The rise and fall of CarMax: 32B giant to business failure?!

CarMax went from just a crazy idea from a couple of Circuit City executives in the 1990s to a chain that did nearly $32 billion in revenue in 2021. But today, CarMax stock has crashed by 75% and the CEO just got fired. This video is the rise and fall of CarMax. In 1999, Circuit City was on top of the world. They had 375 stores and over $7 billion a year in sales. But CEO Richard Sharp wanted to be even bigger, and he and his colleagues were secretly working on a skunkworks project that they called Honest Rick's Used Cars. You see, Americans are buying tens of millions of used cars a year, but the experience, it was horrible. In the '90s, buying a used car meant salespeople wearing plaid jackets, dirty, nasty offices, and the dreaded "let me talk to my manager to see if we could do that deal" game. The reason was an economic something we call information asymmetry. The dealers knew all about the history of the car, but the customers, well, they had no idea. And the dealers took advantage of this. Sharpe and his team said, well, what if we rethink this entire model and try to treat the customers like human beings rather than basically victims the way used car dealers did back then? It's changed the way that people buy cars. So in October 1993, they opened the very first CarMax in Richmond, Virginia. The concept at the time was radical. It was a superstore for used cars. You had 500 cars on 20 acres of land and all of them had less than 70,000 miles and were less than 5 years old. CarMax would put every car through a 125-point inspection. Every car gets a 125-point inspection and comes with a free history report. And most importantly, there was no haggling. There's no haggle, no games, just smooth shopping. They offered a money-back guarantee, which helped delay customers' kind of number one problem with buying used cars, which was What if I buy a lemon? While car sales at the time were entirely built upon deception in the used car market, CarMax said, let's be totally transparent and do things exactly the opposite. CarMax went out kind of slowly. They put $170 million into the model, but for the first 4 years they only had 7 stores before they started to scale. They wanted to make sure that they had the model down and would actually take them 7 years for CarMax to show a profit by the year 2000. And in a world of crazy numbers, that year they did $2 billion in sales. They made $1 million. Not much relative to $2,000 million. Crazy. This is the thing that a lot of smart entrepreneurs do. I've, and I've done it myself. You start scaling the business before you really have it all dialed in. In this case, Circuit City took their time and got it right before they started going bigger and broader. In 1997, Circuit City took CarMax kind of public by creating a tracking stock, and that basically allowed them to raise $436 million. To fuel further expansion. By 2002, they had 40 stores total, and Circuit City spun CarMax out entirely into its own independent business. The timing was perfect, though. You might think it was for reasons like people were buying a lot of cars. Actually, it was something different. As you may have learned in another video on this channel, in 2008, Circuit City, the parent company for CarMax, well, they filed for bankruptcy in 2008 and then liquidated entirely in 2009. CarMax got out just in time. And while both CarMax and Circuit City had done the supersize supercenter approach to retailing, one of them survived and one of them died. All the advantages that had made Circuit City a huge business in the '80s and '90s, when the internet came, Best Buy came, Amazon came, and the big superstores like Walmart and Target came, all the advantages that Circuit City once had, those eroded. At the other end of the spectrum, You had CarMax, which was fighting against fragmented used car dealers who were scummy, who weren't transparent with their customers and didn't have any brand. And things would go really well for CarMax. Well, for now. Throughout the coming couple of decades, the 2000s and the 2010s, CarMax built an incredible flywheel of a business. Each store became a virtual hub for kind of pushing cars through the entire marketplace. They would sell cars, they would finance cars, meaning they would loan people the money to buy those cars from them and any cars they couldn't sell, they would wholesale them as well to other dealers. And one of the things is you look at car dealers, the way they make money is not necessarily selling cars, it's servicing cars. But more importantly, they make money from financing those cars. And CarMax had its own financing arm. In 2021 alone, they held $14 billion worth of car loans. They made $800 million in profit just from those loans. More cars sold meant more loans they could hold on their books, which meant more profits. which meant they could build more CarMaxes near you and me. By 2019, CarMax had over 200 stores across 41 states. And even better, they would get 60% of their cars directly from consumers trading them in that they would turn around and then sell, which is much better than competing with other dealers buying them at the auctions. Eventually, CarMax would reach to sell 1 out of every 25 used cars in the nation, 4% of the total market. For 21 consecutive years ending in 2025, they won Fortune's 100 Best Companies to Work For in the United States. The model was seemingly bulletproof, but everything was about to change. And before I tell you about that, listen to a word here from our sponsor. A ton of these rise and fall stories come down to the same factors over and over again. So I put them all in a new ebook on why businesses win and why they lose. You