How Carvana’s expansion to new vehicles could reshape the U.S. market

After growing to become one of the largest used car retailers in the U.S., Carvana is expanding into the new vehicle market.

The company has quietly purchased seven new vehicle franchises since last year that primarily sell Stellantis‘ Chrysler, Dodge, Jeep and Ram brands, including a store in Arizona that has become the automaker’s largest volume store in the U.S.

Dealers and industry experts said they believe the move could significantly disrupt, if not reshape, the century-old new vehicle franchised dealer system.

“Carvana entering the new vehicle franchise business may be one of the most disruptive forces that auto retailing has seen in the U.S. market in decades,” John Murphy, a longtime Wall Street analyst and automotive consultant told CNBC.

The U.S. franchised dealership system — which includes 16,990 retailers that topped $1.3 trillion in sales last year, according to the National Automobile Dealers Association — has historically been reluctant to change. yet, dealers have grown more adaptable in recent years as a means of survival, including during the pandemic and with the rise of publicly traded dealership groups.

Carvana’s first new car dealership for Stellantis in Casa Grande, Arizona, has grown quickly. It sold more than 700 new vehicles last month, according to Stellantis figures shared with dealers and provided to CNBC.

That made it the best-selling store nationally and compares with an average of roughly 30 to 50 monthly sales the store was doing prior to Carvana purchasing it early last year, as first reported by The Wall Street Journal.

Carvana and its CEO Ernie Garcia have declined to comment about the franchised stores or details of the businesses ahead of a media event this week at which the retailer is expected to disclose its plans.

Carvana’s locations, many of which feature its signature large car vending machines, have historically acted as delivery and drop-off points where customers can pick up vehicles they purchased online or turn in a vehicle they sell to the company. And up until last year, those vehicles had been used cars, trucks and SUVs that were largely brought from auctions and individual consumers.

Adding the new vehicle business not only provides additional revenue for the company, it opens up other avenues for Carvana to more easily purchase used vehicles from their new vehicle customers and through exclusive auctions only open to franchised dealers.

“That is a significant game changer in the secondary market,” Murphy said regarding the private auctions. “If that expands to other brands, that is going to be an advantage.”

It also helps Carvana better capitalize on the complete lifecycle of a vehicle. The dealership model is comprised of four main areas of growth: new, used, parts and service, and finance and insurance.

Carvana has previously covered used sales and F&I, including selling consumer auto loans it originates to institutional investors and partner banks, such as Ally Financial, to maintain liquidity. Adding the new franchises is expected to bring Carvana into the other areas as well. 

“After stabilizing their core business, I think they realized, by looking at the franchise model, that there was a significant amount of revenue and gross profit opportunity that their business model didn’t even contemplate,” said Brian Gordon, president of dealer advisor and broker Dave Cantin Group.

In some states, such as Michigan, the only way to legally purchase a new vehicle is through a franchised dealer — something direct-to-consumer companies such as Tesla and Rivian have battled with varying results.

An annual study by Cox Automotive, which supports franchised auto dealers, found that most buyers don’t want an all-online purchase or a fully in-person transaction. They want a blend of online convenience with in-store interaction.

Franchised dealers also must adhere to far more regulations and rules from the automakers. They range from showroom layouts and what brands they can sell at certain stores to automaker-defined allocations of vehicles and service and repair requirements, which Carvana does not currently offer for customers.

Not all are mandates, but many automakers incentivize retailers through vehicle allocation as well as financial incentives for offering such services and meeting their requirements.

Carvana is already operating a bit differently though than most dealers, as Stellantis has approved it as a certified website provider for the automaker, which means it doesn’t need to go through an approved third-party company, according to four people familiar with the decision, who requested anonymity to speak about matters that have not been made public.

“It’s bred out of desperation,” said a Stellantis dealer who asked for anonymity to be able to speak freely about the automaker, which has drastically lost U.S. market share in recent years. “It’s given Carvana an opportunity to come into the new car space.”

Stellantis, in an statement to CNBC, said Carvana operates as a “corporate owner” of its brands, similar to other large publicly traded companies such as Lithia and AutoNation.

“We apply the same consistent standards and criteria to all dealer partners, and any organization that meets our qualifications is eligible to operate as a franchisee,” the company said, adding that Stellantis “certifies tools and services that will enhance our program and be beneficial to our network. All certified providers must complete a rigorous onboarding process and meet program standards and requirement.”

Carvana’s foray into new vehicles and its rapid growth have been a discussion between Stellantis’ current dealers and the company, according to Stellantis National Dealer Council Chairman Sean Hogan.

Hogan said competition is always good for the consumer, which is why the franchised dealer model was created, but there are a lot of outstanding questions about Carvana’s new vehicle strategy.

“I’m curious to see what their strategy is and, in the long run, I think competition is good. So, if they’re doing something better than we are, then we will need to adapt, or we’re going to be irrelevant,” said Hogan, vice president of Sierra Auto Group in California.

In JD Power’s annual U.S. Sales Satisfaction Index for franchised dealers that ranks purchase experiences, three out of four of Stellantis’ main brands — Chrysler, Dodge and Ram — were under the industry average.

Carvana has built a nationwide logistics and processing company for vehicles similar to Amazon and its backend operations for processing and shipping consumer goods.

“They have a pre-built out infrastructure, digitally, physically, logistically, that probably gives them an advantage over those big, multibranded public companies,” said Larry Dominique, a longtime automotive executive turned industry consultant.

The business concept of Carvana is simple: Buy and sell used cars. But the process behind it has proven to be complicated, labor-intensive and expensive.

Carvana puts each vehicle it intends to sell through a lengthy inspection, repair and sale preparation process. It ranges from fixing scratches, dents and other imperfections to working on engine and powertrain components. There are also significant logistical costs and processes for delivering vehicles to consumers’ homes.

The other new vehicle Stellantis franchises for Carvana are in Sacramento and San Diego, California; Dallas; Atlanta; Cleveland; and Boston. The new dealerships are in addition to more than 100 other Carvana locations, mainly consisting of vending machines and processing centers.

While large dealers have stores across the country that they can utilize for used and new vehicle inventories, they have traditionally sold regionally to avoid additional shipping costs as well as sales and registration complexities due to selling across state lines.

“Carvana is showing the franchise dealer community how the power of digital can be applied to make a future direction retail model,” Dominique said. “There’s nothing stopping any dealer in the United States from doing that today.”

The company’s traditional vending machine locations do not have parts and service departments, like traditional franchised dealers have, which represent significant profits and customer touch points. That’s one of the main questions surrounding Carvana’s plans: Will they expand into parts and services or leave that for current dealers?

“If they’re going to just be an outlet for new cars, then does that change the dynamic of the dealership model? Who’s going to be responsible for taking care of the customer after the sale?” Hogan said.

Murphy said he believes Carvana may be able to use locations of ADESA, an auction company it purchased in 2022, in addition to the new dealer franchises to potentially service its vehicles.

Carvana has reported it has the capacity to recondition approximately 1.5 million vehicles per year. That compares to its sales of less than 600,000 vehicles last year.

“They do have tremendous capacity to recondition, potentially significantly ramp up their service capability in a way that is not present in other large consolidators,” Murphy said. “I think that problem potentially gets cured.”