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Off the Lot

Once Circuit City's redheaded stepchild, CarMax emerged as an industry innovator with a sophisticated mix  of Web-based retailing and Richmond conservatism.

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RICHMOND'S CORPORATE SECTOR has taken a severe beating since 2007, when global economies plunged into the worst recession since World War II. Big-name companies LandAmerica, Qimonda and Circuit City failed and Wachovia Securities moved away, taking with them thousands of jobs and making unemployment here the highest of any metropolitan area in Virginia. Worse still, the recession exposed a veritable identity crisis: Richmond, once home to innovators and groundbreaking retailers, from Best Products to Ukrop's Super Markets, suddenly became a town without a drum to beat.

CarMax, however, stands out as a new bandleader.

The innovative, Goochland County-based car seller with dealerships in 26 states trimmed its sails and weathered the storm while General Motors and Chrysler struggled through bailouts and bankruptcy. Locally, some GM-related dealers such as Dominion in Colonial Heights and Whitlow Chevrolet in Chesterfield County were forced to shut down.

Despite some layoffs of its own, CarMax is back in expansion mode, forging ahead with delayed openings of stores in Dayton, Ohio; Augusta, Ga.; and Cincinnati, bringing its national total to 103 stores. CarMax racked up a 23 percent increase in net sales and operating revenues in its quarter of March, April and May of this year compared to the same period a year ago, beating most analysts' expectations. Same-store sales grew 9 percent in the same quarter.

 The nation's No. 1 used-car seller has a huge inventory and benefited from a recent spike in prices for used vehicles. Even so, CarMax Chief Executive Tom Folliard, a sales wunderkind hired from a dealership parking lot in Florida back in the 1990s by CarMax's founders, warned shareholders at an annual meeting June 28 that despite the brightening news, “I still think we're in for a little bit of a rough road.”

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To be sure, CarMax's stock has been languishing at about $20 a share, in part because some investors are skittish while the company shifts back into growth mode. But with consumer confidence still lagging and stock markets as volatile as ever, anything positive these days is heartening. What's more, CarMax's story is a homegrown mix of innovation and risk-taking, qualities that are sorely lacking in a town that lately tends to follow, not lead.

Greater still, CarMax may offer a blueprint of sorts for how to expand into a 21st-century juggernaut.

Detroit carmakers ended up begging for public bailouts after serving up tired, gas-guzzling brands and selling them the same old way for years. Yet CarMax managed to use new technology to find out precisely what buyers of used cars wanted, streamline the process and introduce a new bargaining transparency that rose above the stereotypical sleaze factor that stuck to much of the used-car market since the days of the Model T Ford. The system also helped squeeze out costs in an industry that's notoriously low on profit margins and huge on inventory costs, which often spell disaster in a deep recession.

In a curious irony, CarMax was hatched by now-dead Circuit City. The Richmond-born mass electronics retailer rode the television and hi-fi stereo wave from the 1950s to the 1990s before repeated management blundering took it down in 2008. Some observers believe the demise of Circuit City was in part because of the brain drain that prompted top talent to leave the electronics chain for CarMax after it opened its first dealership in Richmond in 1993. Perhaps even more ironically, in the mid-1990s it was CarMax that caused heartache at Circuit City headquarters. In its first seven years of existence, CarMax frequently came under attack by analysts and academics as a profit drain on then-mighty Circuit City. 

Back in the day when Circuit City was on the leading edge of retail, it had hired a number of highly capable executives. One was now-retired Richard Sharp, a College of William and Mary graduate who was an electronics maven fascinated with point-of-sale software. He spearheaded CarMax's highly successful computer system that uses the Web to let customers pick out exactly the cars they want. Sharp had been chief executive of Circuit City and became chairman of CarMax after it was cut loose in 2002. He left in 2007.

It turns out that the proprietary system is a factor that gave CarMax unexpected strength during the recession because it eliminated the need for lots of middle-men and streamlined the car-buying process. Customers get a non-negotiable price that, even if they aren't entirely happy with it, cuts through the cheesy bickering that long had shaded used-car sales.

