All right, great. Thanks everyone for joining. My name is Rajat Gupta. My name is Rajat Gupta, a member of the Automotive Equity Research Team at J.P. Morgan. We're gonna kick off the auto retail ecosystem segment of the conference, and it's great to start with the most profitable public auto retailer today, Carvana. And from Carvana, very pleased to have with us, Co-founder and CEO, Ernie Garcia. Ernie has a slide deck that he would like to go through and a few remarks before we go into Q&A. So thank you, Ernie.
Perfect. Thank you. Awesome! Well, thanks, everyone, for coming. Oh, thanks, everyone, for coming. Just to motivate this, I think we had a couple goals in this presentation. I think we're starting to talk again to a number of new investors, and some investors are getting back up to speed after the last couple of years. I think in general, there is a perception that the story is very complicated. I think there's, you know, unquestionably been a lot of volatility over the last couple of years. I think that that can cement that perspective.
And then I think there's a lot of people who are just kinda saying, "Hey, is this really worth it for me to try to figure all this out in light of all the volatility?" And so I think our goal of this presentation is to reduce the story as best we can. So we hope that you find that persuasive, but we do think it's a much simpler story than many people think. Safe harbor, that's exciting. Let's jump to the next one. So here is our reduced form argument of why we think Carvana can play a very large role in some of the automotive ecosystem for a very long time. I think, first of all, we are now the fastest-growing automotive retailer in the country.
We'll get into what we think that means a little bit later. We've produced industry-leading Adjusted EBITDA margin now for two consecutive quarters, and that's grown significantly from Q1 to Q2. So now we've got a pretty decent spread against everyone else. We do not think that our business model is done expressing the strength that is inherent in the model. In terms of all the differences that exist in our business model, we can give customers a much different experience, and we also can have much different financial results, and we think there's still room to run there that we're excited about.
We're in a huge market, and we think that that defines kind of the ceiling, and it's a very fragmented market, which we think defines the competitive dynamics, which we think are very favorable compared to many other disruptive companies. And then we benefit from positive feedback. I think it's very hard to build anything huge in the world if you don't have some positive feedback. You generally either have positive feedback, where you get better as you get bigger, or you have negative feedback, and you get worse as you get bigger. In automotive retail, historically, we think that there's been more negative feedback, and we think that we bring a business model that has positive feedback, and so we think that's a really big differentiation as well.
So first to hit growth, you know, our story was pretty clear from a growth perspective from when we launched in 2013 through 2021. We were always growing very quickly. I think the most important thing that powered that growth was that customers loved our offering. I think it was also, you know, there was a lot of difficulty in building a new machine at the same time that we were growing. And so, you know, we were always working really hard to power that growth, and I think for anyone who followed the story from 2017, we went public through 2021. You know, there was constant discussion of all the different, you know, constraints that we were alleviating.
But across all of that work and across all those discussions, you know, the ultimate growth story was very clear, and it was very consistent, it was very fast. We got, you know, through 2021 and into early 2022, and we peaked at 118,000 sales in a quarter. And I think at that time, we were positioned for a huge growth year in 2022. We had just acquired ADESA, which we, you know, believe we believed at the time, and we still believe was an incredible investment in our future. I think the perspective of that investment changed pretty dramatically from the moment it occurred until about six months later, and I think it's starting to come back to probably positively being perceived.
But that kind of, you know, also was paired with debt that we used to finance that. I think investor perspectives changed a lot around what was important. We were forced to really push toward, you know, profitability as soon as we possibly could, so we could be capital independent. I think all of a sudden, the positive feedback that had been present in the business for a long time turned into negative feedback, and we shrunk for what seemed like forever, but was only really a year. We shrunk for about a year. We shrunk by, you know, on the order of 30%.
We then headed to kind of, you know, stable, stable growth or, or, I guess stable sales for a couple of quarters, and then over the last two quarters, we've started to grow again. And so we think we're back on that trajectory where, things are, are much simpler and much more predictable and easy for people to see. Our growth rate today is 33%. You know, to put that in the context of the industry, you can see among the public retailers, the fastest-growing, public retailer today is 5%. The average is, is slight, shrinking, and then the mid is -6%, our 33% really sets us apart.
