Billion dollar business in junkyard | TELNEWS

Billion dollar business in junkyard

Dallas-based dump car owners have created the perfect business model to help them weather any crisis or pandemic: they make money when car prices rise and when they fall. Working in tandem, father-in-law and son-in-law revolutionized the 1990s by selling broken cars at online auctions, and today they are billionaires.

Forklifts drive around the neat scrap yard, carrying both dilapidated pick-up trucks and nearly new Lotus coupes. This vast area of ​​nearly 40 hectares next to railroad tracks and auto repair shops in the east of Long Island is by no means an East Hampton resort. But this is no ordinary dump. Everything is electronically controlled here: forklift operators strictly follow the graphics displayed on the tablets. On the windshield of every car, whether it is a well-worn BMW or a smashed Toyota, there is a digital code, upon identification of which the car is entered into the lists and moved to the appropriate area at the sales area. In a squat one-story building, customers who have paid for cars via the Internet and scanned a special QR code with their phone are waiting for their turn to pick up freshly purchased scrap metal.

Copart maintains similar operating procedures at 243 landfills in nearly every state and overseas. The Dallas-headquartered company is a key player in the recycling and resale market for wrecked vehicles - damaged enough to be repaired by insurance companies. Copart receives money primarily from insurers, but also works with car rental services, dealerships and individual clients looking to get rid of scrap metal. The company then sells the cars at auctions over the Internet. The goods either go to the analysis for parts, or go to buyers who are ready to repair the vehicle and then drive it - this is especially true for markets outside the United States, where automotive safety rules are less strict.

“We took on a relatively straightforward business of selling cars at regular auctions and turned it into a hundred billion dollar a year business in which 100% of transactions are done online,” says 51-year-old CEO Aaron Jay Adair during a joint call on Zoom with the 73-year-old company founder (and his own father-in-law) Willis Johnson. - Nobody needs to come to the landfill. When we have an online auction, it doesn't matter if a tornado is raging in Florida, we sell cars. ”

And it's a lucrative business: In fiscal 2020 ending July, Copart posted $ 700 million in net income on approximately $ 2.2 billion in revenues. Despite the pandemic, business revenue grew 18% year-over-year. Since January 2019, the company's shares have risen by almost 150%, making both Adair and Johnson billionaires. According to Forbes, Johnson, who owns 6% of Copart, is worth $ 1.8 billion, while Adair, who owns 4%, is worth $ 1.1 billion.

Contrary to the laws of logic, all the advanced technologies aimed at reducing the likelihood of accidents are beneficial to landfills. Of course, LiDAR sensors and autopilot systems installed in the bumper reduce the possibility of accidents, but vehicles that do get into serious accidents remain in better condition and are easier to resell to new customers later. And since it is expensive or impossible to repair high-tech components in the latest car models, insurance companies simply refuse to pay for it - even if we are talking about minor accidents, the damage from which was covered without a doubt ten years ago.

"If you had a head-on collision, and the car is equipped with an automatic control system, then the cost of repairs can increase by 5-6 times only due to the repair of the bumper with sensors," said Gary Prestopino, an analyst at the investment bank Barrington Research from Chicago. "There are so many technologies on these cars now that prices are constantly going up."

Junkyard revolution

Copart's business history began in 1982 when Johnson acquired control of a small car auctioning firm in Vallejo, California. The entrepreneur himself was born in 1947 in the town of Clinton, Oklahoma. Six months after graduating from high school, he was drafted to the Vietnam War, but was wounded in battles and returned to the United States at the age of 20. After briefly working at the Safeway supermarket in Spokane, Washington, the young man returned to California. Here he worked at his father's junkyard until he bought his own on the outskirts of Sacramento. After settling in a trailer with his wife and three children, for the next several years he dismantled cars and trucks for parts. In 1982, he bought an auction in Vallejo and began buying new plots of land in northern California. In 1989, he brought 19-year-old Adair into the business and made him manager.

In 1991, Johnson learned that Insurance Auto Auctions (IAA), Copart's main competitor to this day, was planning to go public, and he wondered why he shouldn't do the same. Three years later, Copart went public and Johnson used the raised money to buy new dumpsites across the country.

The next major step came in 1998 when Adair, by then Copart's president, revolutionized the industry and pioneered online car auctions. This happened just a couple of years after the launch of Copart's first website.

“Previously, when buying, you couldn't even see photos of cars. We were the first to give our clients such an opportunity, - Adair does not hide his pride. - I remember that I was often asked: "How many orders do you think we will take on the Internet?" I then replied: "I think we can reach 10% of the total." And by 2003 this figure was 100% ”.

That same year, Adair and Johnson abandoned live bidding altogether and opened Copart lots to buyers around the world. Seven years later, in 2010, Johnson stepped down as CEO and handed over the reins to his son-in-law. He brought the company to the markets of Brazil, Europe and the Middle East.

excellence is Copart's key differentiator from IAA in an industry that Baird analyst Craig Kennison says is virtually a duopoly. Even more curious, it wasn't until 2015 that IAA started fully utilizing online auctions, 12 years after Copart.

“As soon as we launched on the Internet, Copart found a huge number of buyers interested in such vehicles,” notes Kennison. “And as they go global, they now serve customers literally all over the world.”

Adair likes to say that his companies "are not afraid of a recession or a pandemic." After the 2008 stock market crash, used car prices plummeted as potential buyers saved and cut their costs. However, the same drop in prices has made it cheaper for insurers to write off cars with minor damage and give up their coverage altogether. This has brought more wrecked vehicles to Copart's landfills and increased revenues from their evacuation.

At the beginning of the pandemic this spring, everything happened the other way around, but again in a positive way for business. People are less likely to drive and, as a result, there have been fewer accidents, which has forced insurance companies to cover fewer cars. Fewer emergency vehicles meant Copart had to pay more for each one. But due to the rise in prices, the company's income from the sale of repairable vehicles increased. Great business. Prices are rising? The company makes a profit. Are prices falling? Profit again.

Copart continued to operate during the lockdown, so the company did not fire or leave any of its employees on forced leave. Instead, the organization, which had previously rarely resorted to lending, spent at least $ 800 million of borrowed funds to equip locations and launch new online services, including a virtual queue for QR codes for customers on Long Island.

“There is a natural defense in both directions in our business. It doesn't matter if prices rise or fall, volumes always compensate for everything, says Adair. - And we saw it during the pandemic. This year the company made more profit than the previous year, because now the cars are sold at a higher price than a year ago. "

According to the businessman's estimates, now about 20% of all cars that fall into accidents are not repairable due to expensive technical equipment. At the dawn of Adeira's career in the late 1980s, there were no more than 10% of such cars. Analysts believe that this figure will only grow and will probably even reach 50%, as older cars on the road are replaced by more advanced ones.

“There used to be TV repairmen, but now if a device breaks down, we just throw it away,” compares Adair. - Cars are also moving in this direction. And this tendency plays into our hands as well ”.

 

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