Physical used-car auctions have an online role

Most players in remarketing understand that a digital enhancement of the analog process is well underway at auctions, says Glenn Mercer, president of independent consulting firm Glenn Mercer Automotive.

For years, customers have been able to use their smartphones to bid on vehicles or watch livestreams as a vehicle crosses an auction block. But that digital enhancement is not what worries auction companies, Mercer says.

The lingering concern, Mercer told Automotive News, is, "When does digital completely displace analog?" It's a question the remarketing world has debated for years.

In other words, will online auctions totally eclipse physical ones? The answer holds enormous implications for dealerships that buy or sell vehicles at auctions. Among them, will there be a physical auction for them to send cars to, or will they have to upload every vehicle's photos for sale? Will their used-car buyer never leave the dealership? Will they have to rely completely on condition reports posted online, or will they have a chance to eyeball and sniff a car at auction before deciding whether to buy it? If the dealership currently expects an auction to do minor paint touch-ups as part of the reconditioning, will that service still be available if everything moves online?

While digital will slowly penetrate the market in the next seven to 10 years, Mercer says, there is no near-term definitive winner in the digital vs. physical auction debate. He instead foresees a shifting equilibrium between the two in the volumes of vehicles each handles, according to his 2017 report, "Auction of Tomorrow," prepared for the National Auto Auction Association.

Mercer put the report together last summer and fall, conducting anonymous interviews, auction site visits and separate research. He presented the report, which looks five to 10 years into the future of the industry but excludes salvage auctions, at the NAAA convention in November. It is available on the association's website: naaa.com. He discussed his findings with Automotive News this month.

The report includes a positive forecast for the overall auction industry, citing annual new-vehicle sales estimates of 17 million though 2025, a growing U.S. population and IHS' estimate of 296 million vehicles in operation by 2023, among other trends. "Divorce is great for the auction industry," Mercer added in comments at the NAAA convention in Palm Springs, Calif.

That data shows there certainly will be vehicles that need to be remarketed. How they will be remarketed depends on other growing trends, one being vehicle quality.

Increasing vehicle quality makes it easier to streamline a digital process, but it also means vehicle life will increase. As vehicle life increases, the need for physical auctions will remain, Mercer says.

"As car quality gets better and better, it should be easier to digitally auction a car because a 2-year old Honda Civic with 10,000 miles on it is a very definable concept. There's very little risk in it," Mercer said. "But this also means that cars last longer. So we have more and more cars that are 10 or 12 years old out there, and the older they get, the more you need to inspect the car.

"That's one of the pushes and pulls of forces in the world that make it hard to come up definitively about where this equilibrium lies," he added.

Finding a new equilibrium between digital and physical also depends on the purpose each type of auction serves.

Mercer says digital auctions will thrive because of their efficiency, while physical auctions remain relevant because of their effectiveness.

The digital world is about "doing things right," he said. As vehicle-quality improves, condition reports are perfected and photo- and video-quality advance, the process can become standardized in a wholly digital, efficient — and some argue cheaper — auction.

On the other hand, Mercer says, physical auctions rely on "doing the right things." Physical auctions deal with the exceptions, such as the odd smell of an old vehicle interior or the shot springs in a driver's seat, and have proved better when a problem with the sale emerges, perhaps requiring arbitration. And auctions may find that digital isn't necessarily cheaper, though it may be less profitable for the auction company, he adds.

Nevertheless, Mercer says auction companies should invest in information technology to ready themselves if the needle moves in the digital direction.

Auction giant Manheim says it has long been preparing for the shift to digital by creating tools for those who prefer to go to auctions online or sell their used vehicles there, such as its Online Vehicle Exchange and Dealer Direct Event tools.

But Zach Hallowell, vice president of Manheim Digital Marketplace and RMS Automotive, says Manheim's strategy is to treat digital as a complement to physical, not a competitor.

"I think we do view there being a place for some physical services in some way shape or form that are complementary to the digital channels that are seeing some growth," Hallowell said. "And we're working to structure a business to support both sides of the chain in this new world. I think people want it to be digital or physical, and I think we look at it as digital and physical."

Despite the digital trends, companies still are investing in physical space.

Mercer cites a European online vehicle remarketing company in his report as an example of a digital auction platform that decided physical space was worth investing in.

The service, called G3, launched an entirely digital platform for auctions in 2009. By 2016, the company built a physical auction hall to auction certain vehicles and, later that year, added a second physical auction to the weekly calendar.

Manheim Digital Marketplace and RMS Automotive President Nick Peluso says Manheim isn't backing down from expanding its physical presence, as its role has evolved beyond the buy-sell transaction.

Physical lots still will service, recondition, store and marshal out the nearly 3.5 million vehicles coming off lease and retiring from rental fleets, he said.

Mercer says more auction income is coming from fees for services provided, as opposed to auction fees.

He adds that auctions could become more like a "fleet manager" or "fleet processor" and less of a pure auction, a transition that could be expedited by upstream remarketing but one that still would require a lot of physical space.

Peluso agrees.

"When you look at the number of locations that we have in North America and around the world — those physical spaces provide a lot of services beyond just the hammer coming down and selling a car through an auction," Peluso said. "Owning property is an asset that works to our benefit."