This article was originally published in my newsletter Emergent.
The last few years have been some of the most eventful in the automotive industry’s history. For much of the COVID-19 pandemic many used cars cost more than new ones, the prices of new cars hit record highs and there were huge shortages and backorders for vehicles globally. Meanwhile the industry has seen a growing crop of disruptive tech companies attempting to disrupt different parts of the industry including Carvana, Vroom, CarMax on the buying and selling side and the likes of Tesla, Rivian and other manufacturers in the electric vehicle segment. Much of the action and drama in the automotive industry has been taking place in China and the United States, the two biggest automotive markets in the world.
However, people buy, sell and drive cars everywhere and the winds of disruption are also being felt globally. One of the most interesting startups founded in recent years is Mexican startup Kavak which is aiming to disrupt the used-car market in Latin America. The startup was founded as a private company by Carlos Julio Garcia, his sister Lorianne Garcia, and Roger Laughlin. Carlos Garcia came up with the idea when he personally experienced the inefficiencies of the used car market in Mexico. He had tried to sell his own car, and later ended up buying a used car with mechanical problems. At that point, he realized that there were risks inherent to the market due to a lack of transparency and guarantees. In 2016, along with the other co-founders and a team of only 15, they launched Kavak which has evolved into one of Latin America’s most iconic startups.
Headquartered in Mexico City, Kavak became Mexico’s first ever unicorn 4 years after being founded. Kavak is disrupting the used-car market in Latin America by ensuring used-cars can be bought and sold with transparency and guarantees. Kavak sells its refurbished vehicles through its ecommerce platform as well as a network of brick-and-mortar hubs. Since its founding in 2016 Kavak has managed to:
- Serve hundreds of thousands of customers since inception
- Build a global team of 7000 employees
- Build an inventory of more than 30,000 cars and open 75 operative centers
- Record more than 100% Year-on-year growth since 2016
- Launch in 9 global markets: Argentina, Brazil, Chile, Colombia, Mexico, Peru, Turkey, Oman, UAE
- Hit an eye-watering valuation of $8.7 Billion to become the most valuable startup in Latin America
Kavak is backed by some of the world’s largest investment funds including Softbank, Greenoaks, Kaszek Ventures and General Atlantic. These major funds all see value in Kavak’s core value proposition – which leverages data, technology and innovation throughout the whole process of buying a used vehicle, which formalizes a largely fragmented pre-owned car industry. With its unique approach Kavak is positioned to continue its rapid growth in the years to come across Latin American and in its current and future global markets.
At the highest level Kavak offers an end-to-end solution to streamline the used-car market. Kavak buys, manages and sells pre-owned cars while also offering great after-sales customer services and auto-financing options. It has a wide catalog of guaranteed and certified cars which can be bought via its brick and mortar stores, e-commerce platform and mobile app. The company also has an in-house financing arm called Kavak Capital which provides car-leasing and loan options for its customers. Kavak also takes exceptional care to keep customers happy, even providing home delivery for cars that have been purchased.
Kavak buys pre-owned cars from sellers through a very simple process. Sellers can estimate the fair market value of their car through an online valuation tool offered by Kavak. After having the car inspected either via Kavak’s home service team or at one of their physical locations, Kavak finalizes the purchase of the car with minimal paperwork and often same-day transfer of payment.
Buying a car from Kavak is also a fairly straightforward process. A prospective buyer can browse through the catalog on Kavak’s website which has a simple interface with plenty of options to filter from, allowing for a seamless search process. The customer can either book an appointment to first see the car at a company hub, or directly reserve the car with reservations being valid for 5 days.
Once a car is reserved a buyer can make use of Kavak’s financing options to finance that car. The company offers personalized payment plans, which are tailored according to a customer’s preferences (regarding the initial down payment they can make and the monthly installments they can afford subsequently) and can be obtained through the website. Once a plan is finalized, partners of Kavak contact the buyer through phone, SMS or email to process the proposal. In the end, all that is required of the customer is some basic documentation (proof of identity, address, income, etc). The entire process can be done completely online, which makes it relatively hassle-free.
