Upstart platforms, peer-to-peer sites squeeze auctions

Digital upstarts — launched by retailers, automakers, traditional wholesalers and a host of retail technology companies — continue to pour into the used-vehicle market and are poised to further fragment a business that once mainly ran through traditional auctions.

While consumers and dealers were using digital platforms to buy and sell used cars before the pandemic, the use of such options has skyrocketed in the era of COVID-19.

Consumers can go to used-vehicle retailers such as CarMax and Carvana to buy or sell a vehicle online or select from growing options offered by traditional wholesalers such as Manheim and KAR Global or vehicle listings sites CarGurus or Cars.com. Soon they'll be able to try out CarBravo, General Motors' new platform.

Dealers themselves can browse a variety of peer-to-peer websites and applications — ACV Auctions, for example — for cars and trucks to put on their lots. And they've increasingly turned to such options, as well as buying directly from consumers, as shortages have crimped the supply of new vehicles in the industry and ramped up their focus on the used business.

The smorgasbord of online platforms is likely to further cut the number of vehicles flowing into traditional auctions as dealer-to-dealer and dealer-to-consumer websites and apps snag a growing slice of market share once held by traditional auction companies.

"With the advent of these app-based dealer consignment auction platforms — like ACV, TradeRev, BacklotCars, Carwave within KAR, and Manheim Express within Manheim — I think that the physical auctions will probably continue to decline in volume," said Ryan Brinkman, a J.P. Morgan automotive equity research analyst who covers KAR, the remarketing giant that just sold its traditional ADESA U.S. auction business to Carvana.

The auto industry has largely embraced online procedures, and auction companies are no exception. Major players Manheim and KAR were building out digital product suites and adopting tools such as Manheim's Simulcast many years before COVID-19 swept the world.

Some online startups — such as ACV, which made waves when it went public last year — have also sensed an opportunity. More than 16,000 dealerships currently use ACV's platform, according to the company. More than 140,000 vehicles were sold through the platform in the first quarter of 2022, a 9 percent increase compared with the same period in 2021.

The digital dealer-to-dealer side of the wholesale industry is a roughly 10-million-vehicle annual opportunity, said Daniel Imbro, a Stephens Inc. managing director covering KAR and auto retailers including Carvana.

"Your biggest players there are ACV, KAR — where they own BacklotCars — and then Manheim," Imbro said. "Those three are the biggest, but there's a lot of fragmentation after that."

Companies that have gotten the jump on offering digital options could grow their share of the market enough to displace some of the smaller independent auctions that don't have digital capabilities, Imbro said.

"Our stance has been that we think having an omnichannel approach is the best way, actually, because it gives you — as the auction platform — the ability to sell the car wherever it's going to maximize the most proceeds," Imbro said.

Companies with an omnichannel approach are providing both physical and digital ways to buy vehicles.

For dealers, it becomes a question of which platform is the best fit and helps maximize profits.

"You don't want to get stuck in a funnel," said Eric Widmer, senior vice president of sales and marketing at Alliance Inspection Management, a vehicle inspection company that does work for both Manheim and independent auctions. "There's so many of those marketplaces out there."

But all the digital options won't convince some retailers to abandon physical auction lanes, which Widmer projects will remain a crucial part of dealers' lives.

"As COVID kind of taught us, it's going to be a blend of both online and physical," Widmer said.

After all, the vehicles must be stored somewhere. And the land that physical auction companies own provides space for vehicle logistics and reconditioning services that are a key part of the wholesale life cycle.

"You can never really replace the physical auction experience, but I do think the industry as a whole has become much more comfortable buying cars online, based on condition reports, based on all the tools that are out there, all the algorithms and tools that are available to help you buy the right car at the right time at the right price," Widmer said.

A key factor in the shift to other platforms and strategies? Buying used vehicles at auction costs a lot more.

Wholesale used-vehicle prices increased throughout 2021 and remain elevated this year.

In May, prices were up 9.7 percent from the year-ago period, according to the Manheim Used-Vehicle Value Index.

Because many auction companies set fees by pricing tiers, those higher prices have led to higher fees.

And dealers want to sidestep those costs. Many have realized it can be difficult to make a profit if they are aggressively outbidding other dealers for vehicles.

"The auction is the last place that we go to try to look for a used car because it is so expensive," said Allen Turner, owner of his namesake dealership group based in Pensacola, Fla. "The auction fees that the auction places are charging have gone up just like everything else, so you have to weigh what does it cost to buy a vehicle and get that vehicle back here to the dealership."

Dealers are increasingly securing used-vehicle inventory via trade-ins and direct purchases from consumers.

"All the public dealers, all the used-only car companies like Carvana and CarMax and all the privates we talked to — they're all really trying to invest and lean into buying from consumers right now as a way to avoid the higher wholesale auction prices," Imbro said.

Dealers have more online options than they used to for listing and selling vehicles and thus avoid lugging them to auction sites.

For instance, many are posting vehicles on platforms run by evolving retail technology companies such as Cars.com, which started as an automotive classifieds website, or CarGurus, a listings website for new and used vehicles.

Auction companies with in-person sites and services saw fewer dealers visiting during the early stages of the pandemic, though traffic has started to return. Still, visiting an in-person auction lane becomes less of a requirement each year, especially as dealership ownership transitions to younger people who are more willing to transact online, Brinkman said.

Even against that trend, traditional auctions could see volumes rebound over time as production snags ease and vehicle supplies improve. But such a rebound won't change how the business is "in this longer-term modest structural decline as more and more vehicles go online," Brinkman said.

Prior to the pandemic, vehicles consigned by commercial sellers — rental companies or automakers' captive finance units — had already largely transitioned online.

What remained at physical auctions were disproportionately dealer consignments, Brinkman said.

In the end, the main question that will govern future shifts in the wholesale market is this: Can the digital rivals survive long enough to turn a profit? That largely remains to be seen.

The rise in interest rates, downturn in the stock market, declines in the valuations of profitless technology companies and increased interest in healthy cash flows have caused investors to refocus on cash-generating entities, Brinkman said.

"All of these structural trends are blowing just as strongly in the transition just as much as they were a year ago," he said. "And yet, there's a different investor reception."