We are drawn to companies that vertically integrate key parts of their business which enables them to differentiate themselves by sustainably providing faster/better/cheaper products and services to their customers. In fact, it's one of the key components in our Builder Company framework. Vertical integration makes companies more complicated to analyze and often results in higher operating and financial leverage. This can create short-term gyrations in reported results, especially when they are investing in additional fixed capacity and in customer growth simultaneously. However, management teams that invest to build significant advantages in large end markets help position their companies for sustained long-term success.
In this post, we will use Carvana (NYSE: CVNA) as the subject of a study on how vertical integration can create sustainable competitive advantages. For background, Carvana operates a pretty simple business to the consumer: you can go to www.carvana.com to buy and/or sell a used car. With tens of thousands of cars in inventory, they offer a wide selection of vehicles to purchase and a few additional elements that make their retail experience attractive: (1) no price negotiations, (2) integrated financing options, and (3) home pickup and delivery. Customers can purchase a car in less than 20 minutes and it can be delivered as quickly as the same day in some markets. It's a stress-free transaction supported by wide selection, an easy checkout process and a very pleasing delivery experience.
Likewise, customers can sell or trade in their car to Carvana. Customers can get an instant appraisal of their car's value and sell it within 20 minutes if they like the offer (a highlight of Carvana's new ad campaign). Carvana will then schedule a pickup and the driver will bring a check or can wire the money into your account once all the paperwork is completed. Again, an easy and stress-free transaction with full pricing transparency upfront and payment options that settle significantly faster than traditional dealers'.
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