A view of a Carvana car vending machine with blue sky backdrop

Why Did Carvana Fail the Online Game?

5 minute read
Jennifer Torres avatar
Once the golden child of ecommerce, Carvana’s failure should serve as a cautionary tale for online retailers.

Throughout 2020-2021, Carvana’s online-only model was perfect for pandemic-weary consumers. Supply chain shortages that left new cars in limited supply and a country still sequestered at home created the perfect atmosphere for the online-only used car retailer to thrive.

But lawsuits, consumer complaints, floundering sales, rising interest rates, layoffs and the loss of more than $1 billion this year alone have left many wondering what happened to the wondrous wunderkind of the used-car world?

According to Benjamin Goh, managing partner at BCG, Carvana may have been overwhelmed with its exponential success and forgot to put on a safety belt.

“Carvana took on the pandemic tsunami waves that swept consumers from onsite to online and grew exponentially,” Goh said. “The economy is as unpredictable as the pandemic tsunami, and the one thing that all businesses wanting to survive and sustain is to be able to accurately predict and proactively react by being lean and agile.”

Since August 2021 when Carvana’s stock reached $360 per share, it’s took a deep dive last week to just $6.80 per share — a decline of approximately 98%. It was back to $7.71 Thursday, Dec. 1. In May, the company laid off 2,500 team members — 12% of its total staff and in November saw another reduction of 1,500 additional workers.

David Meerman Scott, author of 12 books including “The New Rules of Marketing & PR," doesn’t believe the company’s current situation reflects a failed future.

“A company's stock price is a visible indication of what people think of the company at that time — yes, the stock price is down, and sales projections have been lowered; however, this does not mean the company has failed,” Scott said. “Apple closed at $0.04 on July 8, 1982, and is trading over $140 today.”

What else can we learn from Carvana's current financial undoing?

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The Carvana Concept

Founded in 2012, the Phoenix-based company has been touted as the “Amazon” of used cars and known for its nearly three dozen tall, gleaming car vending machines across the country. With nationwide expansion and consistent gains in market share, by 2020 Carvana became the second largest seller of used vehicles in the US.

The concept behind the company is built on making car-buying simple. Instead of roaming a car lot and dealing with a salesperson, consumers peruse their 100% online marketplace — which as of the date of this article listed just under 55,000 vehicles. After purchase you can elect to pick it up in person — or the company will deliver it right to your door — many times offering next-day delivery and all with a seven-day, no-questions-asked return policy.

But inflation and the threat of recession have made consumers considerably more cautious, and Carvana's not immune.

Related Article: Is Ecommerce the Antidote to Ongoing Retailer Challenges?

Learning Opportunities

Dips, Debt and Dissatisfaction 

Rhett Stubbendeck, CEO of LeverageRx, a digital lending and insurance marketplace exclusively for doctors, said as a business owner, it’s imperative that leaders and management teams keep track of scale-up projects and change the procedures of the company accordingly. And the management at Carvana failed to address this issue.

“That is why, despite the rapid increase in sales during the pandemic, Carvana couldn’t keep up with the success; for example, they did not have enough vehicles to meet the increased demand, forcing them to buy at higher prices at the end of the day,” Stubbendeck said. “In my opinion, Carvana’s dip in the shares and the resulting loss were partly due to their high debt and the increasing interest on it. The company’s financial management was criticized by the shareholders and eventually led to losses. Other factors also included the unprofessional rise in prices. With rising inflation, the company raised its prices to an all-time high, which was not well received by customers and eventually led to customer dissatisfaction.”

The Better Business Bureau currently lists Carvana's customer review rating at a dismal 1.94 out of 5 (as of Dec. 1). Many of the reviews cite issues with timely shipping, and there are numerous complaints of last-minute rescheduled deliveries, with one reviewer writing, “If I could rate 0, I would.”

In a message to investors this month, Carvana Founder and CEO Ernie Garcia reiterated his belief the company will right the ship.

“We made significant progress in Q3 driving operational efficiencies despite the considerable headwinds facing our industry. Our committed team achieved notable cost reductions across our business while continuing to deliver exceptional customer experiences,” Garcia said in a letter to investors. “This economic environment remains uncertain, but we are focused squarely on the goal of driving the business to profitability. While progress is rarely linear, we remain on the path to becoming the largest and most profitable auto retailer.”

Strong Warning to Online Businesses

Will Ward, founder and CEO of Industry Arabic, has run his online business since 2011. This year in particular, he’s seen other large online companies take massive hits and cuts along with Carvana.

He believes that despite being an innovative solution two years ago, Carvana’s business model was more than they could handle.

“Taking such a gamble during a time when the automotive industry was struggling allowed them an easy entrance to the market but gave them a narrow chance for escape. Carvana might have survived longer had it been established during more stable times,” Ward said. “Carvana leadership failed to consider the resurgence of car manufacturing post-pandemic and now it does not seem like the company will escape insolvency. This is a terrible demonstration of foresight and a good warning to all online resellers. It is a risk to resell goods when their value is at the mercy of the production line.”

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