Carvana to cut 1,500 jobs as online auto dealer’s troubles mount

That depends on the interest to carry a car in inventory. Contracting margins plus increasing "floorplan" (what dealers call the line of credit they use to buy inventory) rates can be devastating.

The market need that Carvana met was reducing the hurdles of buying a used car for those people who generally don't buy used cars. The biggest hurdle is financing. The second biggest is fear of getting a lemon, which is why they have those inspections, guarantees of service and taking the vehicle back. The last hurdle was doing this from the convenience of your home and not dealing with car salesmen. All of these were things that could be done by others, but with more frictions, and Carvana was lowering the bar.

In exchange for adding this value, they are able to charge a premium. That premium is not coming from expert selection of car inventory or buying the cars for less.

Unfortunately the cost that carvana spends to provide these value adds exceeds the premium they can charge. That was true before their margins contracted, and it's even more true now. In fact, carvana is being squeezed like a sandwhich, as as their funding costs are going up even as the willingness of buyers to pay a premium for carvana services are declining, causing the gross margins to go down.

Carvana's biggest cost is rising interest rates. They literally borrowed at 10% in order to extend 5% auto loans to their customers. This is the problem they are in. And there's nothing they can do about their funding costs - investors charge them a premium because it's not clear that carvana is going to be around. Declaring chapter 11 is not going to give them a lower cost of capital, so they will need to get rid of their fleet somehow.

Now whether the fleet goes for a big discount to end consumers has nothing to do with Carvana, because odds are some middleman will buy the fleet, rather than having them do a going out of business sale. We are talking about billions in inventory - an alarming accumulation of inventory:

https://www.macrotrends.net/stocks/charts/CVNA/carvana/inven...

At a higher interest rate, you need to move inventory more quickly, because you are effectively taking out a loan when you buy the car and pay for a warehouse in which it sits and does nothing. The cost of carrying that inventory is higher when rates go up. It is higher for carvana and for whomever buys the fleet. This applies to all inventory everywhere.

So, don't look for special discounts from carvana, look in general for falling prices in the sector as a whole, as dealers and manufacturers continue to get squeezed by the twin rocks of rising interest rates and falling demand.

Not that I don't doubt the cars they sell are sometimes (often?) trash. I sold a 370z to them this summer and the amount of due diligence they performed before paying was practically nil. They didn't even open the hood, or drive it more than the half mile around the block staying <20mph and probably <20% throttle too. It was mildly horrifying to this ex-gearhead who's bought and sold over a dozen cars/bikes in my time.

Great way to sell your car, awful way to buy your car.

With the 7day/100day cushion (100 days or some # miles for mechanical/safety repairs like brakes) I thought they might be losing money because the car had issues which their repair firm had to take care of. Not many local used car lots are going to do that. Maybe they were scooping up less than ideal inventory and its eating away their profits with the repairs.

Carvana is a DriveTime spinoff, and leverages their existing infrastructure for all used vehicle processing -- massive warehouse-style facilities designed to process those vehicles as rapidly as possible and stage them around.