While the drastic shortage of used-car inventory continues to slowly ease, it has indelibly changed the ways dealers source used vehicles. They’ve been forced to embrace new sourcing strategies, include using multiple auction channels and purchasing cars from distant locations they never would’ve considered before. But even as digital tools help dealers source vehicles more efficiently, new challenges keep arising, such as assessing the condition of used electric and ride-share vehicles and buying cars with confidence from afar. To help dealers understand the “new normal” in this rapidly changing arena, Josh Callahan, senior director of SmartAuction at Ally Financial, provides some insights.
Navigating the new dynamics of sourcing used cars in the shifting market landscape
Q: With estimated sales of 35.7 million units by the end of 2023, used vehicles continue to play a crucial role for dealers and their customers. But finding these vehicles has become more difficult and has led dealers to implement new ways of sourcing, often including a blend of approaches. What are some of the steps dealers are taking?
Josh Callahan: The blend of different approaches still holds true in today’s market. Lease returns and trade-ins previously represented a significant portion of dealers’ used inventory, and they would then compliment that inventory with auction purchases. In today’s world, actively searching for that inventory has become more and more necessary. Dealers are using multiple auction channels, sourcing cars direct from the public and actively encouraging their own customers to trade-up their vehicles. To be successful, dealers might consider utilizing all sources available to them to find and source quality used cars.
Q: The used-car market has seen pricing and supply fluctuations like never before. What are some measures dealers are taking to protect themselves when building their used-car inventories?
Callahan: The fundamentals of buying used cars haven’t changed. You still need to buy the right inventory at the right price for your customers. As retail and wholesale prices rose during 2021 and 2022, dealers could afford to be more aggressive in purchasing vehicles that they normally would not purchase. Now, with a return to normal, dealers need to remember the fundamentals of buying the right car at the right price, and if they acquire the wrong inventory, they must sell it quickly and efficiently.
Q: Used vehicles have been in short supply since mid-2020 – what tools have helped dealers overcome these challenges? And are these new tools here to stay?
Callahan: Certainly, the increases in online auctions have helped dealers search inventory far and wide. In addition, online appraisal tools, more marketing and a focus on consumers bringing in their trades have helped dealers source vehicles. And while we are seeing a return to normalcy in the marketplace, these tools are here to stay.
Q: With fewer used vehicles coming in as trade-ins, dealers are finding new sources to maintain their inventory. Are any of these sources resulting in more profitability for dealers than others?
Callahan: Online auctions continue to be a tremendous source for dealers to source their vehicles. The ability to see large numbers of units in an efficient manner and evaluate and make purchase decisions from an office, while at the same time continuing to operate a store, has tremendously helped dealers manage their costs and time. Dealers have more and more on their plates and efficiency will play a bigger role in the operations going forward. Each used-car source has the ability to generate profit margins for dealers, but the true value is taking advantage of all sources available and managing costs and time.
Q: How have dealers managed customer expectations during a time of less inventory? Are there any tools or resources available that help dealers navigate customer expectations in a changing market?
Callahan: It certainly has been a challenge during the past several years, but dealers are, if nothing else, adaptable and have risen to meet the consumer challenges of the day. The limited supply of new inventory has converted some new-car buyers to used-car buyers and consumers are seeing increased costs in all facets of life, thereby reducing the sticker shock of higher payments that stem from supply issues. However, dealers still have to deliver on the value proposition and have done that by providing quality vehicles, offering better customer experiences, reducing wait times, shifting parts of the transaction to a digital format and continuing to service their customers effectively.
Q: Dealers now are often looking much further afield for suitable used vehicles. How does data analytics play a role?
Callahan: Data and the ability to analyze it effectively has been a huge advantage to dealers. While sourcing used vehicles is part art and part science, the science portion now plays a bigger role in the equation. The ability to analyze current local market trends, vehicle prices and acquisition reconditioning and holding costs – all while maintaining a profit margin and anticipating what the consumer will be shopping for in the upcoming weeks and months – is a large task. And using data and analytics to help alleviate portions of the process will help dealers run their operations more efficiently.
Q: Many dealers still use in-person auctions to build their used-car inventory, while more and more dealers are using online auction platforms as well. What blend of these two options has been more successful? Does the size of a dealer or dealer group play a role?
Callahan: During the pandemic, we certainly saw a shift to effectively all-online auctions. And even as we slowly return to normalcy, several of the traditional in-person auctions have shifted to simulcasts to reach a broader audience. The right blend of online vs. physical auction is about efficiency. Dealers must decide what’s the most efficient way to source their vehicles for their individual dealership or dealership groups. As dealerships grow in size and in number of locations, their used-car operations become bigger and more complex. Online auctions allow dealers to effectively manage their human capital, which in turn allows those operations to run smoother and gives dealers the ability to scale up or down quickly. With larger or more complex operations, efficiency is a big factor in success.
Q: Now that dealers can use online auctions exclusively, why are physical auctions still an important part of the process?
Callahan: Not every vehicle is the right car to sell or buy online. It may make more sense to source or sell rougher or unique units in an in-person format. Sometimes it just makes more sense to look at a vehicle yourself to see if it needs any upfits or aftermarket equipment, for example, or to listen to an engine. In today’s environment, those rougher, lower-priced vehicles may require in-person scrutiny, especially for units that are specialized or are in limited supply.
Q: How are hybrids and electric vehicles (EVs) changing things at auctions, both online and in person? How are dealers buying with confidence in cases where battery life and longevity is top of mind?
Callahan: The addition of EV’s to the market is just another evolution in the automotive sector. Dealers have always been adaptable and the supporting industries will adapt to the market and the dealers. As such, we are seeing more and more solutions emerge to help dealers determine battery life, battery health and charging activity. Just as with internal-combustion vehicles, dealers need to understand and know what they are buying before they make purchases.
Q: In addition to hybrids and EVs, we now are seeing ride-share vehicles at auction. Low mileage doesn’t paint the full picture of ride-share vehicles, which can actually experience extreme hours of engine operation. How are condition reports changing to account for these types of used vehicles?
Callahan: We have certainly seen technology enter the condition-report space as well. Videos of engines running, on-board diagnostic II equipment and more accurate disclosures have entered the space with more and more regularity and help provide peace of mind when purchasing online. With that in mind, knowing who you are buying from remains an important part of the process. Do you have faith that the other party will accurately disclose issues with the vehicle? And if not, how can you protect yourself? More and more auctions are adding assurances and protections to help buyers bid and buy with confidence and if issues do arise, they are trying to do the right thing for all parties involved.
ABOUT THE PANELIST
Senior Director, SmartAuction, Ally Financial
Callahan joined Ally in 2002 and is responsible for data and analytics, training and customer care for SmartAuction in the United States and Canada. SmartAuction is an industry-leading internet auction platform that offers access to a virtual inventory of wholesale vehicles for eligible dealers of all brands. Learn more.