Such as system makes CarMax stand out in a glutted used-car market. “They are a bright, shiny star,” says George Hoffer, an economics professor at Virginia Commonwealth University, who adds that CarMax has learned how to get tight and tough after “near death” experiences, the first being a shootout with megastore competitor AutoNation in the late 1990s. “They have gone up the learning curve, they are in the driver's seat,” Hoffer says.

As guiding stars go, CarMax just might be the new constellation.


 

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Tom Marcey, regional vice president for CarMax, says the company will buy any car but won't sell one unless it meets certain standards. Lower gas prices have made SUVs popular again, he says.

A COUNTERVAILING TREND for CarMax is how the company presents itself and treats its employees. While many used-car dealers are plagued by high turnover, intense pressure for sales and beaten-up offices, CarMax's headquarters is a modern, 250,000-square-foot glass structure set in a forested 130-acre tract in Goochland's West Creek office park across the road from Capital One Financial. The building, finished in 2005, is marked by bright reds, greens and blues in interior sections of a building that has a silver certification from the Leadership in Energy and Environmental Design designating it as being earth-friendly and energy-saving.

In the lobby, there's a boxy, black Scion with photos showing the damage that it had sustained before someone tried to sell it to CarMax. The point of the exhibit is to show that although CarMax purchased the car, following its policy of offering to buy any car regardless of condition, the company will not try to pull anything over its customers. The Scion remains unsold because company policy is not to market any car with flood or frame damage.

The campus also has a modern cafeteria and a gymnasium with a basketball court and exercise machines plus showers for 600 or so workers who can sweat off a few pounds running on outdoor paths through the property.

CarMax has been named one of Fortune magazine's 100 best companies to work for — a designation it's won for the past six years. The 2010 selection placed the chain just behind the Mayo Clinic and in such company as software giant Microsoft, consultant Booz Allen Hamilton and insurer USAA.

The point of the plush offices and the casual dress code is to make workers believe they are special and hence should act accordingly. “What makes us work is the integrity throughout the whole process. It hasn't changed,” says Tom Marcey, mid-Atlantic regional vice president and general manager in Richmond.

Sales personnel are trained to adhere strictly to the company's sales procedures, which specify that representatives explain in detail to customers how to use their software to search for the car with all the detailing they want and come to a “haggle-free” price. The process is designed to be fast and efficient.

CarMax also will buy just about any car, but it concentrates on ones that are younger than six years old with fewer than 60,000 miles. Older models are accepted and they are later sold at auctions CarMax sets up for select dealers. Typically, a seller can go through the process from appraisal to title transfer and check cutting in about 30 or 45 minutes. “We'll buy any car,” Marcey says. “We'll even help the customer push it in the driveway.”

Most CarMax salespeople are trained at individual stores, but those involved in appraising car values, a 125-checkpoint process, get more education. They cross-check what they see with industry reports on any crashes the automobile has been involved in and make assessments accordingly. The vehicles feed a wholesale car market that's been a source of surprising strength for CarMax, analysts say. CarMax's wholesale car sales grew 52 percent for the quarter of March, April and May of this year compared to the same period a year ago, despite the feeble recovery.

Trends Marcey says he sees are a much greater computer savvy by customers and a renewed interest in sport utility vehicles because gas prices remain relatively low. “When I started at CarMax in 1993,” he says, “customers would come in with newspaper clippings and Kelley's Blue Book. Now we see computer printouts.”

According to VCU's Hoffer, CarMax has absorbed a number of hard lessons. It went through a near-death moment in 1997-'98 when it went toe-to-toe with competitor AutoNation, founded three years after CarMax by famed entrepreneur Wayne Huizenga, who made his name running Blockbuster and Waste Management.

At the time, both CarMax and AutoNation were rushing to open up new store after new store in fast-growing Sunbelt markets such as Atlanta and Florida, Hoffer says. Doing so at the pace they maintained was enormously expensive and ensured only one winner. It turned out to be CarMax as AutoNation backed out of the used-car business and started selling only new models.

Winning the fight had an added benefit for the Richmond company, which not only killed a tough competitor, buy also emerged as a dominant force without a true challenger.