And again, I think the key driver of that is we've built a business that customers love, and that's the most important thing to drive long-term growth. I think our EBITDA margin is a really exciting part of our story today. First, I think, you know, we believe this is the right measure to evaluate the profitability of automotive retail. We did elect to buy ADESA and to finance that with debt, and so that means that, you know, between EBITDA and net income, that there is a gap, and we'll, you know, we can cover that in as much detail as you would like. But in terms of evaluating the power of the underlying business model to generate cash, we think EBITDA margin is the right measure.
We also have very high-quality EBITDA margin, which we'll hit a little bit later. But if you look at our history first, I think that this is helpful because when you zoom all the way in, you can talk about every, you know, gross profit, line item, you can talk about every SG&A line item, and it can feel like there's a lot of things moving. It can feel like each thing is driven by four or five drivers. All of that is true, but we also participate in a very large, very fragmented market with lots of players who have very similar cost structures, and so the sum of those things tend to balance. And so even for a company that was growing, you know, in triple digits for a very long time, we had very stable march up in EBITDA margin.
We had a step back in 2022, when we kind of hit all the headwinds that we discussed earlier. But we've continued to progress, and so I think if you zoom out and look at that story, it, it's a much less volatile story than if you look at the stock price. I think that that's important because these are the, the business fundamentals, and I think it, it points to the, the strength in the business, the stability in the business, and the predictability of, the potential profitability in this industry broadly. If we look at how we performed last quarter versus the rest of the industry, the highest EBITDA margin among our public retailer peers was 6%, we were 10.4, the average was 5.5.
I think that gap between 5.5-6 speaks to the stability in the industry. That that's also useful to put in historical context for basically post Great Financial Crisis, you know, through 2020. The average EBITDA margin across the sum of the public auto retailers was 4.5%. So it's been very stable for a long time. It generally bounced in a range from 3-5, depending on which retailer you're talking about, but it was very, very stable. It's been slowly drifting down. I think the public retailers specifically the franchise public retailers really I think benefited from industry-wide supply shortages, which led their EBITDA margins to go up a little bit in 2021 and 2022, but they're drifting back down to normal levels.
But you can see that there's a lot of stability, both historically and across retailers. The lowest was 3% EBITDA margin. And then I think, very importantly, to the far right, the highest EBITDA margin that's ever been observed by any other of the public automotive retailers in any one quarter is 9.5%. That was in 2021, which I think was a period in time when, as discussed, many franchise retailers were benefiting from, you know, very non-normal earning levels. And so we now have what we believe is a highly differentiated financial model. And we think that's possible because we've built something that is very differentiated.
It's differentiated in customer experience space, but it's also a very different physical business model that has very different financial properties, and so there's room to have EBITDA margins that are much different from the rest of the industry. We've got some materials online that try to dive into each component of our business and try to explain why we think, you know, we've got more fixed cost for variable cost trades that benefit from scale, and why we think that we've got more centralization, that enables different kinds of economics. So, you know, any of you are interested in that, we can share that with you later. But I think at a very high level, it's not different from the e-commerce playbook.
E-commerce traditionally has a lot of cost benefits to brick-and-mortar, and, you know, we're another expression of, I think, that trend that has been established over a long period of time. Really importantly, we do not think that we're done. So we provided this map in our shareholder letter that tries to walk through some of the key financial metrics. So, you know, we've got net income margin of 1.4%. There was, you know, one-time cost in that that probably cost us about maybe a little bit more than 0.5%. But so that's now a number where we're, you know, we're generating enough cash to cover interest expense and everything else. Our operating margin last quarter was 7.6%.
I think for those of you that are accustomed to covering growth companies, I think the gap between our EBITDA and our operating margin is much tighter than many of these companies. We think that that's really important. The adjustments in our adjusted EBITDA are much, much smaller dollars relative to EBITDA than many of these other companies. We think that's very important because they're smaller adjustments in ways that are not just currently smaller, they're smaller adjustments in ways that are likely persistently smaller by a pretty large margin. We think we have very high-quality EBITDA. Our EBITDA was at 10.4. We did benefit by 40 basis points. We've moved down to the second section of this table from selling extra loans.
