In the driver's seat
CarMax is on the move, expanding in more states and looking for a new CEO

by Jack Milligan
for Virginia Business
April 2006

Just about everyone has a car-buying horror story and CarMax Inc. President and CEO Austin Ligon is no different. Some years back Ligon drove from his home in Chevy Chase, Md., to a car dealer in Northern Virginia to buy the only new Honda CRX Si for miles around. The hot little sports coupe was even the color he wanted — bright yellow. Ligon was in love.

Because the local Maryland dealer didn’t have that particular model in stock, Ligon had been forced to call around to other area dealers until he found one on the far side of Washington, D.C. (He won’t reveal the dealer’s name.) He negotiated a price over the phone with one of the salesmen — or so he thought.

“I drove 50 miles around the Beltway, and about 10 minutes into the deal the sales manager comes in [the salesman’s office] and says, ‘Oh, I’m really sorry, George here didn’t have the right to quote that price. We couldn’t possibly sell it for that,’” he recalls. “What they knew was, ‘This guy really wants it; he’s driven all the way over here and he’s not going home without it.’ And I will admit that I bought it. It was the only racing yellow one, and I wanted that darn little car. But I hated myself — hated them — and never quite felt about the car the way I should have given what I went through to get it.”

CarMax — the country’s largest retailer of used cars — was built on the proposition that cars are fun. Buying them should be pleasant rather than a cause for heartburn. Ligon, one of a group of business entrepreneurs that brought the 15-year-old CarMax to life and nurtured it through its early years, says the Honda CRX story turned out to be a valuable experience. “It gave me a sense of the emotional frustration that can be tied up in the car buying process,” he says during an interview at the company’s Midlothian store.

CarMax has prospered by essentially re-inventing the wheel, at least when it comes to used cars. Not only does the company offer a broad selection of cars and no-haggle buying, CarMax doesn’t sell flood or frame-damaged cars, and it guarantees a clean title and accurate odometer readings.

Its unique consumer proposition — much of which came from its one-time corporate parent, Richmond-based Circuit City Stores Inc. — has turned out to be a tremendous competitive advantage. Indeed, Fortune magazine recently named CarMax as America’s most admired company in automotive retailing/services. The company’s position in the highly fragmented used-car market could strengthen considerably over the next few years.

According to securities analyst John C. White at Richmond-based Davenport & Co., “There have been no successful large-scale attempts to replicate CarMax’s model, and as the company has grown in size and experience, we believe the barriers for success by duplication have only grown.”

With sales of approximately $750 billion in 2004, auto retailing is the largest retail segment in the U.S. economy. Used-car sales accounted for more than 70 percent of total vehicle sales last year. CarMax focuses on cars that are one to six years old, and operates 67 used-car superstores in 31 markets throughout much of the Sunbelt and California. Twenty percent of the company’s annual retail sales are initiated through its popular Web site. Solidly profitable, the company earned $112.6 million on sales of $5.3 billion in its 2005 fiscal year (which runs from March through February). Through the first three quarters of fiscal 2006, net income jumped 29 percent to $107.7 million, and sales advanced 20 percent to $4.6 billion, compared to the prior-year period.

CarMax is generating enough excess cash to comfortably fund an ambitious growth plan over the next several years. As part of its expansion, the company has already moved into a new 250,000-square-foot corporate headquarters building in Goochland County that’s employee friendly with covered on-site parking, a fitness center, full-size basketball court and cafeteria. “The next eight to 10 years we expect to double this business twice,” Ligon says. “So if we have 60-something stores right now, we expect to be 250 to 300 stores eight to 10 years from now.”

But assuming CarMax is able to hit those lofty goals — and there is no other chain of used-car superstores on the horizon at the moment — it won’t be Ligon who drives the company to this new pinnacle. Instead, the 55-year-old native Texan plans to retire just as soon as the CarMax board of directors appoints his successor, most likely from the outside. The company’s strategic growth plan “is really about developing management teams and opening stores,” he explains. “It’s not, to be honest, the thing that energized me about the whole business, and it’s really tiring.”

