Sales: $126.3 million (1997)
Stock Exchanges: NASDAQ
SICs: 7389 Business Services, Not Elsewhere Classified
With 50 locations across the nation, Copart Inc. is one of America’s biggest chains of junkyards, or more accurately, salvage vehicle auction services. The fast-growing company was among the first to consolidate this industry, expanding from four California auction yards in 1990 to 53 locations in 26 states by October 1997. By that time it was processing more than 410,000 units—in excess of half-a-billion dollars worth of autos—each year, accounting for over 16 percent of the $3 billion vehicle salvage industry’s volume. Acquisitions have driven an astounding average annual growth rate of more than 100 percent in the early 1990s, with sales multiplying from $6 million in 1992 to over $126 million by 1997. Net income grew even faster as the company spearheaded the consolidation of a highly fragmented industry, from less than $500,000 to almost $12 million. This rapid expansion ranked Copart 21st among Fortune magazine’s roster of 1997’s 100 Fastest-Growing Companies. Cofounder and CEO Willis Johnson took the company public in 1994, retaining a 31 percent stake.
The Auto Salvage Industry
Copart was founded in 1982 by Willis Johnson, a 34-year-old with ten years of experience in the auto salvage business. (Johnson had a partner for four years but bought him out in 1986.) The word “junkyard” generally conjures up thoughts of rusting hulks of twisted, useless metal surrounded by corrugated metal fence. However, while auto salvage yards (also known in industry parlance as “pools”) are obviously a key element of Copart’s business, they are just the visible tip of the auto salvage iceberg. In fact, the business is essentially an intermediary service between insurance companies and others with undriveable vehicles to sell and used parts dealers looking for inventory. About 80 percent of the time, the chain of events starts with a totaled car, but Copart also processes stolen vehicles that have been recovered and those damaged in natural disasters. Insurance companies (the industry’s core “suppliers”) bring these seemingly useless vehicles to salvagers hoping either to recoup some costs or at least minimize disposal expenses. The salvager first determines whether a vehicle can be economically repaired and sold on the used car market or should be dismantled. If the car is truly totaled, it is up to the salvage company to sell it to a dismantler, usually via auction. Whether the car is fixed, “parted out,” or scrapped, the insurer gets the proceeds.
So how does a salvager like Copart make a profit? It charges auto suppliers for its towing, assessment, processing, and storage services. These fees are customarily realized in one of two ways: by consignment, charging a flat unit rate, or by outright purchase, wherein the salvager buys the vehicle from the insurer and auctions it at a profit. At the other end of the transaction, the auto rebuilders and dismantlers who bought the vehicles also paid fees for storage and towing.
Origins in Mid-1980s
Until the 1980s, the salvage industry was composed of many small, local facilities. Seeking to trim underwriting costs by outsourcing peripheral activities, insurance companies began to demand more efficient service from salvagers. Copart was one of the few companies in the industry to answer the challenge with a comprehensive plan of action. It pursued operating efficiencies via two general strategies: consolidation and innovation.
Copart president Willis Johnson started out in 1982 with one salvage yard near Oakland, California. Over the course of the decade, he used Copart’s cash flow to acquire four more salvage/auction operations in the state. Yet Johnson was not satisfied with growth by brute force. He sought to enhance service to his two client groups—car suppliers and buyers—and simultaneously to maximize his own profits by implementing a multifaceted expansion plan. Over the course of the ensuing 15 years, he introduced innovative purchase programs, developed advanced management information systems, cultivated a loyal customer base, and expanded geographically.
A key to Johnson’s strategy was the development of the Percentage Incentive Program, or “PIP.” Under PIP, Copart pockets a fixed percentage (usually 15 percent) of the return on each vehicle it processes. In contrast to the traditional consignment method, which promised a set return to the yard no matter how much a given vehicle actually brought at auction, this arrangement gave Copart a vested interest in squeezing every dime from the resale process. Just as used car dealers clean and repair autos they purchase, Copart would wash and in some cases repair incoming vehicles in order to enhance resale value. Cars with broken windows but intact interiors might warrant special storage considerations ranging from tape and plastic to shrink-wrapping. Finally, Copart made efforts to promote its auctions in order to encourage higher attendance and thereby to ensure higher bidding. According to a 1994 report on Copart by the Oppenheimer investment group, per-car proceeds from PIP exceeded normal consignment fees by about $50 while adding negligible amounts to the auctioneer’s expenses. Though Copart clearly preferred and promoted the PIP program, it offered suppliers the option of choosing the fixed-fee consignment and purchase options as well. Many of the chain’s customers agreed that PIP was a good concept; by 1990, about 70 percent of Copart’s vehicle transactions were made through the program.