You know, part of our business is we provide financing to our customers. We then sell those loans off. We don't end up taking the credit risk over any extended period of time. But as a result of just that process of accumulating loans and selling them, quarter to quarter, there will be small variations in the number that we sold relative to those that we originated. In the second quarter, that benefited us to the tune of 40 basis points. So, we kind of massaged that out. We also believe that we're built today for 3x our scale. When I say built today, that means that we've got inspection centers that are already fully built out with all the CapEx required to be 3x our scale.
It means we have trucks, you know, the 9-car haulers, the large trucks you see on the freeway if you're driving, that support three times our scale. We've got individual haulers that deliver cars to customer's door, that are three times our scale. We've got all the locations that are necessary to handle our logistics network, for three times our scale. So we really are built to be a much larger company, and then that DNA is flowing through, and all that investment to carry all that expense is flowing through as well. So we believe that by tripling and holding those dollars flat, which is what we've done for the last several quarters, we can get 2.9% leverage there. And then we also...
You know, we have many markets we've launched over a long period of time. If we look at the markets that we launched in our first four years in business, you know, they also had advertising expense that was 60 basis points less than our average advertising expense. When you put all that together, that gets you 3.1 points of additional gains that we think are visible without changing anything fundamental in the business, without monetizing gross profit line items better, without driving expenses to a fundamentally more efficient place. And then that gets you up to 13.5% EBITDA margin, you know, which is a really exciting number versus, you know, industry averages, as discussed prior, in the kind of 4%-6% range.
So we think that that's very exciting, just on a leverage basis alone. And then we also have, you know, the ability to make the business fundamentally more efficient, to leverage all of our benefits from scale, to leverage the benefits from centralization, to continue to get smarter, to rationalize costs, to use new technology to get costs down further. We don't quantify that, but what we do in here is we quantify the gains that we made in the last 12 months. In the last 12 months, in those areas that are not quantified, we improved by approximately $2,000 per sale, which would be on the order of six points of EBITDA margin, give or take.
So, we've made a lot of progress there, and the fact that we've made that much progress, in our opinion, clearly demonstrates that there is more progress to be made and that it is not insignificant. As a result, we expect to be up at the high end of the long-term EBITDA margin that we've provided in our long-term financial model. That range was from 8%-13.5%. And we think that in addition to that, we believe that more of these fundamental gains will be able to be passed to customers as we continue to get better, which we think will provide additional separation between us and our competitors.
I think there's a ton of ways to try to predict, you know, where we're going to go and what scale can we ultimately have. But I think very importantly, this is a business where historically there's been 40 million cars sold per year. We're currently at a time when sales are approximately 36 million per year, so they're about 10% lower than they have been on average. That's pretty suppressed relative to history. I think post-Great Financial Crisis, used car sales were in, like, the 34-35 million range. So this is a relatively low level, but it's bounced around 40 for a very long time. We are currently approximately 1% of that market. The largest player is approximately 2% of that market.
The largest 100 players combined are about 11% of the market. We think that that's really important. That fragmentation, again, we believe exists because historically, it's gotten harder to manage businesses as these businesses as you get larger, because a lot of the decisions are made at the individual rooftop level. And so, as you get larger, you get some benefits from scale, but you also stack layers of hierarchy that offset those benefits, and the scale that you can get to is somewhat limited as a result. And so there's extreme fragmentation. It means, you know, our competition has significantly fewer resources than the competition of most high-growth, disruptive companies, you know, in any other industry, which we think bodes very well. And then, obviously, the room to run is very significant.
If you're 1%, you know, we can argue about what's accessible. From a TAM perspective, we think the vast majority is accessible, but I think reasonable people can make whatever assumptions they want. Regardless, it's a lot, and it's many, many times larger than we are today. And the type of scale that we even talked about on previous slides to unlock all the benefits of our leverage or many of the benefits of our leverage are on the order of three times larger than we are today, which would be 3% market share. So these are not big numbers. For perspective, in e-commerce broadly, across all retail verticals, there's now 19% penetration in e-commerce. Again, we're 1%. I think, again, people could argue about what is the scale of penetration in automotive?
