How Carvana’s expansion into new vehicles could reshape the US market

After growing to become one of the largest used car retailers in the United States, Carvana Expanding into the new vehicle market.

The company has quietly bought seven new-car franchises since last year that it mainly sells StellantisChrysler, Dodge, Jeep and Ram brands, including a store in Arizona that has become the automaker’s largest store in the United States.

Dealers and industry experts said they believe the move could significantly disrupt, if not reshape, the century-old new car dealership system.

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

The U.S. franchise system — which includes 16,990 retailers whose sales exceeded $1.3 trillion last year, according to the National Automobile Dealers Association — has historically been reluctant to change. However, dealers have become more adaptable in recent years as a means of survival, including during the pandemic and with the emergence of publicly traded dealer groups.

Stellantis’ first new Carvana dealership in Casa Grande, Arizona, has grown quickly. It sold more than 700 new vehicles last month, according to Stellantis numbers shared with dealers and provided to CNBC.

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

Carvana and CEO Ernie Garcia declined to comment on the franchised stores or corporate details ahead of a media event this week in which the retailer is expected to unveil its plans.

Carvana’s locations, many of which featured large, distinctive car vending machines, served as pick-up and drop-off points where customers could pick up vehicles they had purchased online or drop off a vehicle they were selling to the company. Until last year, those vehicles were used cars, trucks and SUVs brought in largely from auctions and individual consumers.

The addition of a new vehicle business not only provides additional revenue for the company, it opens up other ways for Carvana to purchase used vehicles more easily from new vehicle customers and through exclusive auctions open only to franchised dealers.

“This is a big game changer in the secondary market,” Murphy said regarding private auctions. “If this extends to other brands, it will be an advantage.”

It also helps Carvana make better use of the full life cycle of the vehicle. The dealership model consists of four main growth areas: new, used, parts, service, finance and insurance.

Carvana previously covered used sales, financing and financing, including the sale of consumer auto loans it originates to institutional investors and partner banks, such as Ally Financeto maintain liquidity. The addition of the new franchises is expected to bring Carvana to other regions as well.

“After their core business stabilized, I think they realized, by looking at the franchise model, that there was a significant amount of revenue and gross profit opportunity that their business model hadn’t even considered,” said Brian Gordon, president of agent and broker advisors Dave Cantin Group.

Despite Carvana’s current position, which includes a market capitalization of more than $70 billion, much higher than that of Stellantis, there are challenges to selling new cars compared to used ones.

Unlike used cars, which Carvana specializes in selling online, new vehicle sales are more heavily regulated from state to state. Franchisees also serve as business partners for most automakers operating in the United States

In some states, like Michigan, the only way to legally buy a new car is through a franchised dealer — something that direct-to-consumer companies like Tesla and Rivian They fought with varying results.

An annual study by Cox Automotive, which supports franchised auto dealers, found that most buyers don’t want to buy online or make a completely in-person transaction. They want a combination of online convenience with in-store interaction.

Authorized dealers must also adhere to more regulations and rules from automakers. They range from showroom layouts and the brands they can sell in specific stores to automaker-specific customizations of vehicles and service and repair requirements, which Carvana does not currently offer to customers.

Not all of them are mandates, but many automakers incentivize retailers through vehicle customization as well as financial incentives to provide such services and meet their requirements.

Carvana already operates a little differently than most dealers, as Stellantis has approved it as an authorized 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 requested anonymity to talk about matters that have not been made public.

“I grew out of desperation,” said one Stellantis dealer, who asked to remain anonymous so he could speak freely about the automaker, which has lost U.S. market share in recent years. “It gave Carvana the opportunity to get into the new vehicle space.”

In a statement to CNBC, Stellantis said Carvana acts as the “institutional owner” of its brands, similar to other large, publicly traded companies such as Lithia and Automatic nation.

“We apply the same consistent criteria and criteria to all dealer partners, and any organization that meets our qualifications is eligible to serve as a franchisee,” the company said, adding that Stellantis “certifies tools and services that will enhance our program and be beneficial to our network. All approved providers must complete a rigorous qualification process and meet the program’s standards and requirements.”

Carvana’s foray into new vehicles and its rapid growth has been a discussion between existing Stellantis dealers and the company, according to Stellantis National Dealer Council President Sean Hogan.

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

“I’m curious to see what their strategy is, and in the long run, I think competition is good,” said Hogan, vice president of Sierra Automotive Group in California. “So, if they’re doing something better than we’re doing, we’ll need to adapt, otherwise we’ll become irrelevant.”

In J.D. Power’s annual U.S. sales satisfaction index for franchise dealers that ranks buying experiences, three out of four major Stellantis brands — Chrysler, Dodge and Ram — were below the industry average.

Although Stellantis said it handles it like other dealers, Carvana is not a traditional car retailer like other major dealers like Lithia or AutoNation. It operates almost exclusively online, with an extensive network of physical facilities supporting it.

Carvana has built a national logistics and supply company for vehicles similar to Amazon and its back-end operations for processing and shipping consumer goods.

“They have a pre-established infrastructure, digitally, physically and logistically, which probably gives them an advantage over those large public companies with multiple brands,” said Larry Dominick, a longtime auto executive turned industry consultant.

Carvana’s business concept is simple: buy and sell used cars. But the process behind it has proven complex, labor-intensive and expensive.

Every car Carvana intends to sell undergoes a lengthy inspection, repair and preparation process. This ranges from repairing dents, dents, and other imperfections to working on engine and drivetrain components. There are also significant logistics costs and processes involved in delivering vehicles to consumers’ homes.

Carvana’s other new Stellantis franchises are in Sacramento and San Diego, California; Dallas. atlanta; cleveland; And Boston. The new dealerships add to Carvana’s more than 100 other locations, which primarily consist of vending machines and processing centers.

While major dealers have stores across the country that they can tap into for used and new vehicle inventories, they traditionally sell regionally to avoid additional shipping costs as well as sales and registration complexities due to selling across state lines.

“Carvana is showing the franchise dealer community how the power of digital technology can be applied to create a future-proof retail model,” Dominick said. “There is nothing preventing any US trader from doing so today.”

The company’s traditional customer locations do not have parts and service departments, like traditional franchise dealers, which represents significant revenue and customer touchpoints. This is one of the main questions surrounding Carvana’s plans: Will it expand to include parts and service or will it leave that to existing dealers?

“If they were just going to be an outlet for new cars, would that change the dynamic of the dealership model? Who would be responsible for taking care of the customer after the sale?” Hogan said.

Murphy said he believes Carvana may be able to use the locations of ADESA, an auction company it bought in 2022, as well as new dealership franchises to service its cars.

Carvana reports that it has the capacity to refurbish approximately 1.5 million vehicles annually. This compares to sales of less than 600,000 cars last year.

“They have tremendous capacity for renewal, and will likely significantly increase their service capabilities in a way that is not found at other large assemblers,” Murphy said. “I think it is possible to treat this problem.”