Meanwhile, CarMax marched to its own drummer in terms of management, spurning business trends that were in vogue for others. For example, CarMax held its precious computer and software system close to the vest while other companies outsourced their information technology functions. That turned out to be a wise move. A report from InformationWeek Analytics shows that of 530 businesses surveyed, 60 percent outsourced IT but more than half said the service they got was substandard. For problems in Virginia, one need look no further than Northrop Grumman, mired in controversy with the state, which let the company handle much of its information technology needs.


 

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CarMax's headquarters in Goochland County's West Creek office park features employee and environmentally-friendly decorations, amenities and lighting.

WHAT'S NEXT FOR CarMax? Assuming the worst of the recession is in the rearview, the company gradually will build back to a faster-paced growth schedule that should go beyond plans to open three to five stores in 2011 and another five to 10 stores in 2013.

Not long ago, CarMax was opening a store a month, but in October 2008 adopted a corporate-wide policy to hunker down and cut costs. The company cut 3,000 jobs, including 600 layoffs, during the period, although the company recently started hiring again. The company was able to spend the expansion break working internal systems. The exercise managed to shave $200 from the cost of refurbishing the average vehicle for resale, Folliard recently told analysts.

Clint Fendley, an industry and stock analyst at Davenport & Co., writes that CarMax has lots of opportunities to grow. Despite an annual sales volume of 350,000 vehicles and more than 100 stores, the company still commands only a mere 2 percent of the national used-car market. “This is primarily due to the highly competitive and fragmented used vehicle market, which consists of nearly 55,000 dealers and millions of private individuals,” Fendley reports, adding that CarMax has room to add another 300 stores.

Marcey notes that CarMax is in 26 states and tends to have congregated in the mid-Atlantic, Sunbelt and part of the West. The retailer doesn't have much presence in the Northeast and “we have nothing in the Northwest,” he says. At the last Super Bowl in New Orleans, for example, CarMax bought television advertising time, but the ad aired only regionally. CarMax remains a relative unknown in about half of the country.

Hoffer expects CarMax to ramp up store openings in new parts of the country, especially in the Midwestern Rust Belt. One reason is that the demise of many venerable U.S. car brands such as Oldsmobile, Pontiac and eventually Saturn will open up the U.S. car market. Filling it in the next decade or so could be Chinese or other new carmakers, Hoffer believes.

If it had a truly national network of dealers, Hoffer says, CarMax could be a natural retailer for imports from China or India. Because many Americans would recognize the CarMax brand name, it might make it easier for Chinese or other new foreign importers to get around a lack of brand-name recognition. “It's a perfect platform for a Chinese vehicle,” Hoffer says.

Shorter-term, some analysts spot negatives with CarMax. The online service of Barron's sees that the slight rise in CarMax's shares of late might stall out. The stock trades at about 15.5 times earnings, “which seems a little pricy,” Barron's reports. The company's stock doesn't pay a dividend and is cash-constrained. “The stock … could give up some of its ground in the future, which will make it more of a bargain at a time when there may be more clarity about the economic recovery.”

Katharine Kenny, CarMax's investor-relations director, notes that besides the stock market being depressed after a run-up of more than a year, consumer confidence and continued unemployment are still dogging CarMax's stock. But, she says, “Earnings and gross profits have improved.”

For Richmond, having a corporate winner after three years of closings and relocations is a rare bit of good news. With its gleaming headquarters, CarMax doesn't seem to be going anywhere anytime soon. Meanwhile it contributes to the community through the CarMax Foundation and to the Boys & Girls Clubs, and funds a summer basketball league for inner-city children at the Pine Camp community center on the city's North Side. A pet charity is Camp Little Hawk in Goochland, which operates during the summer for children.

Corporate giving in Richmond has taken a drubbing in recent years, leaving a few corporate behemoths such as cigarette maker Altria and energy utility Dominion Resources taking on much of the work. CarMax has helped pick up the slack by supporting the nonprofit community “during this recent rocky economy,” says Greg Wingfield, president of the Greater Richmond Partnership. Perhaps more significantly, CarMax carries the baton of retail innovation in a town once renowned for producing cutting-edge businesses and industry standard-bearers.

Correction: In earlier print and online versions, Style incorrectly reported the number of layoffs at CarMax since 2008. About 3,000 jobs were cut mostly through attrition, including 600 layoffs. 

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