What is the ultimate scale of e-commerce penetration in automotive? Those are reasonable questions, but I think today, a reasonable definition of e-commerce would be that we are the only provider. I think, other definitions would maybe provide, you know, some slightly larger scale while, you know, adding sales from other retailers, but, but probably 1% is about where e-commerce penetration is in automotive. And again, in every other vertical, it's 19%. And we think, you know, while you could argue about some of the differences in e-commerce and automotive versus other verticals, there are, I think, reasons why it should be larger, and there are reasons why it should be smaller. You can probably imagine what side of that argument we'll fall on, but I think reasonable people could make both sides of that argument.
If you can make both sides, then 19% is not a crazy place for us to be thinking. Really importantly, you know, there is positive feedback. And so I think to try to articulate that as simply as we can, we've got this little graphic here. As we get bigger, we carry more inventory. When we have more inventory, very simply, customers have more selection. You know, selection shows up in the simplest, most concrete possible of ways. A customer searches for a car, and it's there or it's not. When it's there, they're more likely to convert. When it's not, they're unlikely to convert. So selection is a very clear driver, and the benefit of having a national inventory is as you grow anywhere, you benefit everywhere. So that's a big, big driver.
In addition, as we get more inventory, we also hold it more locations. We open up reconditioning capabilities in more locations. We've always had our inspection centers. Through the ADESA acquisition, we bought 56 additional sites. We've taken three of those sites now, and we're adding reconditioning capabilities at those sites. As our inventory gets bigger, we start to put cars on more of those locations. We start to add reconditioning capacity to more of those locations. That means you have access to more inventory pools to buy cars from. That's beneficial to us. It means that we have less inbound transport. That's beneficial to us. It means that cars are available to customers faster. That drives conversion. It means that our delivery times are shorter. It means that our costs to deliver cars are lower. That either benefits customers or us.
So there really is positive feedback that is significant. You know, we've got brand is another very significant driver of economies of scale. As we get bigger and better known, that feeds back. You know, we are continuously working to drive our customer experience to higher and higher ground, and I think that we've made a ton of gains there over the last year or two. I think there are a ton of gains yet to make that we're very excited about. And then we do think this secular shift to e-commerce is an underlying tailwind. Consumer preferences have been changing for a long time. People want simpler experiences. They want convenience. They're more accustomed to it in everything else they do. That 19% in other industries is not happening in a vacuum.
That's changing the way that customers think about every way that they interact with every company. And so as long as that is occurring, that is also a tailwind that is driving our growth. And so the sum of all that gets us really excited. You know, again, just to go through it, we think that this combination is pretty unique. To be fastest-growing, customers have to love your offering. To be most profitable, you have to have a business model that is differentiated. It's hard to do that in a very large, very mature industry that's highly fragmented. To pair those two things is historically unique. You know, we've tried to do some work on our own, and I think that the results of it are...
They're such that we would ask you to do your own work, because given our work, it's almost embarrassing to, to list the companies that we feel like have paired those two things at the same time. But historically, when you have companies that are the fastest growing in an industry and also the most profitable, it bodes very well for the next 10-20 years. And so we would request that you maybe do some of that work on your own and take a look at what that, what that means and, and decide if you think it's applicable here. You know, we think that we can make tons of gains in customer experience and efficiency from here, and we're extremely excited by that.
I think the reality of being inside of Carvana every day today is that the hardest thing we have to do is get people to focus, because people are excited by the progress over the last couple of years. They see the additional areas for gains, and they want to take on more than we probably should, myself very much included in, in that group. And so I think we're trying to stay focused, but the fact that we're trying to stay focused, I think, points to the scale of the additional gains that are available, and we're extremely excited by that. Huge market. We can be big, positive feedback, and with that, I will stop talking so quickly.
No, thanks, thanks for that presentation. Obviously, very clear. You know, maybe I want to just start with the e-commerce penetration slide that you had. You know, you mentioned there is a secular shift, and traction you're seeing, in e-commerce. I was curious, you know, what gives you that confidence? Because you're the only player, right? You know, the others that were out there in the past, you know, the other three publics, you know, in U.S., U.K., I mean, they've all, you know, shut down their used car business. So, you know, what gives you confidence that the used car e-commerce business has a secular shift, in e-commerce?
