Online startups offer dealers faster, cheaper ways to wholesale vehicles

Editor's note: An earlier version of this story, which also appeared on Page 8 of the April 13 issue, gave incorrect information about Carphoria’s  business model. The company built its business helping consumers sell their used vehicles. 

Bob Gault, president of three dealerships in Endicott, N.Y., tried the usual ways to liquidate unwanted trade-ins.

Wholesalers tended to show up at the wrong time and stayed too long. The auctions worked great. But their per-vehicle fees ranged from a few to several hundred dollars, depending on the price of the vehicle. Multiplied times the 100 to 125 units per month he typically sells, the fees could sometimes account for a loss, said Gault, whose dealerships sell BMW, Chevrolet and Toyota vehicles.

So he joined a test last fall for an auction software product that enables him to hold his own online auctions. Now Gault sells on Auction Simplified, a product of Dealer Simplified.

"We still do a little bit with the auctions, but we have an auction here every other Thursday, pretty much," he said. "We sell 90 to 95 percent" of the vehicles offered for sale.

Years ago, dealers who wanted to get rid of aged inventory and unwanted trade-ins had to take those vehicles to a local physical auction. But that has gradually changed over the past decade.

The traditional auction business model is being challenged by regional players and startups that are using technology to offer faster and easier ways to buy and sell used vehicles at wholesale.

And because these companies don't have the overhead that traditional physical auctions have, they can offer their services for less money, even for free in some cases.

The major auctions are themselves part of the trend.

For example, ADESA's parent, KAR Auction Services Inc., in 2011 acquired Openlane, an Internet-based remarketing company. With that purchase, ADESA acquired the technology and platforms that support the auctions that most automakers run for their own brands' dealers.

In January, Manheim said it now offers services such as vehicle acquisition, inspection, reconditioning and transportation on an a la carte basis. Previously, it had offered those services only for vehicles that dealers bought or sold through its auctions.

Manheim North America President Janet Barnard said the change is in part an acknowledgement that fees to buy and sell vehicles on online-only platforms are "considerably less" than fees charged at physical auction sites.

Earlier, Manheim's parent, Cox Enterprises Inc., had essentially decided that if a startup were to take business from Manheim, it should be a Cox-owned startup.

That was DealerMatch. It debuted in summer 2013 as a Cox unit and corporate sibling to Manheim. Its business model was to help dealerships buy and sell used vehicles among themselves while avoiding the auctions.

But last year, not long after Cox Enterprises created Cox Automotive as an umbrella for all of its automotive holdings, DealerMatch disappeared as a separate company. It was renamed Dealer2Dealer and is now a service offered by Manheim, Barnard said.

Both Manheim and ADESA operate online platforms that enable dealers to participate in physical auctions remotely and in online-only sales.

At less than a year old, Dealer Simplified doesn't mind playing the role of David to the auction companies' Goliath.

Dealer Simplified co-founders Kevin Leigh, Phil Gates and Dave Kaiser are former employees of the West Herr Automotive Group Inc., in Orchard Park, N.Y., which ranks No. 24 on the Automotive News list of the largest 150 dealership groups based in the U.S.

The Auction Simplified product for now is being used by 10 dealership groups in the Buffalo and Rochester, N.Y., area. "But if we had a dealer anywhere in the country that wanted to do this, we could have them up and running in two or four weeks," said Leigh, former director of digital marketing and business development at West Herr.

Dealers such as Gault pay nothing to sell their vehicles. Dealer Simplified collects a per-vehicle fee of $25 to $120 from the buyer and gives $20 of anything over $25 to sellers to help cover the costs of holding a public viewing of the vehicles prior to the auction, Leigh said.

AutoAxess is another regional online auction option for dealers.

The 55 franchised dealerships that sell on AutoAxess are in northern California, but its buyers come from all over the state.

AutoAxess President Mark Codiroli, a former dealer whose family owned Ford, Chrysler and Jeep dealerships in Livermore, Calif., from 1965 until 2005, said he started AutoAxess because he understands that dealers' options to wholesale vehicles are "expensive or didn't work very well."

Independent dealers that buy vehicles on AutoAxess for $500 or less pay a fee of $100; the fee is $200 to buy all other vehicles regardless of their price. Sellers pay $65 per vehicle.

John McSherry, operations manager at the four-dealership Central Valley Automotive Group in Modesto, Calif., said he used to load trade-ins that didn't fit the group's needs on a truck for a 90-minute ride to the nearest physical auction before signing up with AutoAxess.

Now, an AutoAxess representative visits the group's dealerships at no charge to inspect and create detailed condition reports for vehicles McSherry wants to wholesale.

That information and vehicle photos are uploaded on autoaxess.com to post those vehicles for sale during weekly online auctions attended by mostly local, independent used-car dealers.

The vehicles remain on McSherry's dealership lots during the auctions, which run each week from Tuesday morning until Thursday at 5 p.m.

McSherry said he typically sells his vehicles for more than he would have asked someone to pay.

"That's the value of the auction. I have retailers that are buying these cars," McSherry said. "Their end customer is a retail customer, not a wholesale customer, so they can pay more for the cars."

In January, Carphoria, which built it's business on helping consumers sell their used vehicles, launched its dealer services software platform that connects dealers who want to buy specific used vehicles with dealers who want to sell them, said CEO Michael Dodd.

Dodd also owns Mike Dodd's Motor Trends, a used-car store in Houston that's separate from Carphoria.

Dodd said he has about 100 new-car and independent used-car dealers that have indicated which vehicles they typically buy. When a dealer has one of those vehicles to sell, they load its information on the platform's portal. Carphoria's team distributes that information to buyers that have expressed an interest in those vehicles.

"What we've found is that they have a higher return on investment, a faster turn time and they're willing to pay more," said Dodd. "We marry those two."

He expects to have 500 to 700 dealers signed up by year-end.

Traditional auctions are also being upstaged by dealer-only online remarketing channels such as the one run by Mercedes-Benz Financial Services.

In the fourth quarter of 2014, the captive finance company sold more vehicles on its MBONDemand than it sold in physical auction lanes, said Tom O'Connor, the company's senior remarketing manager. As of mid-March, 58 percent of the vehicles Mercedes-Benz Financial offered for sale were sold online.

O'Connor added: "We foresee this to continue to be a big part of our distribution channel."