You know it's helpful in those moments to have someone that stands next to you and says like, 'Hey, we're here and we believe in you and we're going to keep fighting.' I think there's nothing you can do that will leave a more lasting impression than to tell someone you believe in them when everyone else doesn't. Today I'm super excited to sit down with Ernie Garcia Jr., co-founder and CEO of Carvana, the auto retailing powerhouse that has redefined online car sales. We explore the company's meteoric rise, dramatic challenges, and remarkable resurgence, plus get an exclusive look at how Garcia stayed true to his mission even when stock prices hit rock bottom. For those who know my background, this was a super special episode for me, jam-packed with lots of insights, and I hope you enjoy it. A big thank you to our sponsors for making today's episode possible: DealNow, my very own CDG Recruiting, and Effective. And now let's get into the show. Ernie Garcia on the Car Dealership Guy podcast. Ernie, welcome.
Thank you, appreciate it. Thanks for having us.
Thanks for coming on. We finally did it. We've been trying to make this happen for quite a while, or I have been trying to. This is my first real podcast setup too, so never had like the headphones and the mic. It feels very official, very exciting.
Yeah, I mean, I know you've done audio only. Where are you right now? In your office?
Yeah, we're in Phoenix. How are you feeling nowadays?
Good. Probably the most interesting answer to that question is it's less different than you might imagine. I think things are rarely as good as they seem or as bad as they seem. And so I think in the days heading into our troubles in '22 and '23, it probably wasn't feeling quite as good as people imagined. I think in the depths of '22 and '23, it was no fun, there's no question about that, but it probably wasn't quite as bad as people imagine. And today I think we're trying to keep it level as well. So feeling good, but probably not as different as you might imagine.
Did you believe that you could recover? And I say that again, this is for context for those that don't follow the public markets that closely. Your recovery as a company has been historic. You have a very long road ahead of you, you speak about this a lot, but seeing so many drawdowns to your stock price, taking a 99% hit, and it's not at once, right? This is like week and week and week, and it was a very tough time. Did you truly believe within yourself, or was it sort of this like cognitive dissonance where you just say, 'I'm just going to keep going and whatever happens happens'? What went through your brain?
I mean, I'll say, as an entrepreneur, I think you're always inclined to believe that you can figure things out. And so certainly that's where I was personally. I think that's where the whole team was. I think the time that I was most nervous is, inside the company there's a lot of people that care a lot and do a lot of great hard work. And I think we had a couple year period there in 2020 and 2021 where all of a sudden they would go home for the holidays and their parents were excited to talk about their job and what they did, and it felt really great. And then I think in '22 and '23, when you're waking up every day reading articles about how you're going to go bankrupt, I think that's hard on a lot of people inside the company. All of a sudden they're going home for the holidays and they're having very different conversations. And to me, I think the fundamentals were always such that we absolutely should have gotten to this place, and if we do our job from here, we'll go a lot further. But I think when there's that much noise around anything, there's always a risk that the people part breaks down. And the team, they did an incredible job, they fought super hard, they stuck together, and I will be forever grateful for that because I think that was the only real risk that, in my opinion at least, we were facing.
What does that look like on a very tactical basis? When you say the team, at the end of the day you're big, and your great messages to the company, which I'm sure there were many of them, can only go so far. What happens on a day-to-day basis when you go through such a tough period like this? How do you keep the train on the train tracks?