I mean, obviously, we're seeing some in new cars with Tesla, Rivian, et cetera, but help us, you know, understand that better.
So I think we're seeing it everywhere. I think, to your point, it's happening in new cars. I think that it's happening in every walk of life. It's the way that many of us order food every day now. We're just used to doing more things online, and that's continually happening. I also think that consumers don't ask for business models, right? Consumers, they ask for attributes, that they want it to be simple. They don't want to worry afterwards if they paid too much or that, you know, Uncle Car Guy is gonna think that they made a mistake in the car that they bought or how much they paid. And so I think that that's really what customers want. They want a selection, they want an experience that is simple, and then they want to be confident afterwards.
I think that that's what powered our growth from 2013 through 2021. It's what's powering our growth today. I think, you know, even when we first launched in 2013, the question that we would get, you know, in venture capital meetings would be, "Why now?" And, you know, my opinion, for whatever it's worth, is that 2013 wasn't the right time. The right time for automotive e-commerce was probably 2000, but I think that it was just a really hard thing to build. I think, you know, not to simplify in any way, shape, or form the business models or, or other e-commerce business models because they're all hard, and the closer you get, the more you realize how hard they are. But I do think that in other verticals, there are simpler ways to approach the problem.
You can buy your product from a supplier, you can use third-party websites, you can use third-party payment channels, you can use third parties to deliver the cars-- or sorry, to deliver the product. And so I think e-commerce was able to be born, much more quickly when consumers were demanding it. I think to get across the divide of what was necessary in customer experience quality in automotive was always going to be extremely hard. It was always going to be extremely expensive because you couldn't rely on all these third-party businesses that were already existing in the world to make your, your problem a little bit easier to get up that hill. And I think that, you know, when we started to get up that hill in, in 2013, we saw the growth start to really show up.
I think that there's now... You know, trying to tell investors, I think when investors ask us about our moats, I think the things that land are we have a bunch of real estate. You know, we've spent a bunch of money. There are things that are quantifiable. I think when we say it's hard, it doesn't land, or it doesn't feel like it lands when you're in the meetings. I think that's because, generally speaking, you know, hard is not a quantifiable thing, and I think quantifiable things are easier to rely on. I think there's now pretty clear, quantifiable evidence of the difficulty of this problem. I think across the world, there have been on the order of 10 different companies that have swung at the same problem.
I think we are, you know, unquestionably the most successful of those companies, and, you know, our stock went down 99% in the middle. And I don't think it was necessarily because of fundamental, uh, variability in the industry. I think it was because it's very, very hard to build this, and it's very, very hard to keep investor confidence while you're building this, and it's very hard to raise the money to do this. And so to me, the, the time wasn't 2013. Consumer preferences started shifting long before that, but there was always this enormous divide that you had to cross. We've crossed it. I think you're seeing the benefits, you know, come through in the numbers very clearly right now. I think we have to execute really well from here. If we do that, we're gonna build something that's really big and industry-defining.
Well, makes sense. You know, a couple of things that came up on the last earnings call, you know, kind of related. You know, you mentioned two different places in the shareholder letter. You know, like, in one place, you mentioned thoughtful growth. Then another place you mentioned early innings of many years of growth, but still balancing the appropriate pace and going after more efficiencies. Could you elaborate on this more, on this thought process a little more? And how is this gonna be different, you know, from the initial years post-IPO, like 2018, 2019, 2020?
Sure. So, again, to, like, personalize this for a moment, I think part of what makes someone dumb enough to jump off the cliff and try to start a business is you have to believe things are gonna be easier than they're actually gonna be. And I think if you don't believe that, you never start. But then I think that same belief can cause you to want to tackle more problems than you should at any point in time. And I think that's true of me personally. I think that was true of the team inside Carvana for a long time. I think one of the things that we really learned as a very valuable lesson is if you pair that ambition with more discipline around what you tackle, it gets a lot easier.
