Carvana, Vroom Are In Serious Trouble

·6 min read

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Both promised big and have delivered mixed results…

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 who were tired of the old dealership games. However, the revolution seems to be losing steam as problems for both companies accumulate. The question moving forward is will Carvana and Vroom be able to weather the storm, or is this curtains for the new kids on the block?

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Carvana

When it went public in 2017, many both inside and outside the auto industry were trumpeting Carvana as the future of car dealerships. After all, “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 9 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.

For his part, Garcia cited several factors to explain away the troubles Carvana has been facing recently. He of course brought up the covid pandemic, something 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 for eroding the bottom line of the company.  Carvana is working to shrink costs by focusing on better managing selling, general, and administrative expenses per vehicle sold. However, the dealership chain says 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 us “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 that the company violated Pennsylvania’s Unfair and Deceptive Trade Practices Act through its issuing temporary vehicle registrations while improperly collecting car registration and licensing fees from customers. According to the court filing, in some cases consumers waited over two years for their vehicle to be registered. That resulted in trouble with local police, sometimes leading to drivers being arrested. Carvana says the allegations have zero merit and claims no liability.

The purchase of Adesa by Carvana has been controversial in some circles. After all, paying $2.2 billion for the group of wholesale auto auction sites at the same time the company laid off 2,500 employees doesn’t look great. Garcia argues 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 admits 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 out in a CBS News report, there are more than 4,700 formal complaints have been filed against the company through the Better Business Bureau alone.

Speaking of the BBB, Don Parsons, BBB of Houston President, claims 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 starting in 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. That isn’t good for the company image, which undoubtedly will negatively impact sales in the coming months.

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 out in droves 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’s Office allege Vroom has “misrepresented and failed to disclose significant delays in transferring clear title and obtaining vehicle registrations” it also says the company “has misrepresented and failed to disclose vehicle history and condition and terms of financing and approval.” Those aren’t the types of things you want to hear about from any dealer.

With problems mounting as there’s talk of the economy teetering on recession and interest rates keep ratcheting up, many will be watching closely how Carvana and Vroom weather the coming storm.

Source: The Street, Bloomberg, Fox Business, WBALTV, Forbes, CBS News, KJZZ14, Texas Attorney General

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