Well, I think the most important thing is, we launched in 2013, and for eight years all the signals kind of pointed in the same direction, right? Everything was getting better. We told our story about why we thought we could build a business that was great for our customers and great for us, and we were kind of continually always improving. And I think that made it really simple for people to believe that we were building something that mattered and that we were ultimately going to achieve kind of our goals of selling millions of cars and being the largest, most profitable automotive retailer, which is our goal. And I think then when you go into '22 and '23, all of a sudden you're getting crushed in the stock market, which we always ask people not to look at too much because that's a volatile thing and you kind of lose control if you allow yourself to be too influenced by what's happening in the outside world. But people are looking at it, and then they're reading articles that are tough and saying super negative things about us. And I think just trying to make sure that when that's happening, you're reminding everyone about all the things that were true for eight years before are probably still true today. And all the people that you gained respect for over the last eight years and that you worked with every single day over the last eight years, they're all the same people that are here trying to get the same things done. And there are oftentimes in business history, businesses especially businesses that are trying to do big things or swinging at it really aggressively, they go through tough times. And that was kind of our tough time, or at least it was the most publicly visible of our tough times. And I think you just try to get that across to people that we're going through a time that's important for us, but nothing is really different. What we're offering to customers is the same, the fundamentals are the same, the business we're building is powerful as long as we do a good job. You tell that story over and over again, and then I think you try to put together a plan that allows you to make sure that you're making progress a little bit every day so people see that progress and get motivated by the progress and remember all those things that were true for the eight years prior, and shut out the noise that they're reading about every single day. And I think the team was very effective at that. I think people bought in, and then once everyone buys in, it kind of becomes a little bit of us against the world, which is I think part of what motivates every startup. And so in my mind, having been through it, I think it's almost like a great thing that we've been through now because I think we're a stronger company than we ever would have been otherwise. And I think in many ways we were kind of reborn as a startup, like we went back through a moment where no one believed in us, and that creates a different kind of bond and a different kind of energy and motivation. So anyway, I think it was something I never would wish on anyone ever, but once you're on the other side of it, I'm actually kind of perversely glad it happened.
You know, I worked with my dad for many years, and it's just part of the car business, right? There's a lot of family business and sons and daughters. How's their relationship with your dad after all this?
I would say surprisingly unchanged. You know, my dad, I'm very lucky in many ways. I think my dad was an entrepreneur in the car business but also in other businesses, and so he's been through his own trials and tribulations. And so I think that was helpful because you at least have stories that you can be told about riding it out.
I also wonder as you're going through this, right, is there a person that was like a mentor to you, or a board member, a family member, your wife, I don't know who, but was there someone that you'd say they had a very big impact on you throughout this period and kind of helping you stay focused? Anyone like that come to mind?
Sure. I mean, I think I could talk about that for a long time. There's a lot of different ways to answer that. I think if I were to try to answer it in the way that I think is most important, because I think I could give some credit to my dad we just talked about, I think I give some credit to the board, I think I give some credit to the people that I work with every day beside me and all around. I think my biggest piece of advice for anyone who's going through something hard would be try to keep your personal relationships as separate as you possibly can because you need an outlet where things can feel normal. And I think my extended family in general did a good job where it's kind of like, all that's going on, they're reading the articles too I'm sure, but they did a good enough job hiding that they were reading all the terrible articles from me that I wasn't aware of it. And so it meant we could kind of hang out and be normal and you got that little break. So I think that was enormously important because I do think it wasn't that hard to get to the mental place of we're going to ride this thing out because I do think it just made too much sense that the business is a powerful business, we have a team that's too strong, customers like it, like there was no reason we weren't going to ultimately get across the line. But it was going to take a ton of work and it took a ton of work in times that were difficult and where the world was not saying great things about us. So you just kind of need to persevere through all that, and I think having outlets in your life away from everything being about Carvana all the time is very helpful.
Sitting today, it's about to be 2025, you've been doing this for well over a decade. What surprised you about the growth and trajectory of this business the most? If I, this, I mean you can tell me if this is true or not, but I heard, I obviously studied the hell out of your business in many different ways, and we'll talk about that shortly. Actually, I'll tell you a funny story. Do you remember the Shawspring report that came out on you in 2018?
I remember the name, I couldn't place the report, but I'm sure if you bring me up to speed, I'm sure it'll jog my memory.
Oh my goodness, dude. So this report, some, it's negative, can we hit something else? Come on. It's not negative, it's not negative. Let's spend time on this. This was the most, this was like a 100-page report that came out on you that detailed like every part of your business.
I do actually remember, and I know the investor too. I know the investor, he's a really smart guy, a very thoughtful person.
Yeah, so you know, through the grapevine, not through him obviously, but through the grapevine, it hit my email, my desk, and man did I study that thing. And that I think that was in my life, that was a step function change because that was when I looked at online retailing in a whole different lens. I said, 'Wow.' And by the way, and vertical integration, which we'll talk a lot about that, that was when I said, 'Okay, there's a science to this.' And it helped me think bigger because this report, you know, most people listening to this have not read the report, it's just a huge, I mean by now it's outdated somewhat, but it's just like a very meticulous breakdown of how the business works, the flywheel, right? Why we're sitting here today having this conversation to begin with. That was a big change in my life in my time building GAAR. Tell me, when you started now taking you actually way back because I'm curious, when you started Carvana, is it true that your vision stemmed from, 'Hey, why are we landlocked for selling cars? Like why does it have to be done this way? Why can't we grow beyond our borders here and sell virtually?' Right? Like what was that original thesis? Is it true that that was part of that vision?
