Business Strategy and Outlook| David Whiston, CFA, CPA, CFE |
CarMax's revenue has increased at a compound annual rate of about 13% since fiscal 2000 because of the success of customer-friendly sales practices and use of information technology. The firm targets between a 12%-19% annual growth rate for fiscal 2021 to fiscal 2026. Competing dealerships have tried no-haggle pricing and failed because their salesforces are trained to focus on selling vehicles that earn the highest possible gross profit rather than vehicles that customers actually want or need. A traditional dealership relies on profits from service to offset the typically lower margins it gets on new-vehicle sales. CarMax does not hire salespeople from the auto industry, and salespeople receive the same commission regardless of the vehicle sold. They do not even know the profit on the vehicle sold. The CarMax customer stays with the same salesperson throughout the transaction rather than being passed off to a finance department, receiving a buying experience that is hard to match at a dealership. This focus on customer satisfaction, combined with scale advantages that allow for a wide inventory selection and extensive pricing data, create a narrow economic moat.