Carvana CEO on his outlook for the auto industry and the future of car buying

Ernest Garcia, CEO of Carvana, joined Yahoo Finance's Jen Rogers, Myles Udland, Rick Newman, and Akiko Fujita to discuss his outlook for the auto industry and the recent news of Carvana expanding into 100 new markets.

Video Transcript

JEN ROGERS: It was so bad in April for car sales with everyone sheltering in place, they've called it carmageddon. April auto sales-- their worst levels in 30 years. But was that the case for all car dealers, auto dealers? Let's talk to one. I want to bring in Ernie Garcia. He is the CEO of Carvana. In case you don't know, Carvana is an e-commerce platform where you can go on and it's kind of like, Ernie, buying a car like you shop on Amazon. How has business been for Carvana as the nation has sheltered in place?

ERNEST GARCIA: Sure. So it's exactly as you said. You go to our website. We've got about 20,000 cars customers can pick from. You can go through, select financing, schedule a delivery time, sign contracts, and then we deliver to your door using Carvana employees to give you that Amazon-like experience. You get a seven-day return policy where you can return the car if you don't like it. So it's exactly as you outlined.

I think in this new world, consumers are definitely looking for ways to transact that are safer and require less contact with other people. And so I think this business model that's been going great for the last six years-- we've grown at triple-digit rates six years in a row-- has definitely found a tailwind. And so while many other dealers have been down very dramatically, and in early April, car sales were down in certain areas as low as 60%, 70%, even 80%, we, most recently, have actually been up year-over-year about 20% to 30%. So things have been going very well.

RICK NEWMAN: Hey, Ernie. Rick Newman here. What is the supply-demand dynamic like? I've actually been talking to some new car dealers and they started out-- suddenly, nobody wanted to go to a car dealership and their inventory piled up. But then they weren't getting new inventory, and people were starting to buy cars again, so their inventories are going down. How are you doing with used cars?

ERNEST GARCIA: So used cars have an interesting dynamic where, for the most part, a used car was previously driven by some other customer and it only gets recycled into the system if a new customer wants it or if the customer decides they want to trade in that car and buy a new one. And so there's a little more kind of fundamental supply-demand balance that is necessarily existent inside of the used market.

In the new market, you have manufacture of new cars, and so you have to anticipate what demand will be. And if there's a mismatch, [INAUDIBLE] a little bit out of balance. On the used car side, some of those dynamics exist, but generally speaking, it's a little bit more stable. And so we've seen more stability, I would say, in that market. Although certainly, seeing sales decline as much as they did isn't helpful, and there was a glut of supply to some degree and a drop in prices that was associated with that.

MYLES UDLAND: You know, Ernie, you mentioned, as you guys did it in your quarterly letter, that you had that big drop mid-March through the beginning of April. Sales have come back about 20%, 30% year over year in the last few weeks. What do you think is driving-- I mean, we've heard a lot of economists talk about a trough in economic data. What do you think, with your customers, is driving that normalization?

I mean, is there a sense that that real panic-fear phase we all went through, that that might have been the most acute phase of this crisis and people are ready to think about what their needs are? And I think just anecdotally, in our conversations as a group, a lot more people are interested in having a car now than they ever were over the last couple of years.

ERNEST GARCIA: Sure. So I think a car is a large discretionary purchase, and so when things get really tough, it's an easy thing to put off for a little bit. You're not generally in a rush to have to get one right away, with the exception of people that decide they no longer want to use public transportation or whatever else. And so I think that's why sales could drop off so dramatically so quickly in late March and early April.

I think from there-- you know, we're very proud of the offering we've created that gives customers these low prices and a broad selection that delivers to your door, gives you a seven-day return policy. And I think our view is that from a rational perspective, consumers are kind of better off buying this way. Going to a dealership where, effectively, you're paying for all of the staff and you're paying for the physical dealership doesn't necessarily make sense in a world where you can buy it, have it delivered, and then you have seven days to make sure it fits your life.