Approximately. Here's what I would say. I would say, I think I know a little about your background as well, and I think much like you, I kind of grew up around the car business. When I was 16 years old, I felt bad for myself because I had to sit in the auto finance office and make GL entries while my friends went to movies and hung out in the summer. But I always kind of had exposure to the business, and then I think as I got more and more of that exposure, I would just, I don't mean to speak negatively about anyone, but I do think if we're this honest, the auto industry has a bit of a reputation for being a tough and friction-full consumer experience. And so I would always try to understand why that was. And I think generally speaking, I would just ask lots of questions trying to break down the process and why things worked the way they worked. And I think most of the answers tended to either be, 'That's just the way it's always been,' or some version of, 'It would be way too hard to do it any other way,' or maybe it wouldn't make any economic sense. And I just think those answers didn't strike me as totally satisfying. And kind of like a general, maybe nerdly conceptual view that I at least have is I think as the world evolves, people change, their preferences change, technology changes, and the best business solution to any given problem is oftentimes changing as technology is changing or consumer preferences are changing. And so I think when I would look at auto and say, there's a million things that are changing all the time in everyone's business, but if you back up far enough at a very high level, automotive retail had been done in a very similar way for 75, 80 years, and it felt like technology had changed a lot and consumer preferences had changed a lot. And so wanted to try to find a way to, honestly the root of it was, is there a way to reduce variable expenses such that you can make an experience where the customer can just click through it, where you don't have to have a person in between? Because I think part of what creates the stress for people is worrying that they're less educated than the person who's selling them the car and that there's a lot of variable decisions that they can't make in a super educated way. And so was there a way that we could kind of remove that stress from them and try to be super transparent but put them in control, because control itself is a pretty empowering thing, and let them get through it. And I think that was really the goal, was to address kind of the underlying customer angst that exists at least for many customers when they're buying a car. And then I think that the tool set that ended up in our opinion enabling that was trying to automate things and build an online experience. And then that had all these other great properties because it meant you could store cars anywhere and deliver them everywhere, so you could give customers way more selection. And it kind of evolved from there. But I think the root of the vision was how do we build a model where it's okay if we don't sell quite as many aftermarket products, but we give the customer complete control, because if they're clicking through and they're in control, they're probably not going to buy as much aftermarket product, but we can make a business where the economics work. And to do that, we felt like we had to build a completely different business. And so that was really the kind of root of it.
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So I think the honestly like the biggest change is kind of focus in two ways. One is what are the types of things we're focusing on, and then one is how many things are we focused on. And so I'll start with the types of things we're focused on. You know, when you're starting a business, and especially one like this where you're like, okay, we got to build an inventory management business, we've got to build a vehicle acquisition business, we've got to build a logistics business, we've got to build a retailing platform, a finance business, we've got so many things that we have to build. A lot of times the choices that you are making, and then you've got to expand it because it's a business that has a lot of fixed cost and requires scale to get to the variable cost that you think enable the customer experience that you're aiming for. I think you have a lot of choices where you're trading off efficiency for either building more of the machine or scaling the machine. And so maybe you have some new scheduling opportunity where you feel like you could build a smarter scheduler that's going to help logistics save $50 per car, but if you're selling a thousand cars and you build that, it's going to save you $50,000 a year, right? That's probably not going to change the answer for the business in the long run. So it's not a very high priority to put your effort into getting more efficient there. Your priority instead is going to be, let's build the capability so consumers get a great experience, and then we'll fill the gaps with people that care, and it'll be a little less efficient than when you get all the way to the end, but at least you'll get the customer offering, you can get the wheel turning, and you can start kind of rolling down the hill. And so I think those were the types of decisions we made for a very long time, all the way through 2020, '21. I think the good news is the business that we built had a lot of low-hanging fruit in it because we had made those sorts of decisions across every different part of the business for a very long period of time. And then we found ourselves in a time where it was very clear that we had to become capital independent, so we had to make sure the business got to a place where it was generating enough cash where we didn't need to go to the market and ask for it, because the market was making it very clear that it wasn't available to us at that time. We started focusing a lot on efficiencies. And so we went back through every part of the business and all those $50 decisions that we had made over a long period of time that we didn't think were the right investment then, they suddenly became the right investment. And so I think the story that we would like to tell is that kind of the financial power of the business has been revealed by the fact that we've spent the last two years working really hard on it. But the underlying kind of fundamentals of the business, the way that it worked, the customer experiences, the financials that were possible, that really hasn't changed that much. It's more been that we focused on getting to higher efficiency. And then I think the other thing that I think is hard for every entrepreneur, certainly hard for me, is just focusing on fewer things in general. I think my mistake is to get excited about all the cool things we can do and try to do all of them at once. And I think definitely in '21, I think way more so than anyone else in the company, I was personally responsible for getting us overextended and trying to tackle too many things. And I think seeing the cost of that and then seeing the benefits of being forced to focus on fewer things in '22 and '23, you have to kind of gain an appreciation, maybe gain a little bit of patience to say we're going to get to the same place, but we're going to do it more thoughtfully, one at a time, and we're going to make sure we're always making progress. I think that was a big difference that made us way more effective as well.