So I think in 2022 and 2023, you know, we were forced to make massive changes really quickly to try to drive the business to capital independence very quickly. And in doing so, we, we simplified our problem quite a bit, and we said: We're not going to focus on growth. We're going to focus instead on all these things that make us more efficient.
That very clearly worked, and so I think, you know, when we talk now about this transition period, what we're trying to do is we're trying to make it so that when we have all of our meeting cadence that includes many meetings on Monday, and on Monday, we talk to every group who's working on all these different areas of potential gain, and we focus on what are the most important things they're working on and how are they performing against their weekly targets. The simpler that conversation is, the more accountability there is through the entire organization.
I think that this transition to growth is about us trying to manage the extreme gains that exist from going and getting more scale with the extreme benefits of high accountability and focus, and trying to keep things as simple as we can as we transition. So we're trying to thoughtfully kind of, you know, turn the wheel toward growth. In the first quarter, that was 16%. You know, in the second quarter, it was 33%. So we're getting to growth levels that are pretty significant, and they're not coming with a ton of pain, which we think is exciting. But we think the reason to have this transition period is to make sure that we make that focus transition very carefully, because there are gains to working on fewer things. And so we're trying to find the best balance we can.
We think from the perspective of 10 years from now, we won't care if we grew, you know, at 20% right now or 50% right now. What we'll care about is that we made that transition, and we grew at high levels for a very long time, and that we did it while simultaneously getting the business to continually improve fundamentally. So I think those are our goals in this period.
Is the used car backdrop in any way influencing that decision or that transition period? You know, we've talked about the supply backdrop, you know, younger vehicles, a little short out there. Obviously, you've powered through all of that, you know, the last few quarters, but curious, like, how important is the backdrop in itself, a factor?
Two things. I think it's not very important. I think that we feel like we're in a place where we're in control of our destiny. We feel like we see, you know, plenty of demand. We're trying to make sure that we go, you know, steer into that demand while simultaneously getting better, and I think that that's what's really driving our decision. I also think that in, you know, this moment of, you know, there's obviously been crazy volatility, you know, even in the last week or so. I think it's a nice by-product that we're kind of leaning into growth, so we get to observe what's going on in the world around us, but it's not driving the decision.
Understood. Just one more before I turn it to the audience. You know, how should we think about, you know, in context of all, you know, you know, the phase two, phase three transition, how should we think about the path of EBITDA improvement from here in terms of the incremental EBITDA per unit? You know, is it going to come more from further GPU expansion? Is it going to be primarily, you know, leveraging your SG&A? Just asking in the context of, you know, the significant GPU gains you've made over the last few quarters. So would you consider adding some slack into the system to perhaps improve throughput? As you would still be leveraging a lot of fixed costs in the overhead bucket that you talked about, you know, and perhaps even more network effects down the line.
So let me answer that a couple ways. I think there are gains everywhere. In terms of dollars, there are unquestionably pretty large gains that we think are possible in GPU. There are also some pretty large gains that we think are still available in our variable costs. Our, you know, our operations costs, operations expenses, the way that we define it, were down very significantly to just under $1,700 last quarter. Ex-warranty, if you're just looking at the costs associated with delivering a car to a customer, they were around $1,350. That's an incredible number in the industry. We think there's definitely room to drive that down. We think that there's room everywhere.
We think that, you know, as you think about the pace of improvement, I think that we've, you know, we've improved very quickly over the last year. We have plans to continue to improve very quickly. We have to execute well, right? In real life, it's about going into those meetings on Monday and seeing the pace of progress that you actually get. You know, real life is not always perfectly predictable, but it's been pretty predictable over the last year, and hopefully, we continue to execute in that same way. You know, there's some seasonality that you should be aware of that always occurs across the industry, and it's always occurred with us.
But in general, we think, we, we think the progress has the potential to be steady, and we think that that's subject to our execution. So we got, we've got to execute well. I think we're extremely confident we're going to get it over time, and we're very hopeful that we'll get it consistently over time.
Understood. It's clear. Just wanted to ask if any question in the audience. We have one here. There was a mic coming.
Are there insights into the Carvana business that have resulted as a result of the ADESA acquisition?
