Used car sales have defied the dire COVID related expectations, says Carvana CEO Ernest Garcia. “When it first hit there was no doubt that there was a huge hit to demand,” says Garcia. “We saw car sales drop 30, 40, 50, and even 60 percent very early on. They started to recover very quickly by late April and they have continued to recover. That was definitely not the baseline expectation heading in”

Ernest Garcia, CEO of automotive ecommerce retailer Carvana, discusses how COVID has surprisingly been a boon to the used car market over the last several months:

Used Car Sales Up Significantly Year Over Year

When COVID first hit there was no doubt that there was a huge hit to demand. We saw car sales drop 30, 40, 50, and even 60 percent very early on. They started to recover very quickly by late April and they have continued to recover. Many retailers including ourselves are actually up year over year, significantly in our case. It has definitely recovered very quickly and that was definitely not the baseline expectation heading in.

The biggest change has been with the decrease in gas prices. There has been a lot of demand for SUVs and a lot of demand for trucks. But there has been a lot of demand across the board. There has been a lot of demand for off-lease vehicles right now as new production starts to spin back up. There is also a lot of demand for older cars that are a little less expensive. I think across the board we are seeing a lot of demand in all of automotive retail.

There Is Both A Pull Toward Used And A Push Away From New

To some degree, it is pulling from new car sales because used cars are a little less expensive. To some extent, there is a push away from new car sales because production has slowed down and incentives are being pulled back as a result. That is likely to continue for the immediately foreseeable future. There is both a pull toward used and a push away from new as well.

Automotive retail is a very interesting market. On the used side there are 40 million transactions per year. On the new side there are 15 million give or take transactions per year. There are about 40,000 dealers out there. This has always been a market that is enormously competitive and enormously fragmented. Dealers have found a way to persevere and have pretty decent margins over the last 75 years.

We Represent A New Kind Of Business Model

What we represent is a new kind of business model. It’s an ecommerce-centric model where a customer goes to our website, they select a car, they go through the purchase process, and we deliver it to their door using first-party logistics. Then they get a seven-day return policy. That business model has a pretty different cost structure than the traditional automotive resale model. As a result of that, we have additional opportunities above and beyond most automotive retailers.

Used car prices have also been an incredibly interesting and volatile place to watch over the last three and a half months. In April, we’ve had the biggest decrease we’ve ever seen in the Manheim Used Vehicle Value Index, which is one of the measures of used car prices that are broadly used. In May and June, we saw sequentially probably one of the biggest increases we have ever seen in used car prices. They are now at the highest prices they have ever been.

Future Demand Is Very Difficult To Forecast

That market has spun around quite bit, just like the stock market and other gauges of economic activity. It has been very difficult to forecast and I would not want to forecast where it is going to go from here. On the new side, there are likely to be supply shortages. There is a lot of demand today. Trying to figure out what demand is going to look like over the next six months with increased unemployment (payments) potentially expiring and with less stimulus in the economy is very hard.