You know, I always wondered, we were in this era of cheap capital relatively speaking, and I always wondered why you didn't do more acquisitions. Because you love vertical integration, and I want to talk about that too. I love vertical integration, I obviously built a vertically integrated business on a much smaller scale than yours. We'll talk about ADESA shortly as well, which obviously you've made up for all the acquisitions that you maybe could have done. But was there any reason why you didn't do so many more acquisitions as you were building for a decade? You know, I know you did make several, but any specific reason for that, or are you kind of just building for yourself, weren't seeking it out?
Well, maybe a whole series of reasons. I mean, I think generally when you do an acquisition, you have to do it with some form of capital, and the most common form at a time like that would be equity capital. I think, right, wrong, or different, my personal view at least always was that we were going to build something way bigger than we were at any point in time, and so didn't love the idea of taking a ton of dilution. So that was part of it. But I think honestly more importantly, I think the history of whether or not acquisitions make sense is very, very positive. The history of whether or not acquisitions work out is far less positive. And I think that's because reality is always a lot messier than the spreadsheet. It's always a lot harder. There's people, there's systems, there's process you have to integrate. People on both sides of the acquisition tend to believe the way they've been doing things is the right way, and they honestly believe it, but so they're resistant to change. And so a lot of times acquisitions can be tough. And so I think we always had much more of a, we'd rather build it with people that have been inside the company and been absorbed in this culture and attack problems the same way that we attack problems, was kind of the way that we approached things. And then I think ADESA was an incredibly unique opportunity, and I could talk about that for a long time, so maybe I'll pause here, but I'll just say we're extremely happy with the way that has worked out in terms of what it means from a business perspective and also what it means from a strategic perspective, and the way that teams have melded, it has been great. And so I think that's been a great one for us.
One thing that's specific to our business is you've grown this innovative auto retailer, and how have you balanced, this is an issue by the way I struggled with, like how did you balance hiring people with tribal industry knowledge versus bringing outsiders? Right? Because I know I would say majority of your company, or at least from the outside what you can see, is outsiders at this point, or people that did not have prior automotive experience in some capacity, right? But at the end of the day, right, you're selling a car. So what has been sort of your philosophy as a CEO with these types of things, right? Like is your product team only non-automotive because you want them to think completely differently, or blah blah blah, how do you think about this? By the way, by the way, Ernie, my solution was for operations just hiring DriveTime people, so okay, that's nice and simple.
I'm aware of some of those hires by the way. All right, so we're talking about hiring people from industry versus outside the industry. Like here's what I say. I think industry knowledge is very valuable because it helps you to figure out where likely answers are very quickly. I think if you don't have any industry knowledge, you have to rediscover absolutely everything from scratch. And so I think that's hard. I think that industry knowledge is very unhelpful in the sense that it can constrain you and cause you to start to believe there's only one way to do everything, and if there was another way, it would have been done that way. And so I think on average, I think it's best if you're trying to build something different to have more people that don't have industry knowledge, and maybe significantly more people who don't have industry knowledge. But I think you have to have some people that do have industry knowledge so that you can kind of get in the right ballpark quickly, because otherwise it just takes you so long and you can spend forever trying to reinvent the wheel over and over again, would be generally how we thought about it.
