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Morningstar | We Think CarMax Will Remain Competitive Against New Entrants Thanks to Digital Investment and Brand

CarMax's revenue has increased at a compound annual rate of about 12% since fiscal 2000 because of the success of customer-friendly sales practices and use of information technology. Competing dealerships have tried no-haggle pricing and failed because their salesforces are trained to focus on selling vehicles that earn the highest possible gross profit rather than vehicles that customers actually want or need. A traditional dealership relies on profits from service to offset the lower margins it gets on new-vehicle sales. CarMax does not hire salespeople from the auto industry, and salespeople receive the same commission regardless of the vehicle sold. They do not even know the profit on the vehicle sold. The CarMax customer stays with the same salesperson throughout the transaction rather than being passed off to a finance department, receiving a buying experience that is hard to match at a dealership. This culture of customer satisfaction, combined with scale advantages that allow for a wide inventory selection and extensive pricing data, gives the company a narrow economic moat.A key growth driver for CarMax is that about a third of its used-vehicle stores are less than five years old. Management has said repeatedly that it will give any further improvements in operating expenses back to the customer as a price decrease instead of seeking higher gross margins. We like this strategy; CarMax's scale allows it to price below smaller dealerships, and lowering prices should increase comparable-store sales while keeping competitors away, though some large dealers are again copying CarMax's shopping experience. Plus in some cases, the company can make up any lost margin via its highly profitable finance arm, CarMax Auto Finance. CAF finances about 43% of unit sales. Recent investments in search engine optimization have led to more website visits from consumers not including CarMax in their search query, and the company is testing online appraisal, home delivery, and expedited store pickup. All these factors should keep the company growing for many years, despite more competition from franchised dealers and startups, and may lead to international expansion.