Indeed, KAVAK doesn't need to hire McKinsey (I can only imagine the fortune they charged) to identify that its operational processes need efficiency. A good Chief Financial Officer might have the answers to KAVAK's financial and operational problems, but let's start with the simplest things.
1. Buying and Selling Used Cars:
The purchase and sale of used cars can be a profitable business, if "inventory turnover is rapid and without additional costs." In other words, you buy the car today for MXN 100,000 and sell it tomorrow for MXN 120,000. Sounds good, doesn't it? Does this happen at KAVAK? Of course not!
A used car becomes even more expensive when you start identifying all the problems a used car has, which will undoubtedly affect your profit margin due to the purchase of necessary auto parts for its proper functioning.
For KAVAK to generate operational profits, its inventory of approximately 11,000 cars should be rotating every 2 months. Will this happen soon? Unfortunately, no!
2. Massive Purchase of Used Cars:
You probably heard a couple of years ago that KAVAK was making massive purchases of used cars, as we say in Mexico, putting good money into the bad. Remember that a used car depreciates every second, every hour, every day, every week. It would have been better to leave the money in the bank with an annual return rate of 3% than to think about a massive purchase of used cars because KAVAK bought everything! What's the point of having control over used car prices if they can't use it? I don't think so!
3. Control of Used Car Prices:
And indeed, KAVAK truly has control over used car prices. The buying and selling prices of KAVAK are currently used as a reference in the used car market. But does it benefit them? I don't think so. If they increase the prices of used cars, some people will surely continue buying from KAVAK, but many others will likely prefer to "buy a new car" without usage problems. In other words, people prefer to buy "safety" rather than "expensive risk."
4. Mass Layoffs at KAVAK:
A single person can be truly profitable buying and selling between 20 and 40 cars. Can you imagine the profits that a single person can generate by buying and selling 20 to 40 used cars monthly? Of course, this process is profitable, as long as one or two people handle it. However, if you involve 5 or 10 more people in the process, with salaries for directors and managers, additional social costs, more operators, and increased property rental, it surely won't be profitable. Will the mass layoffs continue? Certainly yes! But in reality, the owners and directors of KAVAK are forgetting that the buying and selling of used cars is not the origin of the business or the source of profits.
5. Sale of Warranty Policies:
Someone at KAVAK had the brilliant idea of generating more profits by selling "Warranty Policies." However, KAVAK's business model was not created to sell "Warranty Policies" and make money through a Service Workshop. Sorry, but this is not KAVAK.
The Service Workshops of new car dealerships are "Specialized Workshops," meaning each brand has highly trained personnel to provide the best possible service to their customers. And yet, even premium car brands in Mexico have some issues providing an exceptional service experience. Can you imagine how many brands of used cars KAVAK must handle? Selling Warranty Policies is certainly not the solution.
6. Sponsorship Costs:
You may have noticed that KAVAK is the official sponsor of the following teams:
a) The Mexican National Football Team.
b) Los Diablos Rojos del México.
c) Checo Pérez.
d) Club América Soccer Team, among others.
In other words, "Money thrown in the trash" in millions of dollars, undoubtedly.
And so, we could continue with all the operational problems that KAVAK has and will have in Mexico. What's even more incredible is that KAVAK continues to replicate its business model in other Latin American countries, meaning they will continue to lose money.
So, we might ask ourselves, can KAVAK generate profits? And the answer to that question is... the issue is complicated, very complicated... but "they could generate money."
The way KAVAK probably makes money is through "financing," meaning selling used cars on credit. Let me explain, with the sale of a used car on credit, they freeze the present value of the car and, therefore, freeze the losses... and yes, they also generate profits with financing, from my point of view, not enough to recover the investment and the financial losses currently being incurred.
Here are some solutions and recommendations for KAVAK's Directors, in case they happen to read this article.
Modify the Business Model ASAP.
It sounds simple, but it's something they must do "urgently" if they want to salvage something from KAVAK's current valuation.
But how do they modify KAVAK's Business Model?
Here are some solutions to their business model:
a) Convert Depreciable Short-Term Inventory into Non-Depreciable and Long-Term Assets:
If KAVAK currently has an inventory of approximately 11,000 cars in Mexico, reduce it to the bare minimum and invest in building a facility that allows for centralized operations. KAVAK needs to buy the land where they store their cars at an affordable cost, with high appreciation potential in the medium term. Convert depreciable assets into non-depreciable ones.
b) Centralize Operations and Form Work Teams:
Creating a single "Warehouse with integrated offices" will help KAVAK reduce costs and also create a service team in the workshop for "Regions," for example (Asian cars, American cars, German cars, etc.).
c) Sell What They Truly Know, which is "Technology."
Conclusion:
Can KAVAK's business model really be solved?
The answer is yes, but they urgently need to change their operation, especially the way they squander their investors' money. I have mentioned in previous articles that where there is "waste," there are likely massive financial losses.
In other articles that we will be developing, we will closely follow the case of "KAVAK" and present numbers that can provide a better perspective on its current and medium-term financial situation.