Mexico’s Kavak Wants to Accelerate Brazil’s Used Cars Market with a New Yard in Rio

The SoftBank-funded unicorn will compete in the Brazilian buying and selling secondhand cars market with traditional dealers, rental companies, and startups

Kavak's secondhand cars in Sao Paulo
January 31, 2022 | 08:00 AM
Reading time: 8 min.

Mexico-headquartered Kavak opened its auto reconditioning space and branch in São Paulo six months ago. A newcomer in the market for buying and selling secondhand cars in Brazil, Kavak arrived in Latin America’s largest market with big ambitions. One of them is the expansion to Rio de Janeiro, announced this Monday.

Last year, Kavak said it would invest $500 million in Brazil. Of this amount, the company initially set aside R$ 550 million (about $103 million) for the state of Rio, which will be used to establish the operation and buy used cars.

From now on, Kavak officially starts operating the website and app in Rio de Janeiro and opens a showroom at Botafogo Praia Shopping. A second shop is planned for February 7, at Nova América’s mall.

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Capitalized, Kavak has bet on the user experience to win customers in the country. In the so-called “Kavak City”, infrastructure in the industrial area of Barueri, in São Paulo, the startup created a journey to show the Brazilian customer that it is possible to buy secondhand cars through e-commerce.

Automatic doors direct customers to rooms with screens that show step by step how to sell and buy a car through Kavak’s website. It works like this: Kavak buys a used car that is less than 10 years old, analyses it and reconditions it to the so-called “Kavak standard”. The faults are corrected at Kavak City, which has mechanics, a tire repair shop, a lighting structure to identify faults, and a studio to take photos of the car that are published on the marketplace.

But not all reconditioning is done at Kavak City. The company also has partnerships with third parties, such as funnel shop and painting, which makes the vehicle take about 15 days to be put on sale.

For those who want to sell their car to Kavak, the budget is made online and pricing uses an algorithm of the startup’s technology. The deal can be closed online and the client can receive payment on the same day. Kavak also has partnerships with notaries who check and take care of the documental part of the transaction.

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Kavak offers a two-year warranty and has a seven-day or 186 miles return policy, in addition to partnerships with financial institutions for auto financing. São Paulo customers can choose to receive the car at home. In Rio, this option will become available in March. For those selling the vehicle, the delivery can be made at one of the company’s showrooms.

At Kavak City, everything is done to present the company not as a competitor in the vehicle sector, but as a big tech. Along the way, the consumer has computers available to look at the company’s website. The idea is to show that everything could be done digitally. With Mercedes and BMWs on display, Kavak wants to make buying used cars also something “cool”, beyond the popular car. It is a model similar to the US company Carvana, the fastest growing online used car dealer in the United States.

Kavak's hub in Sao Paulodfd

The hub for clients similar to the São Paulo unit should also arrive in Rio de Janeiro soon. The startup plans to build an inventory of more than 4,000 vehicles in Rio. Starting in March, the company plans to inaugurate 11 new brick-and-mortar shops in the state, creating almost 1,000 new job openings.

The company’s figures, valued at $8.7 billion, are already worrying car dealers in Brazil. In Latin America, Kavak has 40 logistics centers and vehicle reconditioning spaces in addition to more than 5,000 employees (2,000 only in Brazil). By the end of this year, Kavak expects to exceed 100,000 vehicles bought for inventory and to sell 50,000 cars in Brazil. The company has not disclosed how much it will sell in 2021.

The president of Fenauto (Brazil’s Federation of Associations of Automotive Vehicle Dealers), Enilson Sales, said that the companies that are in the market today see Kavak “at first as a predator, which may come to grab a slice of the market pizza”.

“But surely that company is going to make the market move a lot more and, in my opinion, Kavak will end up adjusting as just another company that buys and sells vehicles in that environment. With much more money, with a much more aggressive strategy for the virtual world, but basically a replica of a car shop in a super large size, with several tentacles and several branches operating in various places, and a marketing strategy focused on the virtual environment,” said Sales.

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Fenauto has discussed with Kavak so that this entry into the Brazilian market “is made in a positive way to complement the market, and not cannibalize it,” said Sales.

Besides the traditional dealers in Brazil, Kavak will fight for the market with car rental companies, such as Unidas and Localiza, which have also entered as competitors with high purchasing power. Brazilian unicorn Creditas also announced last year its business unit for buying and selling used cars, complementing the fintech’s vehicle ecosystem, which works with financing and secured loans.