So I think there are several things there. I think that the simplest to plug into the core Carvana story that I think is probably most important when building a model of the next 10 or 15 years, is that there are significant gains from scale. There are significant gains from more inventory pools. Having inventory in more places has all the benefits that, you know, we discussed earlier that we think is very significant. So that's the simplest way to plug it into the story. I think the other very real thing that is that I think will drive additional fundamental gains, but is a little less clear to plug into the stories that exist today is just the vertical integration. You know, I do think that vertical integration is competitive power.
That's what it ends up being because you are able to more completely monetize a transaction. You give yourself a resilience by having kind of thicker access to total profit in the industry than everyone else. So we think that vertical integration is very powerful as well. I think that's a little harder to see, but we do think that that's powerful.
Now that EV is making a more meaningful impact into the pre-owned business, how's it going to be different from an ICE business, an all-ICE business?
So I think fundamentally, it's not crazily different, but there are different things you have to be focused on, at every part of the transaction. When you buy a car from a customer, which is how we acquire most of the cars that we sell to customers, you have to make sure that you've got the charging cable and you've got the adapters, and you want to be intelligent about the state of the battery at the time that you buy it. When you're taking a car through an inspection center, there are some things that are different. There are many things that are the same. You need to make sure that you have charging capacity.
You have to have different processes to manage the fact that when a car gets hot for a long time and it's sitting idle, it can consume battery, and so you maybe with your ICE cars, you don't have to worry about filling them back up with gas before you deliver them to a customer, with electric cars, you do. So there's a series of different processes you build throughout the entire process. From a customer-facing perspective, I don't think it's different. I think customers, you know, they look for the car that they want. They want it delivered. They want a simple experience.
There are some differences in the logistics network as well. You got to be careful about, but generally speaking, I would say it's a bunch of small processes that we have to make adjustments on. We've been making those adjustments. We have a larger market share in EVs than we do in ICE, as you probably expect. It's an area that we'll continue to focus on. I think, you know, every technology goes through, or seemingly every technology goes through its classic, you know, hype cycle, and then, like, kind of, you know, the trough and then back up again. I think EVs may be a little bit in the trough. They may be even emerging a little bit from the trough right now, but our view is EVs are here to stay.
There's a bunch of fundamental reasons why they're a very high-quality technology, and so, you know, we're continuing to invest in that as we think it's important for the future.
Thanks, Ernie, for taking the time, and Rajat for hosting. Just following up on both of those two questions, actually. On the first one, when it comes to CarMax, they only have, I want to say, maybe low teens online penetration. You're building out ADESA and basically localizing inventory pools closer to the customer. Would it be crazy to say maybe 10, 20 years from now, those ADESA locations actually become a storefront for Carvana and give them more omni-channel capabilities? Is that even remotely under consideration?
I don't think that should be a core part of the way that you're thinking about things. What I will say is I think that these distinctions between e-commerce and omni-channel can be... I don't think that they're like holy wars. I think it's all about what does a customer want, and I think it's all about what is your starting position, and I think that those change the best path. I think one way to tie out that historically you've seen e-commerce companies that have evolved into adding more omni-channel capabilities is to basically say that there's a subset of customers at every point in time that is probably constantly changing, that prefers a physical experience.
If you believe you have the ability to create an e-commerce experience that allows you to serve a large portion of the customer base, it is probably most efficient to stick with that model until you get to very large penetration. And then if you believe that, you can almost think about like adding some omni-channel capabilities as being like a small multiple on the demand that you can serve inside of a fixed radius. If you get to larger and larger scales, eventually that increase in demand that you can access, you know, can be large enough to justify the investment. If you start with, you know, a bunch of physical locations, then you probably want to take a different path because you, you've got a sustained business that's working on that path.
I think that things like that can blur the lines a little bit, so I think that we've, you know, we've got things like our vending machines. We've got locations where we're letting customers come and pick up cars. So I think that those things can get a little blurry, and I don't think that we've got, like, a religious affiliation with one side of that equation. I think what we are very focused on is making sure that our business delivers incredible experiences to customers and that it's incredibly efficient and vertically integrated. So I think that's where we'll continue to focus.