I think for anyone listening, just something fascinating to do is to just put Carvana in the Wayback Machine on the internet and just to see how you've evolved the product. I mean, there's so many learnings in there. You see how your homepage suddenly changed to this, to that, suddenly you're promoting 'We Buy Your Car,' like it really shows the evolution of the business in a way, and just a bunch of visuals. Another thing, you know, I'm trying to put myself in your shoes and I say, all right, we just went through this crazy time period, what if it happens again, right? We don't know where our world is going in our country, there's a lot of change. How do you as a CEO, how do you hedge from that as much as possible? In other words, how do you future-proof your business? And there's two angles to this, but I want to start with like the macro, right? Do you think about this like, hey, I want to, if before this drawdown we were investing 30% of our time in efficiencies, and well today in a post-growth-at-all-cost world, I want to consistently invest 60% of our resources in efficiencies in case another economic shock happens. How do you just think about hedging those risks, that you know, the macro risks specifically in the future?
I think your ability to absorb pain is, I think, a function of first and foremost, it's what is the quality of your unit economics versus the rest of the industry. So if you're able to make $1,000 more than the rest of the industry, what that means is as long as the shock impacts you and everyone else the same way, if their profits go to zero, you still make a thousand, right? And it's if you're in an industry where there's many other players that have similar enough unit economics to where they're all going to feel pain at about the same time, that's very helpful. Because unless the shock hits you in a way that is different than the way it hits everyone else, it's unlikely that they're going to be able to go that far below zero, right? It's not like we're competing in this industry with Google and Amazon that have tens of billions of dollars of cash so they can absorb big losses for a long time. That's just not the way the auto industry is set up. So I think having very high quality unit economics is extremely important. And then I think cash is obviously very helpful. I think what was tough for us going through '22 and '23 is that we were at a place where investors believed in the unit economics that we would have, and so they were financing it, and we believed that the bigger the machine was, the better it would be. And so we were running really fast, go get to the scale where those unit economics would show up, be very powerful. And then we got hit by the shocks of car prices and interest rates, and some of our own doing as well, some of the pain of growing very fast for a long period of time I think showed up then, and that caused some problems for us. So we got hit with all that, but we didn't yet have the unit economics, and we might have had cash but it was dwindling because we were losing money still as a company. So that was a very different spot. I think the most resilient in my opinion that you can be is you have to have an offering that customers love, you have to have unit economics that are strong, and then you want to have cash. And so I think trying to just continually deliver to customers great experiences and trying to continually get more efficient with our expenses across the whole income statement, I think those are the things that we can do that are most powerful. And I think that's what we're working on now, but we still have big eyes for the future for sure. We're still going to work hard to grow fast.
I want to slightly push back on one thing you said there, and I'm curious to hear what you're going to say. One of the insecurities I always had running and growing an online auto retailer was the fact that I was simply an auto retailer. I did not have a service department, I didn't have these other businesses that kind of rounded me out and provided some hedging in times of distress. And so have you ever considered going franchise, or acquiring franchises for simply the lease returns, the kind of recurring business of service? I mean, how do you think about that? Because you're right, your unit economics, and we'll talk about unit economics soon as well, are better than the majority of the industry, you're a vertically or a more vertically integrated business, but you also in a sense are operating with this one segment, which is used vehicles. So how do you think about that and hedging in an environment where the majority of your competition has other lines of businesses as well that are impacting their financials?