Kavak’s core business model is quite simple. The company has to purchase used cars at fair market rates and sell them to buyers at a profit. While straightforward this business model has proven hard for startups to execute with Carvana’s struggles in the US one recent example. In contrast, Kavak has been laser focused on efficiency and execution throughout its lifecycle. In the first 4 years of operations Kavak focused on building a viable business model in Mexico that could later be replicated in other emerging markets with similar market dynamics.
Starting a business selling used-cars is a capital-intensive endeavor. Kavak risked burning through mountains of cash inefficiently and having little to show for it. Instead, during these early years, the company smartly invested its capital on building a pricing algorithm which would be responsible for driving its growth. Kavak also built technologies to enable efficiency in every step of the sales process including inspection, purchase, reconditioning and sale, as well as warranty and after-sales services.
Besides its core product of car sales Kavak also makes money through its in-house financing arm – Kavak Capital – which was launched in partnership with financial institutions like HSBC, BBVA, Santander, and Credimovil. In Latin America, automobile financing is generally hard to come by as traditional banking institutions tend to reject 60% of the applications and charge high annual interest rates of up to 30% on those that are approved. This lack of financing opportunities makes an in-house financing arm a major advantage for the company.
Kavak Capital provides affordable leasing options and makes car ownership possible for first-time buyers. It charges annual interest rates of 14% to 20% which has proven popular thanks to their relative affordability. Impressively more than 50% of Kavak’s sales include financing from the company, compared to a 10% average of the traditional industry within the region. The biggest risk here is that Kavak’s underwriting proves to be too lax in the long-term and that many of these automobile loans default. However, this risk is partly ameliorated by the fact that Kavak can repossess these cars which retain much of their physical value, especially in emerging markets where the supply of new cars is far lower than in developed markets.
Market and Competition
Five years ago around the time Kavak was setting up in Mexico the used car market was beginning to undergo significant changes. It was projected that the market would register growth at a CAGR of 3.4%, rising from 18.4 Million unit sales in 2016 to 22.4 Million unit sales in 2022. In recent years Kavak has benefited from the massive disruption to the used car market in Latin America brought on by the COVID-19 pandemic. As manufacturing facilities shut down and supply chains got disrupted across the globe at the peak of the pandemic, the production and inventory of new vehicles took a hit (28% decline in new car sales in 2020). The resulting supply-demand imbalances caused prices of new cars to shoot up, indirectly causing demand for used cars to rise. Additionally, because people feared getting sick with COVID-19 on public transport those who could afford to sought to purchase cars, only further increasing demand and upward pressure on car prices.
The Latin American used-car market is characterized by a few traits that are very common across most emerging markets. It is a highly fragmented market, and transactions are often peer-to-peer which increases the potential for fraud. Car ownership is very much concentrated in urban areas and access to purchasing a car is limited by few available financing options. Furthermore, no formal player has more than 1% of the market and 90% of transactions occur between individuals. This has historically led more than 40% of sales to be exposed to the risk of financial, mechanical or other types of fraud. These conditions make it hard for institutions to take the risk of financing automobiles, in turn making it hard for an everyday person to purchase a car. In the US where 90% of sales are financed and less than 10% are informal sales, 7 out of 10 citizens own a car. In contrast, only 1.5 out of 10 inhabitants in Latin America own a car.
Besides Kavak, several other innovative players are going after LATAM’s car market such as InstaCarro, Localiza, Superbid and Nissan Mexico. InstaCarro holds online auctions for used cars, promising to sell them in 1.5 hours or less to any of its 1,500+ dealers that buy used cars. Localiza is one of LATAM’s biggest car rental companies. The company has a used car division which uses smartphone apps, offers good financing options, while also offering insurance and regular maintenance services. Superbid is a specialist in online car auctions and also has a fleet of used cars for selling. Nissan Mexico offers a catalog of almost-new and used cars, has a 154-checkpoint CPO program, financing, warranty, and on-demand maintenance and services. In comparison to its regional competitors, Kavak has stood out on many instances and as of July 2022, Kavak has expanded to six countries in Latin America, which it says represent 80% of the continent’s car business.
