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CarMax's Brand Is Like Apple's 10 Years Ago

This article is more than 7 years old.

CarMax's brand is a valuable asset that is overlooked by most investors because it does not appear on its balance sheet. David Canaan says CarMax’s brand is at a similar stage of development to where Apple   was 10 years ago and that is why it is his best idea.

David Canaan outperformed all U.S. equity mutual funds for the past 3, 5, and 10 years by investing in companies like Apple while they were building tremendous brand value that was hidden in plain sight.

Before taking anyone’s investment advice, it is a good idea to check their track record.  Click here to see David’s track record.

Ken Kam: In hindsight it is easy to see how Apple benefitted from building strong brand value. What do you see CarMax doing now to build its brand value?

David Canaan: Used car buying is still largely a frontier where slick salesmen determine prices, dealers make negotiating a game of wits, and buyers are fearful of getting a lemon.

Consumers today expect a purchasing experience that’s simpler, more trustworthy and transparent.

Kam: What does CarMax do to deliver on customers’ needs that other car dealers are not doing?

Canaan: Used car buyers in the emerging generation, unlike many in the older generation, dislike negotiating prices, expect easy technology access, outstanding customer service and dealership reliability.

CarMax is redefining the used car business. It has built its brand on no-haggle prices, a low-pressure sales environment and exceptionally well-trained salespeople.

The combination of no-haggle pricing, a low-pressure sales environment, pleasant retail stores, technology links to thousands of available vehicles, well-trained and knowledgeable staff and attention to the smallest detail of the consumer experience has made their sales volume twice that of the nearest competitor.

Kam: Do you think the CarMax brand will eventually carry the same prestige as Apple?

Canaan: Great brands frequently carry a "prestige component” where their image becomes a personal statement the buyer uses to enhance their perception of themselves. CarMax is in a category where prestige is indirect — it is created by the automobile brand purchased rather than the dealer endorsement.

But the CarMax brand is not a barrier to desirability — it isn’t an embarrassment or negative to purchase consideration.

The CarMax name promises an unexcelled (‘maximum') experience. Their promise automatically grows as expectations grow.

Kam:  Are there any other publicly traded competitors?

Canaan: There are several used car dealers:  Autonation , Penske Automotive Group , Sonic Automotive Group.

In addition, there are online information and car location service competitors like TrueCar , AutoTrader, and Kelly Blue Book.

Kam:  What do their competitors’ names promise?

Canaan:  Competitor names tend to describe functional characteristics.

AutoTrader – since early times, ‘traders’ were the model for negotiation.

AutoNation – national reach, which is an inherent feature of online distribution. Besides, does a car purchase require my going somewhere in the nation?

Penske is known for truck rentals. That suggests a brand selling abused, previously rented, vehicles.

Sonic suggests dated technology or fast food.

TrueCar promises honesty but reminds consumers that untrue car information needs to be addressed.

Kelly Blue Book was started in 1918 as a dealer-only resource for pricing and relies on image equity of a nearly 100 year-old industry organization.

Kam:  Aside from having a better name, what else does CarMax do to convey the promise that they will give you a better used car buying experience?

Canaan: CarMax graphics are bold and clear. Contrasting primary colors (blue and yellow) are highly visible. Facilities have a signature architectural look that communicates an image of an open environment, pleasant seating and a professional experience. In contrast, I bought my first used car from a corner lot where the office was a cigarette smoke-filled trailer!

A buyer’s experience is influenced most by personal interactions and CarMax has exceptional training, attentive employees (in uniforms), and unmatched category knowledge at all levels. For ten consecutive years, they have been listed on Fortune Magazine’s “100 Best Companies to Work For."

Kam: How much time are you willing to give this investment to play out?

Canaan: I think the company will continue to add value as they expand and keep their focus on delivering on their brand’s promise. I see a two-year window of improvement.

Kam:  Are there any potential catalysts that you are looking for?

Canaan: When fuel prices go back up, the used car market will grow, particularly selling low efficiency vehicles and finding bargains on newer, higher efficiency ones without the high prices of a new vehicle. The CarMax brand will be trusted for insight and transactions.

Kam:  Do you think their business can double over the 2 year “window of improvement"?  Does it depend on fuel prices going back up?   

Canaan:  Good question. Fuel prices are only one of the factors that will cause their business to improve. Higher interest rates, economic downturns, anxiety over long-term commitments, or changes in driving habits will likely influence their business.

I don’t believe they will double in two years as much of the brand value is already being enjoyed. However, as a two-year investment, CarMax is one of my picks for growth because they meet the criteria for great branding.

Kam:  What is the company’s growth potential?

Canaan: With 140 stores, CarMax is not in all markets (yet), but consistent, recognizable advertising, in-store promotion, appealing street presence and customer follow-up are key to expanding into every market where used cars are bought and sold.

My Take?

Investing in companies with assets that most people overlook is a strategy that Warren Buffett has employed with great success.

Canaan’s firsthand experience as a brand advisor for Fortune 500 companies enables him to make good judgments about which companies are enhancing their brands and which are not. Few other value investors have the firsthand experience to make this investment strategy work.

About my column.

Disclosure: I am the portfolio manager for a mutual fund advised by Marketocracy Capital Management, an SEC registered investment advisor. Before relying on the opinions expressed in this article, you should assume that Marketocracy, its affiliates, clients, and I have material financial interests in these stocks and may hold or trade them contrary to these opinions when, in our view, market conditions change.