can download it for free at girdley.com/why-they-win. Link in the description below. Now back to the show. The first thing to start to go wrong for CarMax was changing demographics. By the early 2010s, millennials had started to become the largest demographic of car buyers in the United States. Unlike their parents, Gen Xers, and grandparents, uh, they would do 14 hours or more of research on average before they even walked into a dealership to buy a car. And they do that all online. And with millennials being the first generation to grow up with the internet being everywhere, The last thing they wanted to do was haggle in person with some person and with some car dealer. And CarMax, well, it was perfect for them. But millennials were also the first generation to grow up with Amazon, and that meant they didn't really want to go into a car dealership. They wanted to finish their transaction online as well. Other entrepreneurs had seen this trend, and in 2013, that's when Carvana was launched with the idea that you could buy a car and do your whole process and then have it delivered to your house without ever going into a showroom. CarMax wasn't stupid. In 2015, they saw this happening and they started to deliver what is called omnichannel, which was the idea that you could, you know, discover online, do your financing online, maybe even get it delivered to your house. But to CarMax, omnichannel really meant one thing that millennials didn't want, which was search online, buy in the store. Last thing these folks wanted to do was go into a store to buy a car. At the time, CarMax had over 200 stores and 25,000 employees. And it was all optimized for walk into the dealership and make a deal here. Those stores are expensive, at least here in San Antonio. The CarMaxes are on very expensive real estate on the sides of interstates, on nice parts of the town. They're staffed by expensive, well-trained associates who understood basically how to sell cars in person, not online. And CarMax at this time was facing the innovator's dilemma, which is some technology and changes in the world were going to upend their business. And suddenly that meant that they were going to either have to, well, make some huge changes and disrupt themselves or expect to get disrupted by folks like Carvana in the future. And this trend got worse when Gen Z came along. Over 73% of them bought their first car by 21. But to make things even worse, they were even more dedicated to buying online than the millennials were. 43% of Gen Z reported they wanted to buy their car exclusively online. They had no interest in going into a store. At all. Then came COVID in 2020 to 2021. And when the pandemic hit, the very first thing people got was a lot of stimulus checks. They were stuck in their homes and they needed a place to spend them. While demand went up like crazy, production turned into a, well, a mess. Automakers, because they couldn't get chips in order to manufacture cars, lost an estimated quarter trillion dollars in sales in 2021 alone. This meant people couldn't buy new cars. They weren't out there. So they went into the used market to try to buy what was there. And if you remember this time, used car prices spiked by over 40%. Things got so crazy that some car models were selling in 2021 as used vehicles for more than what it cost to buy a new version at list price. A 1-year-old car could cost more than a brand new one was supposed to cost. The problem was there weren't any new cars available. CarMax was a huge beneficiary of this. Their sales jumped 68% in that one year alone to over $31 billion. In 2021, they made $1.2 billion in profit, a record for the company. CarMax sold about 900,000 cars that year at retail, over 700,000 at wholesale, for a total of 1.6 million vehicles. Just an astounding scale in 2021. In 2021 as well, they spent over $400 million to basically build up their digital presence by buying online information provider Edmunds. Again, like most companies we see in this, uh, in this channel who face headwinds, these guys saw what was coming. They were just struggling to react to it. On paper, CarMax was riding the wave, and they'd never been stronger. That year, their share price hit almost $155, and it looked like they couldn't lose. But the boom produced by COVID, it was masking problems, and it was only going to be temporary. Wasn't solving their core structural issue, which was the world was changing around them and they were kind of standing still. But while times were good, CarMax just kept buying more cars and it was doing it basically at the top of the market. I remember at this time, my 2017 Subaru Outback, Carvana was offering me like $30,000 for the thing at the time. It's worth about $12,000 right now. So yeah, it was a crazy time and CarMax just kept buying. Then things started to go further wrong for CarMax. The government started to put a brake on all the inflation. And the way they did that was by raising interest rates. The average interest rate almost doubled between 2022 and 2023. It went from about 8.5% to nearly 12%. Subprime borrowers, people with weaker credit, they could be facing 15% or higher as an interest rate. The math became brutal for buyers. The average new car payment shot up to $730 per month in 2023. For used, it was $560 a month. In 2021, just under 7% of car borrowers had a payment of over $1,000 a month. By 2023, that number was over 20% of people paying more than $1,000 a month. Subprime borrowers started to feel it even worse. In 2023, nearly 7% of them became delinquent on their loans, hitting an all-time high for the past 3 decades. By 2024, 1.78 million vehicles were repossessed. It was the highest number since the 2008 financial crisis. It kept