“When any player enters any market with a very high purchasing power, it unbalances the relationships in a first moment, even if those relationships adjust later,” explains Sales.

The association proposed that Kavak would privilege Fenauto members so that they would have access to replenish vehicle stocks by buying from Kavak at more competitive prices, or that the vehicles would first be presented to members before being made available on the marketplace to the general public.

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But, Kavak co-founder and general manager of the Brazilian operation, Roger Laughlin, said Kavak’s focus during its first year in Brazil was to buy cars from individuals to build inventory. “We arrived at a very atypical time globally where there is a shortage of new car production, we have a dynamic where demand has increased a lot but supply has not. One of the differentiators of Kavak is that we buy directly from end consumers,” he said.

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According to Laughlin, Kavak is willing to offer inventory to Fenauto affiliates in the future, but said that today “the cars we have are cars for our consumers, precisely because there is no excess car on the market”.

“Our purpose is to try to reach as many Brazilians as possible. We are a consumer brand, a brand that buys and sells cars. Our value proposition has never been to offer a B2B sales channel, for companies to buy cars from Kavak. There is no excess of vehicles for us to be able to explore other sales channels. On the other hand, I think the market is big enough for all of us,” he stated.

The secondhand car market in Brazil

According to Laughlin, Brazil has the third-largest market of used cars in the world, but also one of the most pulverized, in which 50% of transactions are made by individuals through portals such as Webmotors, OLX, and Mercado Libre.

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“It is not that Kavak is coming here to take players out of the market. We are formalizing and bringing a different opportunity for consumers to have the best buying experience. We believe that this will benefit everyone in the market,” says Laughlin.

Roger Laughlin, Kavak's GM in Brazildfd

According to Fenauto, in 2021, Brazil had more than 15 million used cars sold, an increase of 17.8% compared to 2020. Considering that the average price of a used car is R$40,000 ($7,453) annually the Brazilian secondhand car market generates R$600 billion.

“The secondhand car is overvalued, with very high prices because there is a shortage of new cars. Normally when a good is missing in the market, all the goods that replace it gain price”, recalled Sales.

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From Mexico to the world

Laughlin is Venezuelan, but he left his native country in 2009 because he didn’t see professional opportunities due to the country’s economic and political crisis. He moved to Argentina with his family. But in the global economic crisis, Laughlin found work in Brazil. He took a three-month intensive course, learned Portuguese, and moved to Sao Paulo in January 2010. “It was the land of opportunity, everything was happening in Brazil,” he said.

Laughlin’s first experience in Brazil was as a consultant at Bain and Company. He then spent three years working at Groupon until he managed the nationwide sales operation. In August 2014, he moved to Mexico to become the director of sales for e-commerce Linio.

That’s where he met his partner and CEO of Kavak, Carlos Ottati. “He had a bad experience selling his car in Colombia. When we started talking about it we saw that it was a very big problem, even more so in this type of market in emerging countries.”

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Laughlin, Carlos, and Loreanne Ottati founded Kavak in 2016. After four and a half years, they expanded the company beyond Mexico City, arriving in Guadalajara and then buying Checkars to start operations in Argentina in 2020, the year Kavak became Mexico’s first billionaire startup.

“It was our first venture of our own, but we’ve been part of other companies that taught us a lot, so I think that was fundamental to the kind of business that we built so that Kavak could scale healthily in different markets,” Laughlin said.

The business that Kavak has built is capital intensive and demands infrastructure. If it needed money, Kavak was able to sell its idea to fix the information asymmetry of used car sales - the seller knows what they’re selling but the buyer doesn’t know what they’re buying - to the world’s biggest venture capitalists, such as Tiger Global, D1 and SoftBank.

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“Our business is much more than solving that transactional part. We want to follow the consumer throughout their life. We don’t come from a car industry background. We come from different industries and our background is to solve complex problems for customers in the simplest way possible.”

Kavak is not yet profitable because it finances its growth and expansion. Before generating liquidity for those investors with an IPO (which is not likely to happen this year, according to Laughlin) Kavak has a strategy to grow not only in Latin America but also outside the region.

“We’ve always looked at Kavak as a global solution,” Laughlin said. To Bloomberg, a person familiar with the matter said the startup is looking at Turkey as its next target. “We’re looking for large, complex markets where the experience of buying, selling a car is very problematic,” the executive added.

(This text has been updated; the value of the investment in Rio de Janeiro is R$550 million, not R$500 million)

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