Thanks. When it comes to the difference in all-in reconditioning costs, totally appreciate the differences in processes between EV and ICE, but just all-in reconditioning costs, is it at parity or are EVs more expensive given electrical equipment, ECU needs are probably higher on an EV relative to an ICE? Thank you.
High level, high level, similar. Processes are a bit different. I think it's more about changing processes than it is, about, about cost differences. And then I think very importantly, as long as your mental model for this industry, like, I do think people can focus on every gross profit line item, they can focus on every SG&A line item, and I think it can feel like there's so many moving pieces. As long as your mental model just simplifies things and says, "Wait a minute, there's tens of thousands of dealers in a massive market. They're all smart. They all have very similar costs. They all look at what, you know, a car costs at auction.
They think about what they can sell to a consumer for, and they make sure the gap between those two numbers is large enough to cover all of their expenses, whatever their expenses are, they can forecast, including future depreciation. And if it's not, then they don't buy the car. But if everyone's doing the same thing, the gaps are pretty stable. So in my opinion, in light of that mental model, even if EVs cost an extra $1,000 to recondition, which they don't, the market would just absorb that, and it would just show up. It wouldn't necessarily change your expected profit margins. And I think that that's the right mental model to think about. I think it's why the industry is so much more stable than people believe.
'Cause if you zoom in too far, you can see 15 moving pieces, but if you zoom back out and you just say everyone's doing the same thing, it gets a lot easier to predict.
Just one more question. You know, does—given the volatility we've seen in the markets, unemployment rates went up last month. Just could you talk about the consumer credit backdrop, and the impact to Carvana? We're seeing delinquency, you know, loss data doesn't look great. You know, we're seeing things like voluntary repossessions, early repossessions. How do you feel about this backdrop as you navigate as you go into phase III ? On one hand, you mentioned you're tightening, you know, back in the fourth quarter, but you also serve a broader set of consumers, more subprime consumers. So could you help tie all those pieces together, and how that impacts your phase III evolution?
Sure. So I think we're supposed to pay a lot of attention. I think the, you know, credit was unnaturally good in late 2020 and 2021. I think it started to drift in, you know, 2022, and everyone said, "Oh, but it's still better than 2019." And then 2023, it was like, "Ah, maybe it's a little bit worse." And I think that, you know, generally speaking, like, across all of consumer credit, you know, there's probably been a continual slow drift in credit. I think that, in auto and in most, credit verticals, I think many originators tightened up quite a bit at some point in 2023, and I think the early performance from everything post-tightening for ourselves and everyone else included, I think looks pretty good.
But I think it's something we should definitely, definitely pay attention to. I think it's important also to remember that our business model is about extending credit to customers, originating loans, you know, for a couple of months, and then selling them off. And then, you know, what we monetize is the premium that we get on any loan, you know, and the cost versus the face of the loan and the price that we sell it to investors for. Those investors are then taking the long-term credit risk. So our kind of finance GPU exposure is a function of, during your couple month origination period, how much do underlying cost of funds change? Do you change APRs, and how much do underlying expected losses change?
So generally speaking, we've seen a lot of stability in that number over time. We don't have the traditional finance catch-ups, where you have to monitor a whole portfolio and then, you know, adjust all losses across the portfolio that you own. We've sold that credit off, so you know, we've got a fairly stable and predictable finance GPU.
Understood. Great. I think that's all the time we have, so thanks very much.
Thanks, everyone. Appreciate it.
Thank you, everyone, for joining.
Thank you.
That was great.
Appreciate it.
Thank you so much. I'll see you, I'll see you at dinner.
Awesome. Sounds good.
Yeah.
Hello? Hi, I'm Ryan Brinkman. I just want to make the announcement real quick, that the next presentation scheduled for this room, Stoneridge, unfortunately, the management asked me to extend their regrets. They... Their flight was canceled and diverted to another city, so they won't be here at 9:35 A.M. for the presentation on the agenda. If you'd planned to attend the Stoneridge presentation, like me, you may wish to attend instead the Wallbox presentation, which is in the conference room directly behind this one, an electric vehicle charging company. Thank you.