Ligon doesn’t seem too concerned that his departure — he has run CarMax since 1995 — will deflate it. “What we’ve got is a preferred consumer concept with good economics, sound balance sheet and good ability to fund ourselves going forward,” he says. “If we’re going to have someone come in and join our team, it’s a good time to do that.”

CarMax traces its origin to a decision in 1991 by former Circuit City Chairman and CEO Richard L. Sharp to create another large-scale retailing business along the same lines as the consumer electronics retailer. Ligon had just joined the company from Marriott International Inc. as senior vice president for strategic planning, and one of his first assignments was to look for Circuit City’s next big retailing concept. In an interview, Sharp — who still serves as chairman of the CarMax board of directors — says he wanted to identify a business of sufficient size and scale that could eventually grow to become a $10 billion to $15 billion company.

Ligon oversaw the planning process and recalls that Circuit City officials started by laying out a few important parameters. They wanted to stake out a market that was large enough to accommodate a $15 billion company that had no established competitors. And they wanted a market with the largest consumer gap possible — which Ligon defines as the “gap between what the retail world currently offers and what consumers ideally want.”

The idea of focusing on used cars was actually proposed by Richmond-based consultant Ron Moore, who had been retained to support the undertaking by doing some basic economic research. Ligon describes Moore’s suggestion as an epiphanic moment in which he and Sharp knew immediately the idea had legs. The market was certainly large enough. And was there a business in all of America where the consumer gap was bigger than selling used cars? “Everybody thinks it’s fair to lie, cheat and steal,” says Sharp. “It’s a caveat emptor business.”

To flesh out the idea further, the executives conducted a series of consumer focus groups where Ligon got an earful. “People love cars but they hated the [car buying] process,” he says. For example, they hated the “hide-the-peanut” pricing practices that make it very difficult to understand exactly what it will cost to buy a car once trade-in values, financing and discounts are factored in. They also disliked the fact that few used-car lots offered much variety across different makes and models. And of course they worried about buying a lemon. In fact, the newer the model and the lower the mileage, the more consumers tended to be suspicious of it.

“What we came out with was the core concept of CarMax, which is no-haggle pricing,” says Ligon. All cars would be sold for a non-negotiable price, which was clearly indicated, and the company designed a financing process that tried to take the mystery out of getting a car loan. Plus, CarMax tried to deal with the quality issue by offering a five-day, no-questions-asked return policy on all used-car purchases and by giving buyers a 30-day limited warranty. Before CarMax puts used cars on its lots, they go through a 125-point inspection and reconditioning process.

Another important decision CarMax made early on was to pay its salespeople the same flat commission regardless of the purchase price, which eliminated the temptation to steer consumers toward more expensive vehicles. The company also looked to hire people with retail sales experience rather than a car background. Ligon says the perfect model for a CarMax salesperson is “one of those English butlers you see in the movies, somebody who’s unobtrusive, there when you need them and if they don’t know the answer can get it quickly.” Of course, butler is a masculine term and CarMax also decided early on to hire a lot of women. They are a significant force in the car buying market and tend to trust other women as salespeople more than men.

For customers in need of financing, the company devised a loan application process that is as simple and transparent as possible. Unlike conventional dealerships, CarMax stores do not use a separate finance manager; the salesperson takes the customer through that process as well. Both sit and look at the same information on the computer screen. Customers with excellent credit can apply to the company’s lending subsidiary — CarMax Auto Finance — or Bank of America Corp. in Charlotte. Customers with less-than-prefect credit have several other third-party lenders to choose from.
When the company opened its first superstore on West Broad Street in Richmond in September 1993, there were no shortage of skeptics. After all CarMax was the first of its kind — a big-box retailer selling used cars — and people had trouble understanding the concept. “No one could fathom what was going on until we built the first store,” says Sharp. One of those early skeptics was George Hoffer, an economics professor at Virginia Commonwealth University who specializes in the auto industry. Hoffer thought CarMax was spending too much to acquire cars for resale. “It seemed like their costs were too high,” he says. “Can you name any national retailer who doesn’t get its inventory cheaper than its smaller competitors?”

