Are Salespeople, Real Estate and Inventories the new Glass Counters of Retailing?

In early 2017, a friend of mine and I went out to Laguna Beach to discuss aspects of the car business. As part of those discussions, we reviewed the upcoming launch of Carvana (CVNA). CVNA, for those unfamiliar with it, is a "contactless" car retailer. 

Retailing has been upended by the internet, as the bankruptcies of Neiman-Marcus, J Crew, Lord and Taylor and others has demonstrated. By moving pricing information to the consumer, profits have eroded. This is typical of capitalism. One hundred years ago, F.W. Woolworth made his fortune by allowing customers to directly handle merchandise rather than keeping everything behind glass counters. 

Internet-only retailers have a challenge to find profitability. The shift of pricing information to the consumer means that the retailer has to find ways to profitability other than marking up the inventory. Amazon has been ingenious with Amazon Web Services and third-party marketplaces. A quick review of the CVNA concept left me unmotivated - no barriers to entry, no structural skills, some industry knowledge (DriveTime) and losses to the horizon. 

Instead I focused my thoughts on CarMax (KMX) - a "big box" retailer which has scooped up market share in a fragmented business. Their secret? They hire no one from the car selling business. Instead KMX focuses its efforts on pleasing the customer with friendly salespeople, a huge inventory of cars, no haggle processes and great locations. In the "real" world, this combination is ideal.

Since 2017, CVNA's operating losses have piled up while the stock has moved from $11 to $200 - an amazing move. During the same period, KMX's operating gains have piled up while the stock has moved from $60 to $100 - representing a contraction in its price to everything else ratios. Further, the market cap of CVNA is roughly $35 billion versus KMX at $16 billion - an astonishing difference.

Starting with the AMZN vs WMT battle, the fights between the incumbent profitable companies and the upstarts internet-only money-losing companies continue to be waged and the market's bets are being placed firmly on the upstarts. Unlike the "bubble" of 1999, the upstarts seem much more powerful. Within the last three weeks, I have spoken with three people who attempted to purchase through KMX only to find themselves most happily served by CVNA.