Yeah, well, let's just, because like vertical integration has been like the nerdy business topic, so let's put it in the frame of that. I think one of the comments that I made during that previous rant was if the shock doesn't hit you in a way that's different from the way it hits everyone else, the places where you're exposed to hitting you differently is if others have a business line that you don't have, right? And so I think our weakness as a business in that frame is that we don't have service. That's something that many traditional dealers have, and it's a very profitable business and it works out great for them. I think our strength is in the vertical integration of the rest of the business. We've got a finance business, we've got a logistics business, we've got an auction business. This is a bit complicated, but having a large inventory changes the economics of what's available a little bit. If you're a dealer with 100 cars and there's a car that only one out of 200 customers really likes, you could choose to put it on your lot, but it's going to take twice as long to turn, and so you're going to have to buy it with a bigger margin expectation. If you have 20,000 cars and there's a car that one out of 200 people's going to like, you can buy a hundred of them and you still sell them just as fast as every other car. So there's some benefits to having a scaled inventory. There's many, an auto-centric audience, forever if anyone who's been in the auto business, you hear about wholesalers that buy cars where they're cheap and ship them to where they're expensive, or they go and they buy convertibles in the Midwest in the winter and they ship them down to California and they sell them. Our business sort of does that without us having to plan for it, because if we have demand for convertibles in California, we're going to basically be looking across the whole country for where can we get convertibles for the best price, we're going to buy them, we're going to recondition them there, the customer in California is going to buy it, and we're going to ship it with our own shipping. So there's areas where I think we're relatively strong and there's areas where we're relatively weak, but I do think service is an area where we're relatively weak. I think there's a number of ways that we could try to approach that in the future, but I think that's a fair comment.
Do you see yourself ever acquiring a service business, launching a service business, providing retail service to consumers?
I think, part of your question was 'ever,' and I think we'll never take anything off the table. I think in the near term, I think our general view of service is that there's more service capacity, as defined by kind of service bays, around the country than is necessary. Like there's lots of excess service bays that are being underutilized, and our asset is that we've got around two and a half million customers driving around. And so probably in kind of the near term, the best thing that we can do is try to partner with service providers, dealers and otherwise, and send them customers. And then you do it in a way where we're meaningful enough to them to where we can make sure that they're held to an SLA where they're delivering great experience to our customers, and we're meaningful enough to them to where it's exciting for them. So I think that's probably like an easier direction for us to go in the near term. But the road is long, we'll see.
In general, I have to ask this, but would you ever consider, and I like to say 'ever' because you know, keeps it long term, but would you ever consider making an acquisition of a franchise dealer group or groups for the inventory and the other benefits that come along with that? Or is that just not something that's on the cards?
I mean, again, when you say 'ever,' ever is a long time, so I'm going to be, I'm always going to be very careful to leave every possible door open.
Give us some of the secrets, Ernie, come on man.
Yeah, we're a public company, like the whole job is to be cagey. Yeah, I think so far we've put a lot of focus on used. It's a roughly three times as large market. I think there's no question that the offering would work with new as well. But to date we've put our focus on used.
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Not really, would be the answer. What I would say is I think it depends a little bit on near-term versus medium and long-term. I think near-term you can always run into little bumps, and so you want to make sure you've got diversified access to different inventory pools. You want to make sure that you're being smart about where you're buying inventory. And I think there's always challenges that you face day-to-day and always ways that you try to improve day-to-day as well. I think medium and long-term, the way that we try to think about this market is that there's approximately 270 million cars in the US and they're all being driven by someone. And basically what happens is once every six years, customers kind of get bored of the car they're in and they want a different car. And then there's this whole thing called the auto industry that sits there and takes the car from one person and bounces around, maybe goes to auction, goes to a different dealer, who knows all the different kind of things that it goes through. But then ultimately it goes to another customer. And as dealers, we're sort of the thing in the middle that holds all that inventory while it's in that state between one customer before it gets to the next customer. But the fundamentals are such that we as dealers aren't actually demand. Supply and demand is just consumers trading cars with each other, and so it's always out there. And so I think if you're delivering great experiences on the buy side and on the sell side, that supply and demand has to go somewhere. And the goal is to get as much of it as we can.
Tell me more about just how you think about hedging your business in general. I think the vehicle margin is compressing, right? It's been compressing. I mean, there was again this blip with the pandemic and all that, but margins are compressing again. And the used vehicle is becoming more commoditized. It's not commoditized, then of course there's all the other outlier risks like robotaxis eating up the kind of entry-level market share and blah blah blah, but that's probably further out. How do you think about differentiating your business?
Look, when I started building GettaCar in 2018, much after you, I had to—we built just like you, we built a lot of the technology. We had 30-plus engineers in digital retailing. I mean, we did all these things in-house because we couldn't find software that was great and could really create the experience we wanted. And vertical integration for me was again, like you said, it's a fancy way of me saying we're going to build more in-house so we can control the experience. Oh, and by the way, we'll have better margins because of that as well.
