Michael Bor, Will Boland and Aaron Montgomery, all Harvard Business School graduates, were kicking around an idea for starting a company five years ago.
The concept: a consignment store for used cars.
With $500,000 of seed money from investors, the trio initiated their business plan.
They found the real estate they needed — a former car dealership at 11944 Midlothian Turnpike in Chesterfield County — and opened the first CarLotz store in June 2011.
The company raised an additional $1.5 million in 2012 and added a second Richmond-area store at 8406 W. Broad St. in Henrico County, followed by a store in Chesapeake.
Last month, CarLotz added a showroom for motorcycles at its flagship location on Midlothian Turnpike.
CarLotz sold a few hundred vehicles during the first year, said Bor, the company’s chief executive officer. It expects to sell 2,000 or more this year.
There’s more to come — possibly a lot more. The company completed a $5 million capital raise in August to further fund expansion. About half the new capital came from previous investors.
Before the month is over, the company expects to have a soft opening for a store at 5055 Virginia Beach Blvd. in Virginia Beach.
CarLotz plans to venture out of Virginia with a store in Charlotte, N.C., this summer, and later, stores in Maryland, Georgia and other East Coast states.
The reasons investors are willing to back the company are not complicated, said James E. Ukrop, a partner with venture capital fund New Richmond Ventures LLC and former chairman of the family-owned Ukrop’s grocery chain that was sold and became Martin’s Food Markets.
The business model for CarLotz “sounded like a good concept,” Ukrop said.
And he was impressed with the backgrounds of the three CarLotz founders.
Bor and Boland had both worked for the Richmond-based investment bank Harris Williams & Co. — which, by the way, assisted in the Ukrop’s Super Markets Inc. sale.
Montgomery had worked for the global management consulting firm McKinsey & Co. And, as a bonus (or, perhaps, most important), he is from Detroit, where he worked at a dealership selling cars by the time he was 16.
“They knew what they were doing,” Ukrop said. “They’re all out of Harvard Business School. They all had great careers going. They took a big risk in starting a new company.”
After he made his investment, Ukrop said, “I tried them out. I had a car to sell, and I took it to another place that made an offer. Then I tried CarLotz and got a good bit more for it.”
Besides, he said, he wanted to encourage a local enterprise with great potential. “We’ve had some great companies based in Richmond,” he said. “Some are gone, and we want others to replace them.”
The CarLotz business model echoes that of the classic consignment store. The seller brings in the merchandise. The store markets it, sells it and takes a cut.
“We’re not explaining a new invention,” Bor said.
Boland, the company’s chief financial officer and a Douglas S. Freeman High School graduate, chimed in: “The concept is simple. The execution is difficult.”
When you sell your car through CarLotz, the company charges $199 upfront. That gets the car inspected, cleaned and listed for sale.
CarLotz assembles information about the car and shows it at a CarLotz location. When the sale is complete, CarLotz gets an additional $600.
“The fees are the same,” Bor said, “whether it’s a Ferrari or a Ford.”
And, he said, CarLotz doesn’t have limits on the inventory it accepts for sale — no cutoffs of model year, mileage or price.
“The breadth of our inventory is much greater than some traditional dealers,” he said. “The cars we have are the cars our customers bring. You might find a ’66 Mustang, a 2014 SUV or a Lamborghini.”
An online check of inventory listed for the Midlothian Turnpike location last week showed no Lamborghini or Ferrari — but the store did have a 2012 Tesla Model S for $82,000, a 1966 Corvette Stingray convertible for $30,000 and a 2006 Kia Sedona minivan for $2,500.
Haggling over price can be part of the process.
Boland pointed out that the prices are reached after consultation with the sellers about the condition and maintenance of the car.
“If you bring us a car that you’ve taken good care of,” he said, “the price will reflect that. … And if a buyer questions that price, we’ll explain how we reached it.
“We show the buyer all the information we have about the car,” he said, including a Carfax vehicle-history report and any applicable information about open recalls.
“We don’t want an offer that offends the seller,” he said, “so if the offer is extremely low, we’ll say, ‘Hey, let’s take a look at this. If it’s a matter of budget, maybe there’s another car that makes more sense.’ ”
In the end, Boland said, “we present every offer to the seller, and the seller can accept, make a counteroffer or just turn it down.”
The fact that CarLotz doesn’t get a commission based on the sale price — only the standard flat fee — reassures seller and buyer that the price is justified, he said.
George E. Hoffer, a transportation economics professor at the University of Richmond who follows the auto industry, said CarLotz “makes the market more perfect” with the way it operates.
“And by that,” Hoffer said, “I mean CarLotz narrows the price wedge between the buyer and the seller.”
Because the buyer and seller have expectations that aren’t too far apart, and because CarLotz explains the price, he said, seller and buyer are both likely to be satisfied with the transaction.
The used-car trade is a lucrative segment of the auto retail business, Hoffer said.
Statistics from the National Automobile Dealers Association in 2013 show the average profit a new-car dealer makes selling a used car is nearly double the average profit on a new car, Hoffer pointed out.
The average gross profit for a used car that year was $2,361 — up 13 percent over the previous year. The average profit for a new car was $1,200 — down 7 percent from the previous year.
“CarLotz really hit a sweet spot,” Hoffer said. “The market had room for the service they offer.”
He said the consignment model also works well with cars because they are a high-ticket item. The cut taken by CarLotz is a smaller percentage than most merchandise handled by many consignment businesses — say, furniture, books or clothes.
Montgomery said the company’s modest expansion pace so far has been purposeful.
“We’ve been very deliberate, very thoughtful,” he said. “The second store was in the Richmond area just across the river from our first.
“Then we tried it out in Hampton Roads, where we saw a big market in the military community.
“When you want to build a bigger company, there’s always the tension between doing it right and doing it quickly. We think we’re at the point that we can do it right and quickly.”
Montgomery said his role as chief operations officer has evolved from concentrating on logistics — handling the vehicles and the paperwork, getting them ready to sell — to responsibility for the CarLotz corporate culture.
“When we started, we sold 10 or 20 cars a month,” he said. “Now we’re looking at selling thousands per year and going from five or six stores to dozens of stores.”
To do that successfully, he said, CarLotz will need engaged employees, and customers — sellers and buyers — who trust the company.
Would the three CarLotz founders sell the company to a deep-pockets buyer — perhaps a mega-dealer or CarMax, the used-car retail giant based in Goochland County?
Boland shrugged at the question. “Our ambition is to build a nationwide concept,” he said, noting that demand for the service exists in every city in the country.
He said he, Bor and Montgomery would consider a partnership with a larger company “as a means to an end — but all of us want this to be the last company we’ll work for.”
There’s another option for rapid expansion, Bor said. “We’re thinking through the possibility of franchising our concept. … With the systems and processes in place, it could be successful.”
Hoffer said franchising might be the ideal path, “because CarLotz never owns its inventory. The cars pass from seller to buyer. CarLotz provides the service and the showroom.”
“That means the capital barriers to opening a store as a franchise owner are relatively low,” he said. “I think that’s the way the company needs to grow.”
Hoffer said there is an urgency for CarLotz to expand rapidly.
“The only thing that scares me about the future of the company is that somebody else will clone the idea and expand faster,” he said. “CarLotz has proven that the concept works. They’ve been under the radar, but now they need to extend as broad a footprint as they can, as quickly as they can.”
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