Auto Auctions Likely to Change Faster in Next 5 Years Than Past 20

The North American wholesale vehicle auction market is dominated by Manheim Auctions, Inc. and KAR Auction Services, Inc. (NYSE: KAR), each having an estimated 42% and 27% market share, respectively. The remaining share is split between dozens of independent auctions ranging from the largest, Connecticut-based Southern Auto Auction, to small one- or two-lane dealer-only outfits. While digital technology and the internet have transformed how buyers and sellers interact in traditional auctions, emerging app-based startups are disrupting on a larger scale. These disruptors offer more convenience, lower fees, and faster monetization of used vehicle inventory. Auction incumbents are being forced to adjust, and whether they change from within or acquire attractive remarketing companies, the industry is likely to change faster in the next five years than it has in the past 20.

For decades, physical auctions have remained largely unchanged. Institutional consignors, like rental car companies, commercial fleets, and captive lenders, along with car dealers, transported vehicles to auctions where they might be reconditioned, inspected, and then assigned a date and run number in an upcoming auction. If the vehicle did not receive enough bids, or if it did not meet the reserve price, it would be returned to the storage area to offer in a future sale. As large institutional consignors began to view remarketing as integral to determining the return on investment, bypassing the physical auctions, which added time and expenses, encouraged adoption of private direct sales channels, like KAR’s OPENLANE unit. However, dealer-consigned vehicles, which account for nearly half of the units sold via physical auctions, have been late to adopt dealer-to-dealer virtual sales.

But in the past five years, huge changes have been enabling the transformation of dealer wholesale remarketing channels. AI tools; a new generation of tech-savvy dealership staff that is comfortable with buying online; and 24/7 inventory exposure are allowing dealers to target specific cars for their stores. Online buying confidence is the result of reliable condition reports due to standardized inspections, digital photography, and VIN-based vehicle histories. Recognizing these trends, several auction startups emerged over the last few years, offering dealer-to-dealer (DTD) virtual auctions that provided these benefits as well as vehicle guarantees, while charging much lower fees than their physical counterparts. These virtual players are geared toward the dealer trade-in market, which we estimate at 5 to 10 million vehicles per year, and includes companies, like ACV Auctions, BacklotCars, EBlock, Manheim Express, TradeRev (wholly-owned by KAR), and others, with each company offering a digital-based auction proposition for both buyers and sellers. In 2019, when combined, it’s estimated that these emerging auctions will sell 550,000 to 750,000 vehicles, a number that shows room for growth.

In their initial rollouts, DTD startups entered markets where their only competitors were physical auctions. To convince dealers to try their platforms, they listed dealer wholesale inventory for free and only charged the dealer if the vehicle sold. Recognizing the limited risk, selling dealers were quick to try out the platforms then rapidly became wholesale buyers as well. In markets where DTD auctions have other digital competitors, dealer adoption is growing at an even quicker rate as these startups offer competitive perks to dealers, like free shipping, to develop newcomer loyalty. There is a low barrier to entry for new DTD startups as a result of an asset-light balance sheet, use of “gig workers” to take vehicle inspections and ship vehicles, and even shared logistics platforms. DTD startups have raised hundreds of millions of dollars from venture capitalists to seize new markets and gain a first-mover advantage, with the ultimate goal of establishing a network where buyers and sellers become and remain loyal to their platforms. But as they continue to scale, their profitability is threatened as they continue to induce dealers with incentives and lower fees to gain share.

After surveying dozens of nationwide dealers, we learned that dealer awareness of DTD remarketing channels as an alternative to traditional auctions was high. Nearly 42% of dealers surveyed had inquired or used an alternative DTD auction to sell unwanted inventory. These dealers explained that they preferred to avoid bringing vehicles to physical auctions if they could net more through a DTD alternative. As far as which providers they considered, awareness was highest for the DTD offerings by the auction incumbents (e.g., TradeRev and Manheim Express). Dealers explained that speed to sale, total fees and costs, as well as ease of use, influenced their loyalty to a DTD auction. Finally, dealers noted that the DTD startups need improvement in their physical auction-like services, including arbitration, inspection consistency, floor planning, and overall scale.

Manheim and KAR, the two major auction incumbents, largely control the auction ecosystem. While their volume is decreasing from DTD disruptors, large consignors still view the incumbents as a necessary remarketing channel that provides physical and digital services in scale. Plus, Manheim, and KAR, via its OPENLANE unit, control almost every automaker’s remarketing channel for off-lease vehicles. The loyalty of the large consigners to the auction incumbents means that bidding dealers are dependent on physical auctions and their off-lease platforms to buy inventory. And while the DTD players would like to siphon the large consigner business from the incumbents, the barrier to entry is very high as large consigners rely on the multi-platform, capital intensive, large-scale solutions that these platforms currently offer. But while the incumbents may have locked up the large consigners, they will continue to lose share unless they also actively compete in the DTD segment.

Both KAR and Manheim operate and own DTD business units. In TradeRev’s case, KAR purchased the unit in 2017 and dedicated significant resources to scale its DTD offering to build dealer loyalty and limit the growth of disruptors. KAR also purchased auction-related companies, like data and AI firms, to improve its remarketing offerings to sellers and buyers. Manheim, on the other hand, is following the “if you build it, they will come” philosophy. It launched an internal strategy to promote its self-built Manheim Express offering to its vast dealer network and is providing various incentives to lure dealer listings. KAR’s strategy to buy related remarketing businesses and invest heavily in their growth is both costly and risky for a publicly traded company, but it is likely the best strategy as dealers and large consigners told us that they prefer holistic and unified solutions to buy and sell vehicle inventory, versus the growing fragmentation in the DTD segment.

While the dealer-to-dealer auction segment is being “disrupted,” the entire vehicle auction market is not. If the two auction incumbents are willing to sacrifice short-term earnings to secure long-term gains, they can dominate the DTD auction space. However, this space is evolving quickly, and as the disruptors continue to evolve their models at a rapid pace, the incumbents will have a hard time keeping up.

Maryann Keller is principal of Maryann Keller & Associates, a global automotive strategy consultancy.