CarMax expanded quickly over the next five years, growing to 29 stores. That steep growth curve was driven in part by the entry of Ft. Lauderdale, Fla.-based AutoNation Inc., the country’s largest auto retailer, into the market with a similar strategy. AutoNation eventually discontinued its used-car venture in 1999 (although the company’s 281 new car dealerships still sell used cars), which allowed CarMax to take a three-year breather from expansion and focus on operational improvements. Ligon had been appointed president of the company in 1995, and two years later Circuit City spun a part of the company off in an initial public offering of stock. The rest of the company was distributed to Circuit City shareholders in 2002, the same year that Ligon was named CEO. “Austin is one of the brightest and most capable people I’ve run into,” says Sharp.

In addition to its unique consumer offering, a big competitive advantage for CarMax has been its use of technology, beginning with inventory management. The ability to buy used cars is central since the typical CarMax store carries an inventory of 300 to 400 vehicles, and turns its inventory over eight to 10 times a year. More than half of the inventory is purchased directly from private owners, many as trade-ins, while the balance comes through public auctions. CarMax has developed a highly sophisticated database of pricing information which gives the company’s 600 or so car buyers very specific guidance on how much to pay for any make or model. They know what the resale price is likely to be and how long it will take to sell, which allows CarMax to manage its inventory turnover rate. “They use data rather than gut instinct,” notes VCU’s Hoffer.

Mark O’Neil, a veteran car guy who Sharp recruited in 1992 to oversee management of CarMax’s growing network of stores, says the company’s technological prowess now extends well beyond how much to pay for, say, a 2002 Toyota Camry. O’Neil, who left CarMax in 2001 to become president and CEO of Lake Success, N.Y.-based DealerTrack Inc., a technology solutions provider that focuses on the auto retailing industry, says CarMax uses its knowledge of historical buying patterns to arrange cars on store lots the same way a more traditional retailer would stock its shelves.

Popular items go in certain locations; less popular items somewhere else. O’Neil figures that CarMax enjoys a 10-year technological advantage over most of the retail auto industry. “I think CarMax has been a showcase in the industry on how to improve auto retailing through technology,” he says.

Over the next several years CarMax wants to grow its store base by 15 percent to 20 percent a year. And with just 1.5 percent of the highly fragmented used-car market, based on Davenport & Co.’s estimate, and with a great many markets yet to enter, CarMax should be able to sustain that growth rate for many years to come.

Ligon makes it clear he’s stepping away from the company because he wants to do something different with his life. Now that the creative, entrepreneurial phase in CarMax’s evolution is now largely over, he feels someone new can comfortably lead the expansion. “I feel like for me and for CarMax this is a good transition point,” he says. “It has a very clear path for the future…” The new CEO, adds Ligon, will most likely come from the outside since the current crop of senior managers just below him are not quite seasoned yet to run the company.

With personal holdings of 1.2 million shares of CarMax stock (having a market value in mid March, at $35 a share, of $42 million) and more than a million options, Ligon has a strong financial interest in seeing that the transition goes smoothly and will remain as CEO until that has been accomplished. Then he plans to take some time off and travel with his wife and three children before considering various ways of reinventing himself.

He speaks wistfully of friends and acquaintances that were fortunate enough to be able to retire early and start new careers that were really avocations — including Roger H. Brown, who became head of the Berklee College of Music in Boston after co-founding a successful childcare company, Bright Horizons Family Solutions. Ligon and his wife have purchased a horse farm in southern Albemarle County and are in the process of renovating an old farmhouse there.

Ligon will no doubt prosper in this next phase of his life, as will CarMax. His accomplishment in helping to create an entirely new kind of retailer is underscored by the fact that CarMax was named for the second year running to Fortune magazine’s annual list of “100 Best Companies to Work For” in 2006. One employee perk: associates can buy a car at cost plus $300 if it has been for sale on a lot for more than 14 days. Given the low regard that Americans have typically held for the trade, it says something when you’ve built a used-car company that customers want to do business with and employees want to work for. That sounds far too sweet to be a lemon.