Wholesalers are evolving to stay in the game

Not much is known, statistically, about wholesalers — those independent operators who buy from dealerships and auctions and sell to other dealerships, either directly or through auctions. But they always manage to make room for themselves in the remarketing world.

Glenn Mercer, president of independent consulting firm Glenn Mercer Automotive in Cleveland, spent months compiling research and interviews for his 2017 "Auction of Tomorrow" report, commissioned by the National Auto Auction Association.

At the end of his research, he still couldn't say how much revenue wholesalers generated last year, or even how many of them exist.

Some of the industry folks he interviewed — all on condition of anonymity — seemed equally perplexed by wholesalers. Consider some of the comments he collected:

• "I don't get it. Many wholesalers buy a car at one auction, then sell it elsewhere and make money doing it. Theoretically, that's impossible!"
• "Wholesalers make money on mistakes, and we make fewer every day."
• "They are huge competitors of ours ... AND huge customers!"
• "They have better focus, better brains on [used-car] prices than [used-car] managers."
• "But if they go away, who moves these cars?"

Amid the uncertainty, Mercer determined that wholesaling is evolving.

Mercer says the auction industry should expect to see fewer traditional wholesalers as it gains better pricing transparency and up-to-date vehicle pricing sources. At the same time, new entrants are bringing wholesale apps and online platforms to the market, potentially pushing wholesalers and auction companies to do the same.

It started in retail with what Mercer calls "the app crew." Retailers such as Tred, Carvana and the now-defunct Beepi figured customers would prefer to purchase used vehicles online and through smartphone apps.

That customer-facing strategy started seeping into the business-facing side of vehicle transactions.

"A lot of wholesalers are reinventing themselves as these wholesale applications, smartphone apps," Mercer said. "And some of the auctions say, 'If you can't beat 'em, join 'em.' "

Costs to enter the wholesale business are low. Unlike new- or used-car dealerships that invest in real estate and more, a wholesaler has "a business card, a couple of smartphones and a whole bunch of trucks they contract with," Mercer said. And wholesalers perform a number of useful services for the industry. These include: helping solve inventory problems for overworked used-car managers; offering lower costs than auctions, especially for older vehicles; and extending fast funds to cash-strapped independent dealerships. As one of Mercer's sources told him, "Some are banks as much as merchants."

While individual companies and apps may come and go, Mercer recommends viewing "the app crew" as a collective group — one that tends to grow quickly and is receiving ample funding from investors.

For example, ACV Auctions Inc., a dealer-to-dealer wholesale online auction platform, said it sold more than 5,000 vehicles in March, representing a 400 percent increase in year-over-year vehicle sales for the company.

Certain auction companies figure it's time to get on board.

KAR Auction Services Inc., the parent of ADESA auctions, took full ownership of TradeRev last year. The company's app allows dealerships to bid on vehicles online before they go to auction. Last month, Manheim launched Manheim Express, a 24/7 phone app that allows dealerships to list or sell vehicles directly from their lots.

As for traditional wholesalers, Mercer says some are working to evolve with "the app crew." While he expects to see fewer traditional wholesalers going forward, they've been known to stick around, despite expectations. Mercer believes they will survive, perhaps by focusing increasingly on older vehicles.

"Many of the people I talked with say, 'I don't quite understand how they continue to exist.' But they're always there and always have been," Mercer said. "They can have very low cost-bases and can keep on for a long period of time. I think that's one of the things that makes them resilient."