How is Carvana drawing investors with a losing proposition? The Alpha Dawg blames short sellers and the shortsighted. 
 - Photo by tepic via Getty Images

How is Carvana drawing investors with a losing proposition? The Alpha Dawg blames short sellers and the shortsighted.

Photo by tepic via Getty Images

As Mark Twain once said, “Never argue with stupid people. They will drag you down to their level and then beat you with experience.” In recent years, the retail car business has been invaded, infiltrated, and infested by armies of idiots, fools, and disreputable vendors, as well as a seedy assorted collection of outright criminals. The one thing they all seem to have in common is a cloak of self-righteousness. They market themselves as the defenders of consumers who have long been abused by evil car dealers.

The buzzwords, battle cry, and new-age mantra all promise a better car-buying experience. The plot below the surface has become increasingly transparent.

The master plan is to put you out of business. They are convinced they can do the entire transaction online and eliminate dealers — if only the laws were changed and assuming consumers will cooperate. Luckily, in at least one high-profile case, it ain’t gonna happen.

No Partner of Mine

I always crack up when companies that are working feverishly to steal your customers and resell your data refer to themselves as “dealer partners.” The same technology that some vendors claim proves “attribution” also leaves a trail of what they do with your data, including to whom it is sold.

I can rant and complain about what I perceive to be dishonorable, dishonest vendors with pages of examples and documentable facts. But in my opinion, the worst, the sleaziest, the kings of deception, are the people at Carvana.

I am not going to bore you with 20 pages listing all the deadly accurate predictions I’ve made over the last 30 years. Let’s just say I’ve gotten a lot of things right when so many other people were saying the opposite. I’ve often said that it’s not because I am so brilliant. It’s because some other people are so stupid.

Carvana broke into the rankings of America’s top 10 used-vehicle retailers in 2018, but analysts say the company loses more than $2,000 every time it sells a car. 
 - Photo by zombieite via Flickr

Carvana broke into the rankings of America’s top 10 used-vehicle retailers in 2018, but analysts say the company loses more than $2,000 every time it sells a car.

Photo by zombieite via Flickr

It’s also worth mentioning that, unlike many of my fellow futurists, I speak to literally thousands of dealers, dealership personnel, and manufacturer and vendor executives every month.

Somewhere around Christmas of 2018 I started hearing from dealers that Carvana buyers were showing up at virtually every auction, every rental company, and anywhere else wholesale cars are sold — and that they were paying stupid money for every car on the block.

First the dealers complained there weren’t any cars left. Then they realized they could take their distressed units to auction, knowing Carvana would most likely pick them up. By springtime, the buying frenzy was accelerating at warp speed.

The March 2017 issue of F&I and Showroom (“Who Shot the Dealer?,” Page 34) was the first time Carvana appeared in one of my articles. I just revisited that article and cracked myself up laughing at my own jokes. If you take a moment and read it, you’ll see I was onto these frauds from the beginning.

In part, I wrote, “The reason none of the manufacturers and vendors have been successful with online volume sales is because they are operating on false assumptions and flawed paradigms. In other words, they don’t understand consumers and what actually motivates them to make a buying decision.”

Months later, I went after Carvana’s ownership for a column in this magazine (“All Things Must Pass,” July 2017, Page 10): “Remember that Carvana is a spinoff of DriveTime Automotive Group, which is privately owned; the majority share owner of DriveTime and Carvana is Ernest Garcia II. His son, Ernie Garcia III, is the CEO of Carvana. Garcia’s partner, Raymond Fidel, is the CEO of DriveTime.”

Garcia II and Fidel are both convicted felons. They played small roles in the Charles Keating/Lincoln Savings and Loan debacle in the late ’80s and early ’90s, reportedly escaping jail time by ratting out their co-conspirators. Interestingly, there was no mention of any federal crimes in Carvana’s 2017 IPO. Technically, it wasn’t required. But it should have been an issue.

Now, before you go all soft and fuzzy here, let me assure you these guys are not huggable or forgivable. When Garcia pled guilty, he said he entered the plea with “tremendous feelings of remorse.”

Read further and I’ll show you exactly what tremendous remorse feels like today.

This Might Not Be Sustainable

Remember, the S&L crisis caused thousands of senior citizens to lose their life savings. The partial government bailout that followed cost U.S. taxpayers $3.4 billion — for Lincoln alone.

Today, despite his track record, which includes personal and corporate bankruptcies, Garcia II is a multibillionaire. The mothership in this fleet, DriveTime Automotive, sells cars and financing largely to low-income and credit-distressed buyers. Incredibly high delinquency rates and an army of collection agents stationed at home and abroad have drawn scrutiny from consumer advocates.

In 2014, the U.S. Consumer Financial Protection Bureau brought an enforcement action with an $8 million civil penalty against DriveTime in 2014. Regulators said the company “harmed consumers by making harassing debt collection calls and providing inaccurate credit information to credit reporting agencies.”

Remember, this is the guy that pled guilty to participating in a scheme that ruined many lives. And now he’s swimming in the shallowest end of the credit pool, selling allegedly overpriced cars to people who allegedly can’t afford them.

I am sure he’s not spreading more misery with this DriveTime operation, aren’t you? These are the guys who are trying to create a better car-buying experience, remember?

Well the image they’re selling is all smoke and mirrors. And you don’t have to take it from me. Wall Street analysts have calculated that overpaying for inventory is causing Carvana to lose $2,157 per unit retailed. In the words of Groucho Marx, “If we don’t sell too many of these, we might break even.”

And don’t forget those ridiculous, eight-story vending machines erected on high-priced real estate in several U.S. markets. More schlock and glitter, at a huge expense, for nothing.

The Big Question

Knowing all this, we must ask ourselves: Is Carvana little more than another scam to trick Wall Street into pouring more and more money down an infinite, unprofitable rathole?

For every analyst knocking Carvana, there’s another one calling their stock a “buy.” Strange, considering they are bleeding money out of every artery. Garcia keeps going to the well and getting huge cash infusions on stocks for some big players — although a huge percentage are short sellers betting the stock will tank.

They’re probably right. Analysts say Carvana is sitting on long-term debt of $500 million, and the interest payment on that debt has risen to $15 million — more than 17% of gross profit. And of course the company’s net losses are accelerating with increased sales, now at $82.6 million.

There are several other companies out there with similar business models. Most are suffering similar setbacks. (Remember Beepi?)

Still, there are some really stupid people who are drinking the Kool-Aid and buying into the Carvana story. The Garcias will get theirs no matter who gets hurt. When it crashes — and I’m betting it’ll crash hard — they will come through it without a scratch. Again.

I don’t try to argue with stupid people anymore. I let them believe what they choose to believe. As the old story goes, I asked a guru for the secret to eternal happiness, and he said, “Never argue with a fool.” I said I disagreed. And he said, “You are right.”

Author

Jim Ziegler
Jim Ziegler

President and CEO of Ziegler SuperSystems

Jim Ziegler ranks among the industry's most recognized and honored trainers, consultants, authors, speakers, and forecasters.

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Jim Ziegler ranks among the industry's most recognized and honored trainers, consultants, authors, speakers, and forecasters.

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