning (Austin Ligon). The job of CEOs and strategy VPs is to think clearly and deeply about where they’re going. My experience is that they generally do this very well, even if can be unclear from the outside. I think it’s fair to say that it’s rare that their thinking vectors so radically that it results in a spin-off company. Incidentally, the first name for CarMax was “Honest Rick’s Used Cars”. Rick, the CEO.
Sharp and Ligon were ready by 1993 to put their theories to the test. Using money from Circuit City to finance the startup, Sharp and Ligon opened their first superstore, a lot operating under the banner “CarMax: The Auto Superstore,” in October 1993.
They had to get the funding somewhere. It makes sense to leverage their existing company with billions in revenue.
As Sharp and Ligon pressed forward with their plan of applying the superstore concept to used car retailing, they knew the road ahead would be difficult. Neither executive anticipated the enterprise would generate a profit for several years—perhaps taking as long as the end of the 1990s.
They got funding and grew. The funding did not come from CircuitCity.
“We’ve had to learn as we go along,” Ligon explained in a July 12, 1999 interview with Automotive News. “We’re going to hit about $2 billion in sales this year, which is about the critical mass we need to get to make a profit.” Roughly six months later, when the financial results for fiscal 2000 were announced, something unprecedented in the history of CarMax occurred. For the year, 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.
So by the year 2000 they were profitable, though barely. But they hit the point where scale helped, and from there the profits increased steadily, and were over $100mm by 2003.
The story of CarMax is really interesting. They had a great concept, and they believed that the service and management skills they learned from CircuitCity would work extremely well in the used car business. I’m too young to remember what buying a used car was like in the 80s or early 90s, but I imagine it being tremendously shitty. That New York Times article about CarMax has a telling quote too:
Nearly everyone who has shopped for a used car, or a new one for that matter, has a story of Stephen King proportions. Despite the thousands of hard-working, reputable people who make a living selling used cars, it is an industry in dire need of a public-perception tuneup.
So buying used cars was shitty. This was before online sales, before Craigslist, before things like Certified Pre-Owned. The general perception was that when buying a used car you would end up dealing with a sleaze ball who would try to gouge you on price.
In that sense, CarMax represented a tremendous value proposition to the public. You got a money-back guarantee, an inspection far surpassing state requirements, a no-haggle price (which took away the sleaze), and a wide-ranging inventory. It’s no wonder it caught on.
To scale it up and make it worthwhile required huge amounts of capital. Economies of scale meant they had to leverage hard in the 1990s so that they could start building profits in the 2000s. This was a very long term investment.
At first I thought perhaps they leveraged CircuitCity to make CarMax happen. But that is apparently incorrect:
The financial constraints of expanding in the face of persistent losses presented formidable obstacles to Sharp and Ligon. Although Circuit City had contributed to CarMax’s startup, the company’s financial assistance to CarMax essentially ended there. The arrangement kept Circuit City’s financial health from being drained by CarMax’s costly expansion program, forcing Sharp and Ligon to find other ways to secure capital.
And still.. Sharp and Ligon weren’t just anyone. They were the CEO and VP of Corporate Planning for CircuitCity. Those are the folks you expect to direct the entire company. Sharp, meanwhile, studied electrical engineering and computer science and had also founded hardware and computer software companies. Like many in the 90s, I’m sure he had some sense that the Internet would be a big deal; how much is pure speculation.
All of this makes me wonder if they simply allowed CircuitCity to die, or at least atrophy. Perhaps they even saw an eventual end to big-box consumer stores. CircuitCity during the 1990s lived off it’s reputation. They were a big deal in the late 1980s, when they introduced their “plug” design stores. They had renowned customer service and started the 90s as a company in the billions. By 2000, however, the stores were out of date and generally in bad locations. They were faring poorly against new competition like Best Buy. And 2000 is the same year that Sharp left CircuitCity as CEO.
The coincident timing of all of this is striking, as is the dearth of information easily available. Maybe I just like a story, but I’m somewhat convinced that CarMax was an extreme pivot. The corporate leadership didn’t see a future in consumer electronics and migrated their great service and management structure to a new industry desperate for a better reputation. They could have pivoted far more gently into more service-oriented consumer electronics. This is, in fact, what Best Buy has done to continue their growth; they’ve embraced both services (like Geek Squad) and an online trajectory.
Instead, Sharp and Ligon took on a whole new industry and built something brand new and exciting, with Ligon as the CEO. They spent years fostering it’s growth while continuing to manage a parent company in decline. And finally, they ”let” the parent company die while new and shiny CarMax sprung out of 1990s debt and expansion to generate hundreds of millions in profit year over year in the 21st century.
I don’t know if I’m right, but I sure would like to hear more about their early thinking.