Kavak differentiates itself from other car reselling businesses in three ways. Firstly, the car-buying process is end-to-end, which lends customers a sense of safety and ease on their car buying journey. All cars on the Kavak platform are inspected and reconditioned to the highest standards of quality. In fact, Kavak has a rigorous “240-point” inspection process for obtaining its inventory. Secondly, customer service is given a big priority at the company. Once a buyer finalizes a deal with Kavak, the company even delivers the vehicle directly to the customer’s address. The company has a 7-day return policy, which allows prospective buyers to go beyond basic test drives and keep the car for a week to see if they like it. All cars come with the Kavak warranty, free for 90-days and extendable to 2 years.
Lastly, Kavak leverages technology to keep the car buying and selling process transparent, fair and brief. Its algorithms ensure customers can sell and buy vehicles from Kavak at fair market prices. Data and AI technology help reduce the time required for reconditioning cars and devise transparent financing options for buyers. Special financial technology provides populations with different credit profiles with the ability to purchase a car, even if they have never previously had a credit application approved.
Kavak’s growth trajectory has been impressive. In the 5 years since its inception, Kavak has expanded through Latin America as well as recently launching in the Middle East. By 2021, the company had raised over US$900 million to disrupt the used-car market and became the most valuable private startup in Latin America. By July 2022 it became the largest pre-owned car operation worldwide, with 75 hubs and 9 reconditioning centers worldwide.
Kavak has several potential paths to unlock further growth moving forward including:
- Pursuing further global expansion
- Expand into car leasing and auto servicing
- Expand into new car sales
On numerous occasions, Kavak has shared its growth plans for the future. In July 2021 the company stated its plans to open the largest vehicle reconditioning center for Latin America in Sao Paulo, which will support its plans to purchase over 200,000 units globally in the next 2 years of operations. It is clear Kavak plans on winning big in Brazil which is a $1.5 trillion economy and the most important economy in Latin America. In May of the same year, the company shared its long-term strategy to expand into Turkey where it plans to offer more than 300,000 cars to its customers by the end of 2025. This is yet another bold move, but not one without its logic. Turkey is among the 6th largest used-car markets in the world, and incidentally does not have a local established winner.
More recently Kavak launched in the Middle East after merging with Carzaty, a startup based in Oman that was disrupting the region’s used car market. Kavak has committed $130 million as part of its expansion plan in the region and the company is live in the UAE and Oman. The next step for the company is to launch in Saudi Arabia, the region’s economic giant where recent regulatory changes are making it easier to offer consumers debt, which will most likely see car sales rise significantly from the roughly 500,000 a year today.
Aside from geographical expansion Kavak has a compelling opportunity to expand into the auto servicing market. Since Kavak will already have built a relationship with both buyers and sellers during a sales process, the company has the ability to try upsell these customers to a range of automotive maintenance services. Cars require constant maintenance and investment and accrue roughly $0.09 of maintenance and repair costs per mile driven. Maintenance and repair services also allow the company to build a long-term and recurring relationship with customers to unlock more revenue per customer. Finally, Kavak’s core value proposition of a trusted, high-quality centralized service for buying vetted used cars can be easily translated to offering a vetted, high-quality and centralized platform for car maintenance.
Lastly, Kavak has been focused on disrupting the used car market in emerging markets where far fewer people can afford new cars and instead opt to buy used cars. However, the company has built much of the infrastructure and processes to expand into the new car sales segment over time. While this segment brings some new complexities it is also likely to continue to grow over time as emerging markets become wealthier.
Kavak is one of the most important startups to have launched in the last few years in Latin America. Its international expansion into markets like Turkey, Oman and the UAE is blazing a new path that very few startups have. The company’s playbook of delivering a trusted, verified, vetted and centralized service in an industry where trust and standards are low can be applied to many other industries in emerging markets. The same dynamics are present in many different industries. Kavak has significant room ahead of it to continue its growth and the path it paves and example it sets will likely be followed by many more international startups with lofty global ambitions.
This article was originally published in my newsletter Emergent.