For some time, upstarts Carvana and Vroom have been transforming how thousands of Americans buy their cars. Focusing on internet sales and non-traditional delivery methods, these chains enamored cynical consumers tired of the old dealership games.
However, problems for both companies are accumulating. The question moving forward is will Carvana and Vroom be able to weather the storm?
Carvana
When it went public in 2017, many both inside and outside the auto industry were trumpeting Carvana as the future of car dealerships. "The Amazon of car dealers” was surging despite critics waving it off as a short-lived fad. However, that meteoric rise suddenly sputtered and reversed course this year as news hit that Carvana was laying off 2,500 employees.
During an earnings phone call with investors in April, Carvana CEO Ernie Garcia described the first quarter of this year as “challenging.” He tried to calm potential jitters investors might very well be feeling, thanks in no small part to J.P. Morgan characterizing those Q1 results as “confidence shattering,” since the company lost more per share than originally predicted. In the past nine months, market value for Carvana has plummeted a whopping 92%. It seems the “growth-at-all-costs” strategy has sputtered.
Sales for Carvana dropped 7% during the first quarter of this year. Thanks to car prices increasing, many people have simply been priced out of buying a different vehicle.
That factor should be affecting more than just Carvana, signaling potential trouble across the industry. The difference between other dealers and Carvana is Carvana struggled to manage its excess inventory gracefully, thanks in part to what some former employees claim is explosive growth contributing to logistics problems. Ultimately, during Q1 of this year, Carvana lost $3,255 for every vehicle sold.
Garcia cited several factors to explain away the troubles Carvana has been facing recently. He brought up the COVID pandemic, which initially worked in favor of the company, as people wanted to buy cars but didn’t want to interact with others face-to-face. Buying a used vehicle from a giant vending machine or having it delivered at their house was soothing for many, but that charm seems to have worn thin.
Garcia also referenced skyrocketing used car prices along with climbing interest rates. Carvana is working to shrink costs by focusing on better managing expenses per vehicle sold. However, the dealership chain said it’s aiming to not negatively impact each customer’s buying or selling experience as a result of cuts. But that’s where another issue plagues Carvana.
An industry source told Motorious that “Carvana is no longer allowed to sell in some states because of their title issues.” That’s backed up by multiple reports across the country.
For example, Illinois recently suspended Carvana’s dealership license after an investigation concluded the company has been failing to transfer vehicle titles to customers while abusing out-of-state temporary registration permits. Carvana reportedly will have to correct these problems before the suspension will be lifted.
Carvana has had hundreds if not thousands of complaints filed against it in states like Maryland, North Carolina, Florida and Texas. Chalk it up to logistical problems as the company has set up dealership locations all over the nation, but many customers have complained that after months of waiting, they still didn’t receive their vehicle title and couldn’t register their new ride in their state.
Meanwhile, a class action lawsuit has been filed against Carvana in Pennsylvania. The allegation in that suit is the company violated Pennsylvania’s Unfair and Deceptive Trade Practices Act by issuing temporary vehicle registrations while improperly collecting car registration and licensing fees from customers.
According to the court filing, in some cases consumers waited more than two years for their vehicle to be registered. That resulted in trouble with local police, sometimes leading to drivers being arrested. Carvana said the allegations have zero merit and claimed no liability.
The purchase of ADESA by Carvana has been controversial in some circles---paying $2.2 billion for the group of wholesale auto auction sites at the same time the company laid off 2,500 employees didn't look great. Garcia argued the move will reduce costs associated with refurbishing and shipping used cars. Time will tell if it was a wise investment or a misstep.
Vroom
Surging in market share, Vroom has seen sales skyrocket as revenue increased 167% in the past year. That kind of growth has come with its fair share of logistical problems, like what Carvana has suffered. In fact, an SEC filing from the company admitted it’s suffering “operational challenges” as it continues expanding.
And similar to Carvana, Vroom faces thousands of official complaints filed by customers across the nation. Those complaints allege the company has delayed getting car titles and registrations to consumers after the purchase process was completed.
As detailed in a CBS News report, more than 4,700 formal complaints have been filed against the company through the Better Business Bureau alone.
Speaking of the BBB, Don Parsons, president of the BBB's Houston chapter, said no other company generates more complaints than Vroom. With multiple problems reported every day, Vroom has an “F” rating and was stripped of its BBB accreditation.
Government trouble for Vroom has been mounting as well. The Texas Department of Motor Vehicles has cited the company for 80 violations since 2019, and 59 cease and desist orders. Because car dealers have 30 days from the date of sale for a vehicle to be registered with the Texas DMV, or 45 days if the car is financed, Vroom has picked up a lawsuit from the Texas Attorney General’s Office for deceptive trade practices.
Vroom was hit with 47 counts of not transferring a vehicle title by the Florida Department of Highway Safety and Motor Vehicles recently. That violation of state law also came with a $47,000 fine.
Arizona is looking into customer complaints as well, so more fines and citations might be coming soon.
While complaints about the company have been pouring in from customers in other states like Massachusetts, Utah and Tennessee, Vroom is a licensed dealer only in Texas, Arizona and Florida, so there’s no going after its license elsewhere. Still, consumers can file complaints with their state’s DMV and with authorities from the state where the car was sold.
Not only does the Texas AG Office allege Vroom has “misrepresented and failed to disclose significant delays in transferring clear title and obtaining vehicle registrations,” it also said the company “has misrepresented and failed to disclose vehicle history and condition and terms of financing and approval.”