getting worse. By February 2025, nearly 1 in 3 applicants for a car loan were getting basically rejected. It was tough to get financing. And remember CarMax's loan flywheel and buy flywheel and wholesale flywheel? Suddenly it was working in reverse. There were fewer buyers and fewer cars being sold. And so while sales and all that is going down for CarMax, they're still having to pay for all those stores. They have 200 of them and 25,000 people. Many of them stand around doing nothing. But wait, it gets worse. There was another problem hiding in the data. As cars have kind of matured and we've got better at making them as well, basically as humans, the average car now lasts over 12.5 years. That is an all-time high. Cars are now more reliable and lasting longer than they ever have in past. New and used cars, they've gotten so expensive with some entry-level pickup trucks being like $70,000 or $80,000. People are just deciding, well, I'd rather keep that money myself and keep driving the car that's working perfectly well. So just as CarMax is needed to buy the type of cars from consumers that it loves to sell, the ones that are less than 10 years old, the supply of those is shrinking. And in the 2020s, we started to see the rise of electric vehicles in some markets, pushing 20% or even 25% of total vehicles sold. And guess what? For CarMax, they're an entire business built around internal combustion engines. They got caught flat-footed. They just didn't know how to deal with EV prices and EV markets. In fact, CarMax didn't even know how to do battery health testing on EVs until June 2025. And even then, they had to go out to a third party to bring that basically ability into their stores. And while EVs are surging as an option with younger buyers, CarMax just doesn't know how to sell them. And even worse than you necessarily know how to price them. With many EVs getting flooded into the market, with Tesla pushing prices down some by over 40% over a few years, CarMax has again been caught flat-footed. So while all these external market factors and demographics and everything have gone against CarMax, there's been a big competitive threat that's come in, and that's come in in the form of Carvana. In 2022, once high-flying Carvana, the online-only, no-store, and direct-to-consumer used car sales marketplace, it looked like they were about to die. Their stock hit a low of $3.72 in 2022. The stock market had seen they had massive debt, inventory problems, and, uh, it looked like they were going to go bankrupt. But Carvana doesn't have a bunch of stores like CarMax does. They were able to step forward and restructure their entire business. Carvana in this time cut $1.1 billion in expenses, mostly through reducing headcount. Over 4,000 people were let go. All that debt, they restructured it, $1.3 billion, and got it to, well, basically a manageable level for Carvana. By mid-2023, Carvana reported its first profit after years of losses. And get this, the stock went from $3.72 to over $415 in 2 years. That's a 10,000% return if you'd own the shares of Carvana. Carvana is perfectly positioned to take advantage of the new way people want to buy, uh, millennials and Gen Z especially. And you can see it in the numbers. Carvana sales are up over 60% year over year, while CarMax is down 7%. And it makes a lot of sense if you look at it. A typical CarMax car is about 10% more expensive than typical Carvana car. So let's say a typical Carvana car is going to be around $24,000. And by the way, their prices are going down. CarMax's are going up and they're around $26,000. Price sells cars and CarMax is just structurally not in a place to be price competitive. And despite CarMax having 4 times the revenue of Carvana, Carvana is valued by the stock market at more than CarMax. All these headwinds and missing what was coming has finally caught up to CarMax. The CEO, Bill Nash, he announced he was stepping down. In other words, he was asked to leave by the board and he'll be leaving in December 2025. And one of the ways you could tell he was fired is there's an interim CEO. A man named David McCrae, who had been a board member. He's been put in as interim CEO. CarMax is now trading below $39 a share, down over 75% from its peak. The stock is the lowest it's been since 2012, and it's lost over $11 billion in market value. They keep doing layoffs. In October 2024, they laid off over 400 people. They did it again this year in 2025, laying off another 350. Mostly logistics drivers. If you're not selling cars, well, you don't need anybody to drive them around. And they're going the wrong way on customer perks. One of the things they were famous for was a 30-day money-back guarantee. Bring it back, any reason, no questions asked. In this case, they've reduced that car warranty and guarantee down to just 10 days. And in this case, the numbers and therefore the board are sending a clear message to the CarMax leadership. The old playbook isn't working. If you look at this story of CarMax, the moment I would've done stuff differently in the leadership thing looking back is when they went to omnichannel instead of purely online. The Carvana model is clearly how people wanna buy cars. The Tesla model is clearly how people wanna buy cars. No hassle, no haggle, no mess, no weirdo salespeople pressuring you and making you always feel like you got screwed. And while CarMax did something to address the changing in the marketplace, they didn't do enough and truly understand what Generation Z and millennials want to do when they buy cars. And while it looked like omnichannel was the answer, turned out it wasn't. All right, let me know what you think in the comments below. I try to read them all. Catch you next time.