I think telling that story, though, is hard because this industry has existed for a very long time and people are used to doing things in a certain way. And I think that, you know, this has been such a difficult time for so many people. But a silver lining for our business, at least, is all of a sudden, people's minds are much more open to considering new ways to transact. And I think we've certainly benefited from that.

- So Ernie, you know, building on that answer, it seems like the last month and a half, we've essentially been holed up with no real timeline. And now what we're starting to see are some states reopening. And so the discussion we were talking about earlier-- whether people are going to want to get on public transportation, whether people are going to want to buy cars.

I know we're looking at a small sample, but I'm wondering if you have seen an uptick in certain markets. Have you seen a change?

ERNEST GARCIA: So we've certainly seen a change nationwide. I think we've seen the coasts, notably kind of New York, the Northwest-- they reacted on the downside more quickly than I would say the middle of the country did. By probably the third week in March, early April, I think the entire country was pretty holed up.

On the recovery, I think it's been fairly broad-based. I think it has a little bit of the same flavor, where maybe the coasts have not recovered quite as fast as some of the rest of the country, but pretty broad-based. I'm not sure there's a specific geography I would call out as being meaningfully differentiated.

RICK NEWMAN: Hey, Ernie. Rick Newman again. You sell used cars. Can you ever get into the market for new cars where traditional dealers have those strong relationships with the manufacturers?

ERNEST GARCIA: So I think first, I would say, the used car market is about three times as large as the new car market. It's a much, much larger market. Many more consumers transact in that market. There's a lot of really desirable features of the used car market. It's great for consumers because prices are lower and you don't take as much depreciation right after buying the car.

So we're pretty focused on the used market, as we're still extremely small, relative to this huge opportunity. There are 40 million used cars purchased per year by consumers, which is an absolutely enormous number, and so we're pretty focused on that for now.

JEN ROGERS: Ernie, we've been covering Hertz here considering bankruptcy, and Moody's wrote about the fact that maybe they could sell, or be forced to sell, their fleet by creditors, and that that could remove a backstop for vehicle prices-- used cars. Is that a concern of yours, that we could see the market sort of flooded here, and that prices would then take a hit?

ERNEST GARCIA: So I think that that's certainly possible. I think to characterize it as a concern, you have to decide what your perspective is. And so I think, you know, to the extent that happens, I think that would be extremely unfortunate for Hertz. We wish them the best and hope they make it through this and can continue to run their business. This has obviously been a very difficult thing for the rental companies going through all this.

But if those cars do come to market, I think it'll be tough for those that hold vehicle inventory, as prices would likely drop as a result. I think it would be great for consumers because they would get great deals. And I think the way we like to look at the business is we're trying to build a brand for the next 20 years. And so if that were to happen, we would view it as an opportunity to give customers great deals and go from there.

JEN ROGERS: Do you have any sense, or can you tell us right now, are you getting more incoming about people buying or about people trying to sell their cars? Do you know what the ratio there is at all?

ERNEST GARCIA: Sure. I would say there's definitely demand for both, and both are probably less than they were pre-COVID, but both are recovering. I think maybe there are different need stakes there. I think many consumers are deciding they don't want to use public transport. Maybe they're not as comfortable ride-sharing right now, and so that's driving some demand on the retail side.

And then I think some other customers are saying, you know, I need to tighten up financially, and so I'd like to unload one car from my family fleet. And so I'd like to sell something on the wholesale side. And so I think that both things are happening and there's migration in both areas.

MYLES UDLAND: And then, I guess, Ernie, finally, just maybe more a conceptual question about running a business in this kind of environment, the assumptions that you make. Obviously, it's early days here. But as you look out-- you say in the letter, the detour hasn't changed the destination.

But the assumption in terms of how much capital you're going to have on hand, how you can hire, how you can expand into new markets-- have you started to work through if those things might be changing for you as an executive, you know, as an allocator of capital, as well as an operator over the next couple of years? Because we hear a lot about this recession will drag, almost inevitably. 30 million people are out of work. Have you started to reimagine some of those plans yet?

