CARMAX CASE:
Executive Summary
CarMax broke industry records in 2013 and has successfully grown into a leader in the used car industry. However complications have emerged as a result of duplicators attempting to copy their “no hassle offers” in the highly competitive used car market. Therefore, CarMax’s primary concern is staying ahead of the competition and eliminating threats from potential future disruptions from competitors. Therefore the key question we will try to answer in this analysis of the CarMax case is, can CarMax continue to grow successfully given the threat of new competitors entering the market?

After thorough analysis of the situation, our team has come up with a series of recommendations that will allow CarMax to remain competitive in the market in the midst of growing threats form new competitors.

First CarMax should expand the Parts and Service Department by offering attractive bundles to customers when purchasing cars such as service a service add on. This will
CarMax gain additional market share by allowing them to become a one stop shop for car issues, incentivizing repeat customers and increasing the lifetime value of each customer.

In addition, CarMax can build a mobile application that allows customers to make purchases. This move will help CarMax reach a wider audience, enhance customer experiences, and avoid having to incur additional costs associated with hiring and training new salespersons.

Issue Analysis
The industry is subject to economic conditions. Consumers do not make big purchasing decisions, such as buying a car, if the economy is doing poorly. This suits CarMax because their used cars are priced lower than new cars. Despite this, the industry revenue fell by 5% annually between 2007-2011.

The market is a red ocean at the moment, with tough competition from Autonation and Penske, who sell both used and new cars. CarMax needs to compete in an already saturated market, while still expanding within the United States. The market looks attractive towards satellite stores because CarMax is able to penetrate a niche market and use their economy of scale to build fast and out-price competition. In 2013 CarMax reported a record net income of $434 million. Satellite prototype stores estimate average cost is $25.6 million, while the average superstore investment price is $38.4 million. This means they can open up smaller stores very quickly and can expand faster. By opening up smaller satellite stores focused on used car sales and they eliminate competition of new car sales against AutoNation and Penske, who mainly sell new cars. The margin on selling a used car is higher than that of a new car, which means CarMax would increase their profits.

Strong competition from competitors means CarMax must improve their services. Parts/Service is only 2.5% of CarMax’s sales currently. However CarMax makes much better margins compared to its closed competitor (difference in margins is 14%). The company can focus on this and become a market leader using their satellite store model to both expand and counter the competition.

Lastly, one of the most important issues cited in the report was the limited amount of trained employees. CarMax has an extensive training program that lasts several months in order to assure the best possible service for customers. This is costly and time consuming, so a possible option to explore would be building an app (like Carfax) in order to increase the speed of purchase transactions and facilitate the viewing process of cars, their history, pricing, comparison etc. Carfax has one of the largest databases of used car information since it has been collecting it since their foundation. By focusing on training employees on how to sell well to customers, the app will take care of the information seeking aspect as employees will not need to be trained to memorize facts and the history of the car. This adds customer loyalty because it could show comparative pricing with competitors so customers make the right choice for themselves. The reduction in training time and inclusion of a large database of information available to customers will return a high investment since only the initial investment is the cost of the app. The overall issue for Carmax is their decline in growth. The company would like to continue to expand, but tough, copycat competition is debilitating it’s growth within the country. Their disruptive model allowed them to become the leader within their market. So their fear is that a future company could disrupt their business model, just like Best Buy did to their parent company Circuit City.

Final Recommendations
Recommendation 1:

Expand the Parts and Service Department: As mentioned in the issue analysis the margin received from this by CarMax is very high. It receives more than 14% than its closest competitor (Penske).
Target Market: Customers who have bought cars from CarMax in the past.
Key Actions: In order to attract more customers to purchase the services and parts from CarMax, they should offer attractive bundles to customers when buying a car. When the customers buy a car, they can include service for an additional fee which will be more lucrative than buying the service individually. This might seem more lucrative for the customer.
Investment Required: In the short term, there would be a very small investment of advertising but as the sector keeps going they would need to stop outsourcing to third parties and build their own parts and service branch which will be capital intensive to obtain the necessary infrastructure.

The market is attractive due to the higher margins and Carmax could be the one stop shop for every issue that a customer has with their car which will make them loyal. They already have a very good reputation in the used cars sector and if they are able to replicate that in the parts and services sector, it will be very difficult for competitors to catch up. They already have brand recognition and are a market leader so this expansion will help their value proposition. This will be a method which will help CarMax gain additional market share as the service and parts branch will be an added benefit for a customer to buy a car from CarMax.

Recommendation 2:

Building an App for customers to make purchases: With the recent development of technology and building of applications for every possible service, CarMax should develop a mobile and tablet application where customers can look up all the details of the car and even make orders/viewings online.
Target Market: Existing as well as new customers of CarMax

Key Actions: It is relatively simple to build an application. The application should have all the details about every car on sale. Through the app customers will be able to look at all the cars (with details) available near the store closest to them and can also look at the choices they have in other stores. Additionally, they would not need to train the employees as much as all the information about the cars will be available in the app.

Investment Required: The investment required for this to come in is very minimal and returns will be high as CarMax is the first company to come up with this integrated app.
Through this app people from all over the country can see the cars available to them. This would increase target market as well as the market size. People can book viewings and order cars through a smartphone app. As mentioned earlier, the biggest challenge CarMax faces is that of human capital and not having enough trained employees. This app will reduce the need for this because all the information will be easily available and also reduce the cost of lost customers due to misleading information from customer representatives. This will be something new and CarMax will be able to disrupt the used car market again.
Appendix
SCEQ Analysis:
1) Situation: CarMax has grown into becoming the leader in the used car industry, hitting records in 2013.
2) Complication: The used car industry is extremely competitive with many duplicators coming in recently. Best Buy had disrupted Circuit City causing them to go bankrupt and
CarMax is worried about something similar happening to them.
3) Enablers: Economies of Scale and Operational Excellence, Keeping a competitive price point/advantage, Adapting IT to lower costs and becoming more efficient, successful trade-in process, successful expansions, essential human capital, Avoiding complacency, wide array of physical infrastructure, successful innovation
4) Key Question: Can CarMax continue growing successfully given the threat of new competitors entering the market?