"We do not think there is as big a need to create a physical marketplace as there is to create a digital marketplace," O'Neil said. "Fewer cars may come to the physical auctions, and fewer people will come to those auctions, but there will still be a marketplace."
Manheim is wrapping up a three-year, $400 million revamp of its physical auctions — the company's Designing the Future project standardized processes and expanded online services across all 78 locations.
That online component is key as the share of virtual auction attendees vs. physical attendees has swapped.
In the last two or three years, roughly 1,200 of the 2,000 dealers interacting with the company's Manheim Detroit auction each week, or 60 percent, have been online, according to the site's general manager, Mandy Savage. Before that, physical dealer traffic accounted for 60 percent of auction attendance.
The swing in part has been helped by improvements in online vehicle descriptions.
While overall auction volume is likely to be flat in 2018, Cox predicts fewer vehicles will go through auction lanes this year. That forecast comes despite a continued deluge of off-lease vehicles, including popular truck models. The off-lease surge is expected to peak in 2019 at 4.1 million vehicles, Cox Automotive's chief economist, Jonathan Smoke, told Automotive News.
As auction traffic shifts online and the volume of vehicles arriving at physical auctions slows, Manheim is looking to boost other lines of business.
"Part of what Manheim's been pushing on is what we call diversifying our revenue, getting less dependent on the buy and the sell and moving more into these services that we've been providing," Matt Trapp, Manheim regional vice president, told Automotive News.
For instance, the company invested $17 million in reconditioning operations at physical locations in the past three years. That should help Manheim capture business from dealers looking to buy wholesale inventory before the vehicles reach physical auction lanes.
"Being able to service those vehicles, park those vehicles, inspect those vehicles, recondition those vehicles is really important," Savage said.
The disconnect between auction volume and the increase in off-lease vehicles is happening because dealers are hogging the most sought-after vehicles in upstream channels, Smoke said. One example is a dealership that originated a lease deciding to keep the vehicle when it's turned in. That leaves less inventory to go through the auctions.
"The return rate of what typically actually ends up hitting the wholesale market is much lower than what we have been seeing in recent years," Smoke said.
In addition, there is stagnation in other types of used vehicles. Growth has also tapered off in off-rental and fleet volumes, Smoke said. Rental car fleets are smaller, and repossessions are declining as the economy improves.
"Dealers have fewer options available to them in the wholesale market," Smoke said. "There are fewer units of possible inventory available to power more sales down the road."