June 3, 1999

by Alex Daniels

Staff Writer

CarMax Auto Superstores Inc., the big-box used car retailer owned by Circuit City Stores Inc., is hoping to find a new lease on life in Montgomery County.

It opened its first store in the county -- following three others in the Baltimore-Washington area -- in Rockville last month.

When the company unveiled its strategy in 1993, its first year of operation, it was heralded as visionary. Many industry watchers thought the company, which operated huge retail outlets where customers could test-drive all sorts of makes and models, was paving the way for car sellers of the future. The plan hinged not only on high volume -- each of its lots could accommodate up to 1,000 cars -- but also on its unique "no haggle" policy. Customers could be assured that the price affixed to the window tag was the amount they would pay for their car.

W. Austin Ligon, president of the company, says that by taking negotiations and "deception" out of the business, he has made buying a car fun. "People react positively to the differences," he says. "We try to keep a fun environment in the store" -- which includes a children's play area complete with video games and stuffed animals -- "and not take ourselves seriously."

Six years later, the company has yet to capitalize on its plan, which spawned a number of knockoffs, such as AutoNation Inc. and the Car Corporation of America.

While its sales have risen consistently, CarMax continues to bleed. In its fiscal year 1999, which ended in March, the company reported losses of $23.5 million on sales of $1.47 billion. While total sales were up 68 percent from the previous year, same-store sales declined by 2 percent. Its stock also has taken a beating, sinking from its 52-week high of $13.438 to close at $4.94 on May 4.

Ligon has mapped out a new course for the company; its success largely hinges on the fortunes of its new outlets. While the company is dedicated to its raison d'être -- a hassle-free, no-haggle policy -- and is touting its large selection of vehicles, the Rockville location represents a departure from the company's original superstore strategy. Unlike its other stores, the Rockville location will accommodate only about 300 vehicles and will not have the large service area (some stores have more than 50 car lifts) found in its other locations.

Customers in larger markets, such as Washington and Los Angeles -- where the company is also trying to establish a presence -- don't travel as far to purchase a car, largely because of traffic congestion. Land prices in these areas often are prohibitive. Rather than open more superstores, Ligon has opted for a "hub and spoke" strategy, opening smaller outlets that revolve around a superstore.

By opening a smaller store "we can come into a high-cost area like Rockville Pike, where land is at a premium," says Ligon.

But where Carmax sees potential for success, others have experienced disappointment. CarMax didn't have to construct the new store; it had been vacated only a few months before by the Car Corporation of America, which left the business altogether.

But that doesn't seem to worry Ligon. He says CarMax's size allows it to buy cars at a high volume and spend more on advertising -- $50 million is budgeted for this year -- than a smaller company.

Not all are convinced that CarMax's plan will pan out.

"If you figure 'we'll just do it with volume,' that poses a problem on the other side of the ledger when you try to establish yourself as a profitable enterprise," says Gerard Murphy, president of the Washington Area New Auto Dealers Association.

The 200 franchises belonging to Murphy's association represent the stiffest challenge to CarMax. New car costs increased only marginally over the past few years, and dealers offer incentives to get people behind the wheel of a car just delivered from the factory. These incentives add to advertising clutter, making it more difficult for CarMax to get its message out on the airwaves.

Says Murphy: "It still remains to be seen whether [CarMax's] model is going to be viable. It hasn't been lucrative," so far. The problem, he says, is largely because of consumers' buying habits. When making a purchase as major as an auto, he says many people expect there to be flexibility in the price.

"Car purchasing is a very personal process to most folks," Murphy says. "It has been a negotiated transaction since there's been a business."

Used car sales, once the stepchild business of new car dealers, is also taking a higher profile.

"There's more interest in the used car market than there ever has been," says Wayne Gates, used car sales manager at Rockville's Manhattan dealership, where customers can shop for Mercedes, Jaguars and Lincolns. Gates says more and more people are comparing prices on the Internet, which is increasing his company's geographic sales range and boosting the level of competition.

But Jacob Cohen, managing director of American Express Tax and Business Services in Towson, notes that CarMax is invading new dealers' turf as well.

"Their business model is beginning to become obsolete, but they're modifying it fast," he says.

Three years ago, automotive industry consultants J.D. Power Associates predicted that CarMax would be part of a "revolution" in car retailing. They have now scaled back their expectations.

"It hasn't really caught on like wildfire like people expected," says Tony Cohen, a senior research manager at the company. Cohen says the sales model will still have a great impact, but the company simply needs to experiment with it.

And the company is responding. In 1998, CarMax opened its first new car dealership and now combines new and used operations at several of its locations.

"It gives a better impression," says Cohen. "It also helps bring in more traffic."

Cohen says that in the Washington, D.C., area, cars are a $15 billion business, accounting for one-sixth of all retail sales.