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Carvana, the nation’s second largest used car retailer, is expanding beyond its profitable online sales business and its novel vending machines with the purchase of a new car dealership in San Diego.
Wednesday, the Temple, Ariz.-based company acquired the San Diego Chrysler Dodge Jeep Ram dealership at 777 Camino del Rio South in Mission Valley from an entity affiliated with Sunroad Enterprises, the company confirmed to the Union-Tribune.
With the buy, Carvana has secured the local franchise rights to sell new cars from automotive manufacturer Stellantis to San Diego-area customers, who can purchase the vehicles online, in typical Carvana-fashion, for home delivery or pick-up.
“We look forward to bringing exceptional Carvana experiences to San Diego Chrysler, Dodge, Jeep and Ram customers,” a Carvana spokesperson said.
The purchase is Carvana’s third franchise dealership buy since February and its first in San Diego. The publicly traded company spent a combined $51 million on the prior transactions — it owns a Chrysler, Dodge, Jeep and Ram dealership in Casa Grande, Ariz,. and another in Dallas — according to regulatory filings. The company operates the dealerships as physical locations where local customers can test- drive cars or get their vehicles serviced, but purchases take place online at the vehicle’s set price, no haggling involved.
Founded in 2012, Carvana traffics in a technology-driven approach to buying and selling used cars meant to eradicate the most common friction points for consumers. More than 30% of Carvana customers now complete the entire car-buying process without human interaction until the vehicle is delivered or picked, co-founder and CEO Ernest Garcia said in his Oct. 29 letter to shareholders.
The company currently sells around 600,000 cars per year, but has set a goal to sell 3 million cars per year in the next five to 10 years. It is the nation’s second-largest used car retailer behind Carmax, according to IBIS World. From July through September, Carvana made $263 million in profit on $5.6 billion in revenue, and it is on track to hit $20 billion in sales for the entire year, according to the company’s most recent quarterly earnings report.
In San Diego, Carvana has two vending machines and owns an ADESA wholesale auto auction facility in Otay Mesa. In October, the company started offering same-day delivery in the region.
Now its local selection includes new cars, as the brick-and-mortar purchase comes with a franchise agreement that gives Carvana the right to sell and service Stellantis vehicles in the San Diego region. The agreement is a legal requirement for any dealer that wants to advertise new cars for sale, and is the only way to acquire new car inventory.
The San Diego Chrysler Dodge Jeep Ram dealership at 777 Camino del Rio South was built in 1979 and occupies 3.37 acres of land in Mission Valley south of Interstate 8, according to real estate tracker CoStar. Sunroad purchased the dealership in 2013 for $8.2 million, according to CoStar.
Since its foray into physical dealerships, Carvana has remained relatively quiet about its intentions with the new-car business line. During Carvana’s most recent earnings call, Garcia told an analyst it would be too early to comment on whether the company would continue to invest in dealerships.
“We’re going to stick to focusing on the core business,” he said.
In addition to providing new car inventory, the physical locations will likely help Carvana with brand-name recognition and could inspire car buyers to take the leap from the traditional car buying experience to one that is entirely Internet-based.
Tuesday, Garcia explained the general challenge the company faces in growing its overall business during a Wells Fargo corporate banking conference.
“Buying a car is an anxiety-producing customer experience that has a reputation that has been earned over a very long period of time. And so part of what I’m trying to do … is make sure that I don’t do anything dumb,” Garcia said of the customer thought process.
“And a lot of times, the way to feel the least dumb is to do the traditional thing. And so I think many customers are like that’s the debate that they have in their head. It’s like, OK, Carvana seems appealing. But also if I just buy a car the old way that everyone has always bought a car, I can’t be that wrong,” he said. “So just getting out there in the world and having people see you and make all those subconscious connections so that they don’t run the risk of feeling like they made a mistake is I think a huge part of what we have to do over a long period of time.”
The new car business doesn’t come without substantial financial risk.
According to regulatory filings, Carvana entered into a loan agreement with Stellantis Financial Services, Inc. for a $99 million credit line — at a variable interest rate between 2.25% and 3.25% — to finance the purchase of new vehicle inventory. The agreement, known as a Trade Floor Plan Facility, essentially means the manufacturer fronts the money for the new cars until Carvana can sell the inventory and repay the debt. The company is also required to pay its balance in full for vehicles held in inventory for more than 11 months.
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