ERNEST GARCIA: Of course. I think we try to do the best job we can forecasting what the world looks like in the future, just like everyone else. And I think just like everyone else, it's a very hard thing to get exactly right. I think we're benefiting from a shift in consumer preference toward buying things online, and we think that that's likely to overwhelm market-wide decreases in demand, although that's certainly likely, as well.

We like to take a very long-term perspective and say, you know, we're building a business here over the next 20 years. We want to represent for customers what buying a car in the future looks like, and we want them to hear Carvana and think that's a great way to buy a car. You get a fair price. You get a great experience. It's fun. And so I think those are our kind of longer considerations than what's going on over the next two or three months.

And that's what drives most of our planning. I think the thing that we've tried to be most cognizant of, going through this, is all the people that work at every company are going to look back on this time over the next 5 or 10 years, and this is going to be a huge moment that defines what the culture of that company is, and ultimately, what every company does, the function of all the people inside that company, and how much they care, and how excited they are every day to come work on what they work on.

And so we've been really careful to try to go through this period. And we haven't done any layoffs. We haven't done any furloughs. We've tried to make sure that we use this as a moment for the company to come together. We try to build as much culture as possible. And so that's been a major part of our focus as we try to manage through this. It's something that we're extremely happy about how we've done it.

We did a pretty interesting thing where, like all companies that see a demand shock, and in late March and early April where all of the sudden, sales plummet, you know, we unfortunately did have to make the decision to reduce hours for many people in the business. But what the company did is everyone came together. We created a fund we call the We're All in This Together Fund.

Hundreds and hundreds of employees from around the company, including the entire board of directors and executive team, contributed their salaries into this fund that then went to offset lost wages for all the people that unfortunately did lose wages during that time. And so I think going through this period, that's been the focal point for us is let's make sure we maintain and build culture in this moment.

JEN ROGERS: Well, that's great stuff to hear there. I know I started this segment by calling it carmageddon, but I did not reveal the fact that I actually bought a car during this time. And my question for you is-- because I did use Carvana--

ERNEST GARCIA: Oh, there we go. All right.

JEN ROGERS: I did note, I used it, like I talked to people there. But I ended up buying a car from a dealer just because I could get it quickly. But what I would note is that-- and I wonder how you think about it-- is your technology is way above what the regular dealers have. Right? You can really see the cars. But they know you're there. So they're like, oh, we can bring you a car. We can do that. But they don't have the seven-day policy and all that other kind of stuff.

Do you think that they are going to catch up, though, to some of what you're offering? Just because it's so consumer-friendly to have these options and to be able to look through stuff. Like, who do you think your competitors are? Is it the other companies that, you know, are like Carvana online, or is it the dealers?

ERNEST GARCIA: I think what you have to do when you're trying to run a business is look at your customers and look at what they need, and then design solutions from the ground up to deliver to them what they need and what they want. I think it's much easier to start to mimic features on a site and say, hey, I'll bring the car to you, as well.

But what's important is that you fundamentally build the business to deliver exact what customers want from the ground up. So that means building a culture that gives customers great experiences. It means building technology that makes it easy and fun to shop online. It means building an infrastructure that allows us to hold 20,000 cars around the country and deliver to your door as soon as the next day.

And so I think instead of focusing too much on any one competitor or what anyone else is doing, we try to say really, really focused on what our customers need. And we think if we build that, it'll work out in the end.

JEN ROGERS: All right. I'm going to keep looking. I think there's a lot of people in the market for cars, especially in Europe. Akiko was saying she was really enjoying just driving, getting out, because everyone's been trapped.

ERNEST GARCIA: It's freedom.

JEN ROGERS: It's free-- exactly. It definitely feels that way. Really great to get a chance to talk with you, Ernie. Thank you so much. Again--

ERNEST GARCIA: Thank you.

JEN ROGERS: --the CEO of Carvana, Ernie Garcia. Thanks a lot.