Dealer Insights - Nov/Dec 2011 - Revisiting What Made CarMax Big

Its strategies can work for you, too

When CarMax entered the arena two decades ago, traditional auto dealers cringed at its no-haggle sales approach and “big-box” retail strategy. Now that the megaretailer has survived the recession and passed the 100-store mark, let’s re-examine what vaulted the company from start-up to retail giant — and which of its strategies might benefit your dealership.

Listening to customers

Original parent company Circuit City Stores funded CarMax in 1991when its founders hatched the concept of selling “like new” used cars en masse. The two began fleshing out a business plan after surveying car buyers about their shopping experience and finding they had more “dislikes” than “likes.” The often drawn-out haggling process over vehicle price was at the top of the customers’ “dislike” list.

CarMax’s first used car lot opened in 1993 and offered customers vehicles at a fixed price. From then on, growth was steady. A portion of CarMax went public in 1997, it recorded its first annual profit in 1999 and it spun off from Circuit City in 2002. That year the company began operating “superstores” stocking about 500 used cars no more than six model years old. And CarMax reported 2011 fiscal-year net earnings of $381 million, an increase of 35% over its record results in 2010.

Pricing without haggling

Numerous studies have shown that many car buyers, especially women, prefer no-haggle pricing. The concept has paid off for CarMax, and other retail giants have followed suit.

For example, AutoNation, the nation’s largest auto dealer, recently expanded its no-haggle Value Vehicle Outlets that specialize in low-price (older) cars. The outlets are part of existing locations but have their own section on the lot and separate signage.

Some auto retailers also argue that it’s easier to find good salespeople when you eliminate the qualification that they be ace negotiators. And sales managers reportedly benefit from a negotiation-free sales environment because it frees them from “desking deals” and allows more time for coaching sales consultants and managing other aspects of the sales process, such as inventory, pricing and lead follow-up.

But no-haggle pricing hasn’t been right for everyone. The CEO of the Lithia chain said during a 2010 interview that no-haggle failed as an overall marketing strategy for his company. Nevertheless, fewer than one-half of Lithia’s customers negotiate their purchases because “the [no-haggle] principle is still in force,” he said. The company trains sales managers to discourage negotiations, particularly during used car sales.

If you want to consider adopting a partial or full no-haggle pricing system at your dealership, be sure to consider the following:

  • Your customer base and demographics — how will current and potential customers respond to the switch? 
  • Pay plans for your sales staff — how will the plans need to change? 
  • Local competition — is anyone else offering this pricing structure? 
  • Level of gross profit you’ll accept — it’s likely to be less per vehicle and more dependent on volume, and 
  • Purchasing and trade-in practices — will you use higher used-vehicle trade-in values as a method to sell more new vehicles?

These are complex questions with no easy answers. You’ll want to analyze each of these areas closely before making a decision.

Aiming to please

CarMax began its journey by giving customers what they said they wanted — not only no-haggle pricing but also an upbeat shopping environment and good selection and prices — and it has held tight to its goal. In 2005, for example, the company learned that 78% of car purchasers suffered from buyer’s remorse and wished they could return a vehicle shortly after buying it. CarMax implemented a money-back guarantee for the first five days after a purchase.

Your dealership can apply customer-centric strategies, too. Survey your customers regularly on how you’re doing in all areas of your business. Then implement action plans to clear up any false perceptions and to make changes to your operations in response to any negative perceptions that are true.

Forging ahead online

One key CarMax initiative for fiscal 2012 is to give customers more online abilities before going into a store. That will include setting up an appointment with a sales consultant, starting paperwork and putting a car on hold — all from the comfort of home.

You, too, can make sure that your dealership’s website is shopper-friendly, online inventories are updated and Internet inquiries are responded to within 24 hours or less.

Not for everyone

One-price selling isn’t the preferred pricing structure for all dealerships that sell new or used cars. But making the shopping process easier and generally better for the customer — “what car buying should be” — both on-site and online is likely to kick up any store’s sales.

Sidebar: Pleasing employees, too

One part of CarMax’s success connects to the satisfaction level of its estimated 13,000 employees. In 2011, FORTUNE magazine cited CarMax as one of the “100 best companies to work for” for the seventh consecutive year.

The company’s top executives cited a positive and rewarding workplace as the reason behind the distinction. Corporate benefits are competitive and wide-ranging and include, for example, a tuition-assistance program, an adoption benefit and health insurance for domestic partners.

It may be impossible for a local or regional dealership to offer a benefit plan like the one that CarMax offers its employees, mainly because of the dollars involved. But there are many other ways to boost employee loyalty and satisfaction, including recognition, praise, respect and listening to employees’ needs.


Dealer Insights - November/December 2011  

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