Johnson also pioneered innovations in information management, compiling and publishing what Oppenheimer called “the industry’s definitive salvage estimating guide.” An automated version of this manual was dubbed the Copart Asset Manager. Insurance adjusters could enter a vehicle’s make, model, options, mileage and damage, and the software would calculate a value based on past returns on comparable vehicles. The software gave insurance companies easy access to information that helped adjusters decide whether to repair a vehicle or write it off as a total loss. Copart inspired confidence in the accuracy of the system by promising to purchase vehicles at the quoted value.
However, the service did not stop there. Copart’s exclusive Salvage Lynk tracking software enabled vehicle suppliers to obtain information on their property throughout the transaction period, which averaged one to three months. Copart provided dedicated network terminals to insurers who took advantage of this system. The company also compiled monthly transaction and status reports, developed training programs to familiarize insurance adjusters with state vehicle registration regulations and procedures, and let some of its biggest customers set up inspection areas at Copart yards. A database of over 18,000 potential buyers enabled Copart to target marketing efforts through direct mail. The company even offered “frequent buyer” incentives.
Nationwide Expansion in 1990s
Johnson tapped private loans and bonds to finance his growth strategy in the early 1990s. Acquisitions in Oregon, Washington, and Texas nearly tripled Copart’s yearly volume, from 17,200 autos in 1990 to over 45,000 by July 1993. Johnson’s acquisition push proved well timed. Many operators of the nation’s independent salvage yards were nearing retirement age, and few of these local operators had successors lined up. Johnson’s stellar professional reputation made him an ideal acquirer. Copart made an initial public stock offering in March 1994, raising $26 million to finance a flurry of acquisitions. By that July, the chain had increased its annual unit volume to over 100,000 at 15 locations.
The company’s largest purchase to date came in May 1995, when it bought NER Auction Group for $43.6 million. NER’s network of 20 auto salvage facilities in 11 midwestern states doubled Copart’s total auto processing volume to more than 220,000 units per year by July. However, NER proved a difficult fit with Copart’s previous operations due to the fact that it relied almost exclusively on the fixed-fee consignment method in contrast with Copart’s emphasis on the PIP program. This factor skewed Copart’s financial results for fiscal 1996. Furthermore, the ratio of vehicles processed through PIP declined to just 25 percent in fiscal 1996. Copart’s profit margin as a percentage of sales suffered a corresponding decline, sliding from 11.9 percent in fiscal 1995 to 9.5 percent in fiscal 1996 and 1997. The new parent quickly set to work converting the former NER operations to its preferred program. By the end of fiscal 1997, about one-third of Copart’s total sales were through PIP, and 61 percent remained on fixed-fee consignment.
Competition between Copart and its chief rival, Insurance Auto Auctions, Inc., to purchase the biggest and best salvage yards in key markets drove up acquisition prices, making the establishment of “greenfield” operations more attractive in some cases. Although acquisitions continued to be the company’s primary growth vehicle, it also founded six new locations from July 1995 to July 1996.
Now that the company has reached the position of having broad market coverage for its services throughout the country and has become a leading provider to the major vehicle suppliers, the challenge for Copan is threefold: to continue to expand selectively through acquisitions and new openings where market conditions are positive; to continue to integrate all operations and facilities for maximum efficiency and profitability, and to continue to innovate by providing new services supporting the salvage vehicle disposition process.
While Copart’s operations spanned coast-to-coast by the mid-1990s, many areas remained in which the firm did not have a presence. In order to provide nationwide service to the country’s biggest insurance companies, the company established The Copart Network, a confederation of independent vehicle auction houses. Having built a nationwide chain of facilities supported by sophisticated information systems, Copart CEO Willis Johnson was poised to proceed with the next step in his master plan: to procure regional and national contracts with the nation’s leading insurance companies. Johnson’s fiscal 1996 letter to shareholders boasted that “Vehicle suppliers can make one phone call to Copart to assign a vehicle for salvage anywhere in the country as well as monitor and track each vehicle in the disposition process.”
Though some industry observers predicted that the decline in collisions that started in 1980 would continue indefinitely, Copart’s strategy of consolidation and professional management seemed to assure it of profitable growth through the remainder of the 20th century.
“Anatomy of a Deal: Mezzanine Financing as IPO Foundation,” Inc., September 1995, p. 113.
Croghan, Lore, “Copart: Crash Cow,” Financial World, March 11, 1996, p. 16.
McLean, Bethany, “An Urge to Merge,” Fortune, January 13, 1997, p. 159.
Murphy, H. Lee, “At the Top of the Junk Heap of Cars,” Grain’s Chicago Business, July 8, 1996, pp. 4, 23.
Oppenheimer & Co., Inc., “Copart Inc.—Company Report,” The Investext Group, May 27, 1994.
—April D. Gasbarre