large and scattered
Latin America is a regional market, but it surpasses China in transaction volume with 21 million orders. Of these, Brazil alone has 14 million transactions. Latin America has become the third largest used car market in the world. Brazil's addressable market is valued at $140 billion, Mexico is about 40% the size of Brazil, and the market is valued at $60 billion, and Argentina at $15 billion. The Latin American market is growing at a CAGR of 4% per year. One thing these markets have in common is the lack of a dominant used car trading platform, which is very appealing to Kavak. Today, Kavak leads Mexico with a market share of 0.4%.
unstructured transaction
Many used car sales take place without an intermediary, with peer-to-peer (P2P) transactions accounting for about 60% of total transactions in Brazil and Argentina, and 80% in Mexico. P2P transactions are very risky due to the high rate of fraud. The U.S. has a 2% fraud rate, Brazil is five times the U.S. rate, and Mexico is 12.5 times the U.S. rate. In Mexico, 25% of all transactions are victims of fraud involving theft, unfair pricing, etc.
importance
For low-income families, owning a car changes everything. In the United States, numerous studies have shown that using a car can lead to better jobs, higher income levels, and more, improving people's quality of life. In Latin America, cars can be especially important. The relatively weak public transport system in most cities in Latin America means that there is no better alternative to the car. Another important consideration is that for most Latinos, buying a car is probably the biggest expense of their life. Hernán Kazah, founder of venture capital firm Kaszek, likened the deal to buying a house. "For many people, the car is the primary asset they own," he said, "and the car is really an asset."
Product: Consumer First
Sales
Kavak offers a simple and easy way to acquire vehicles at reasonable prices.
First, consumers enter vehicle details into the Kavak website. Within two minutes, the website provides an initial market value based on vehicle information, usage, market trends, and more.
After that, customers must book a vehicle inspection time. Within 1-2 hours, Kavak will give a final quotation based on the inspection results, and the customer has five days to make the final consideration.
Buy
Kavak expects the buying process to be just as smooth and shipping the purchased vehicle to the customer's home.
The company website and app offer a range of vehicles, from SUVs to convertibles to sedans. Each listing contains car details. Unlike the average car salesman who tries to cover up the flaws in the car, Kavak clearly identifies these issues with photo proof.
All Kavak buyers can return within 7 days. Cars are insured for three months by default, but buyers can extend this to fifteen months by purchasing the company's insurance product, Kavak Total, which can be booked for repairs and maintenance through Kavak's app.
Finance
To make car ownership more accessible, Kavak offers strong financial options through its subsidiary Kavak Capital. Consumers can receive multiple rental options within two minutes, with interest rates ranging from 14%-20%.
While Kavak works with financial institutions to expand its options, more than half of the financing is handled in-house. Capital plays a vital role in business models. Not only does it expand the entire addressable market for new buyers to gain car ownership, but it also increases conversion rates.
team management
participatory dictatorship
Kavak has power beyond leadership. Garcia describes the company's culture as a "participatory dictatorship."
Garcia describes it as, everyone has a task and they are all given decision-making control. But that power resides in a larger system that should be communicated constantly. The end result is a culture of extreme ownership combined with collaboration.
Valuation: Overheated
Kavak is an undeniably good deal. While Garcia didn't release specific figures, the company's funding history and market expansion confirm it.
Given the dramatic changes in the global used car market, it seems unlikely that Kavak will ever get that valuation again.
Kavak announced a new valuation of $8.7 billion on September 22, 2021.
On that day, Carvana's market cap was roughly $57 billion, Vroom was $3.2 billion, Cazoo was $7 billion, and CarMax was $22.7 billion. Eight months later, all four companies have seen their market capitalizations plummet. CarMax was the best performer, falling 34% to a market cap of $14.97 billion; Carvana fell nearly 90% to just $5.96 billion; and Vroom was hit even harder, collapsing to just $198.5 million, a 94% drop. Europe's Cazoo fell 84%, even though its first-quarter earnings showed a 159% rise in annual revenue.
Changes in the macro environment mean Kavak won't get the same valuation today, but Kavak doesn't burn cash to grow. In 2022, every business will need to adopt a more frugal approach, but Kavak continues to climb, according to investors.
Questions about whether Kavak is overvalued is only temporary. One more important point: Kavak is a technology company.
Technology is integrated into company operations. Technology not only provides the way to serve and communicate with customers, but also the way Kavak prices and handles financing.
Kavak is a brick and mortar business with real operations. Kavak needs access to capital to increase the supply in the market and provide financing. Launching a new market requires more than a new website, refurbishment technology, car parks and showrooms are all required. This makes Kavak very different from marketplaces like Airbnb, where Airbnb doesn't need to own the underlying assets.
The future: Brazil and beyond
geographic expansion
Given Brazil's prominence in Latin America's used car market, it's no surprise that Kavak decided to enter the country. The size of Kavak's investment indicates that they are sure to win a battle in the Brazilian market. So far, Kavak's attempts have been successful. "What they've done in Brazil is unbelievable," the source said. Kavak's expansion into Rio de Janeiro is another show of confidence.
Latin American startups tend to follow a familiar pattern: companies that start in Mexico quickly move to Brazil; those who start in Brazil always head north. Once those two markets were locked, Kavak moved to smaller regional markets such as Colombia, Argentina, Chile, Peru and Ecuador.
Garcia decided to enter the Turkish market before entering more Latin American countries. Instead of picking the easiest market to enter, Garcia decided to attack the biggest market without an established winner. With 7.5 million used cars sold annually, Turkey is the sixth largest used car market in the world, surpassing Mexico, France, Russia, Indonesia, India and Spain.
Previously, Kavak entered new markets through mergers and acquisitions, acquiring Checkars in Argentina and Garaj Sepeti in Turkey. We should expect a similar strategy as it expands into more markets.
The used car market in India is growing at a compound annual growth rate of 11% and is expected to reach 8.3 million transactions by 2026, making it one of the largest used car markets in the world. Unlike Kavak in other regions, India has well-funded competitors. CARS24, Droom, CarDekho, and Spinny have all raised hundreds of millions of dollars. The scale of these competitors makes mergers and acquisitions difficult.
"Super App" ambitions
Kavak doesn't just want to grow geographically. García wants Kavak to be a "super app experience" that bundles multiple services into one package. To a certain extent, Kavak has achieved this, offering an extremely full-featured product for buying, selling, financing, repairing and insuring automobiles.
With the launch of a full suite of services in the market, adding insurance and financial services to countries like Turkey, Colombia, Saudi Arabia, etc., revenue has grown significantly, even without adding new customers.
Kavak already acts as a one-stop car shop in mature markets, but car rentals may be the missing thing. In addition to opening up Kavak's inventory, the company could also facilitate a managed peer-to-peer model, giving customers another way to gain financial benefits from car ownership. Succeeding in this area is complex, but it is commendable to rely on Kavak to reduce fraud and eliminate consumer pain points.
Kavak City is not a faraway chase, but a steadfast alignment with the core business. But that's not to say Kavak City won't face failures or setbacks. It remains to be seen whether Kavak can grow to an exciting valuation size and achieve similar success to Mexico in Turkey and the Middle East. While Kavak has made massive investments in technology, it remains a capital-intensive business in itself that will only grow in size with a corresponding physical expansion.
What is certain is that Kavak will not stand still, just as its products are constantly changing, advancing, conquering.
