Changes in acquisition habits spark new options

As dealers buckle down on their used-vehicle acquisition practices in 2023 in the face of shifting demand and declining profitability, leaders of online wholesale auction companies sense a ripe opportunity to nab more of their business.

Online auction platforms have enjoyed more name recognition and growing usage in recent years, especially since the coronavirus pandemic. But the move to digital auctions that began accelerating three years ago as dealers migrated online to avoid illness has morphed. Now, auction executives say, dealers' approach to both wholesaling and inventory acquisition has evolved to a combination of options as they seek convenience and better deals.

The evolution has digital auction companies vying to take a larger piece of the wholesaling pie — to gain more dealer users and increase transactions and market share — in what has become a deeply fragmented landscape. Some of those players aim to add physical assets in the hopes that doing so will attract a wider variety of buyers and sellers. Virtual dealer-to-dealer auction platform EBlock, for one, has been on the acquisition trail, buying two physical auction sites in 2022.

"I believe, in the future, 100 percent of cars are going to be sold digitally," said Jason McClenahan, CEO of E Inc., the parent company of EBlock. "It's just a question of from what location — the dealer's lot or at a physical [auction] location?"

But competing for franchised dealerships' business is complicated by fluctuating used-market conditions that have pushed dealers to reevaluate how they acquire used vehicles for their lots. Many dealers in the past few years notably have reduced their reliance on both traditional and digital auctions in favor of snapping up used cars and trucks from other pipelines, such as purchasing directly from retail customers. More software tools that better enable dealers to buy used vehicles from other dealers or consumers also have emerged.

"The auction percent has dropped pretty dramatically," said Robert Gonzalez, dealer principal of Rush Chevrolet in Elgin, Texas, east of Austin. "The biggest single thing we've done that's increased our [used-vehicle] availability, like everybody else has, is we've started trying to market and buy direct from consumers."

Jeremy Beaver, CEO of Del Grande Dealer Group of San Jose, Calif., told Automotive News that one-third of the retailer's used inventory comes from a mix of off-lease and auction purchases. Another third comes from direct buys from consumers, and the remainder is trade-ins, he said.

"Over the last couple of years, we've really shifted more to focusing on being able to buy as many vehicles from the public as possible and work on trade-ins," said Beaver, whose group has 18 franchised dealerships in northern California that sell about 1,200 used vehicles monthly.

Auction executives are watching closely to see how dealers' acquisition habits further skew in 2023 — whether economic conditions and the tight used-vehicle supply will drive more dealership vehicle buyers to use digital lanes versus physical ones.

Used vehicles remain a critical focus for dealers, though changing consumer demand and wholesale price fluctuations have caused them to be choosier about which vehicles they're willing to acquire via auctions, and at what price — especially with dealerships' per-vehicle gross profits on used cars shrinking from the highs they recorded in 2021 and 2022.

"The last two years were an anomaly," ACV Auctions CEO George Chamoun told Automotive News. "Dealers wanted to keep everything, retail everything, because they had high gross profits."

Now, dealers concerned about financial pressures in the used market should more thoroughly examine a vehicle's condition before choosing to retail or wholesale it — a decision point that only becomes more critical if consumers become choosier and profit margins continue to recede while reconditioning and repair costs stay the same, Chamoun said.

Beaver said the high-margin days when used-vehicle value was appreciating are clearly over.

During 2022's fourth quarter, "used-car values dropped, so people were trying to figure out valuations and strategies, and a lot of that is due to what the auction prices are transacting at," he said. "Online is a huge piece to that. But it's also at the end of the day about efficiency through technology and in the automotive industry."

Wholesale auction volumes are in decline, said David Paris, senior manager of market insights at J.D. Power.

That volume at traditional auctions plunged by 29 percent to 5,454,611 vehicles sold in 2022, Paris wrote in an email to Automotive News. That is based on AuctionNet data, which covers more than 80 percent of the nation's daily auction sales using transaction-level data from major auction houses, including Manheim, ADESA, ServNet, ABC and key independents. It is comprised of physical and online sales from those auction companies but does not include any dealer-to- dealer, dealer-to-consumer or other upstream sales, he noted.

The decline stems, in part, from the production loss of an estimated 7 million new vehicles since March 2020 because of COVID-related supply chain disruptions, Paris wrote. That means fewer new vehicles aging into used vehicles, and the pattern contributed to an increase in older, higher-mileage vehicles sold by franchised dealerships last year, wrote Paris, who added that tight used-vehicle supply will remain a "huge challenge" for dealers moving forward.

ACV Auctions, in contrast to the J.D. Power data from traditional auctions, has reported steady growth until last year in its marketplace units, which it defines as the number of vehicles sold on its digital marketplace within an applicable period. Before the pandemic, ACV reported 241,477 marketplace sales in 2019. That grew to 391,466 in 2020, then to 560,959 in 2021, then dropped slightly to 546,088 in 2022. Those figures include any vehicle sold, even if the auction is not completed by the buyer or seller, according to ACV's regulatory filings.

In the last decade — and especially in the last two years — key players in the wholesale industry have pointed to dealer demand as a major reason for their growing shift to online or hybrid auctions.

KAR Global, for one, completed a blockbuster divestiture of its ADESA U.S. physical auction network to online used-vehicle retailer Carvana Co. last May. KAR, which described that move as key to its plan to pivot to offering majority-online auctions, finished integrating its dealer-to-dealer BacklotCars unit with Carwave, another KAR online auction site, into a single platform last month.

"As you combine the platforms, you combine the buyer bases," BacklotCars CEO Justin Davis told Automotive News. "When you do that, you're combining the reach and then you're allowing more access to a bigger demand pool."

That helps sellers bring better values and gives buyers access to different supply in areas they wouldn't have had it before, Davis said.

"Obviously, we don't have all the brick-and-mortar, so we can operate lean and mean and then be aligned with our dealer partners," he said.

Merging customer bases is also critical for EBlock, though its twist was to add physical assets. In 2022, the company purchased Fastlane Auto Auction in Michigan and 1st Choice Auto Auction in Louisiana.

Those acquisitions, EBlock's McClenahan said, enhance the company's reach beyond its digital lanes. EBlock also earlier this month announced it acquired Houston Auto Auction, an independent auction focused on commercial accounts with a specialization in fleet and repossession vehicle sales. It transacted about 6,500 vehicles in 2022, EBlock said.

"We migrate [the customer bases] onto one consistent platform, so it instantly increases our marketplace participant count and gets more traffic to the EBlock.com platform," McClenahan said.

EBlock had 12,994 franchised and used-only dealerships using its platform in the third quarter of 2022, up 44 percent from a year prior, the company reported.

That figure includes organic growth on the core EBlock digital platform and participants gained with the 2022 acquisitions.

At Manheim, the largest network of physical auctions in the U.S., 75 percent of vehicle purchases are made by digital buyers, a company spokeswoman said.

Before pandemic shutdowns began in March 2020, that number was slightly above 50 percent.

Even with growing digital sales, Grace Huang, president of Cox Automotive's inventory solutions division, which includes Manheim, positions the auction network's physical space as a competitive advantage.

"It will never just go away," Huang said. "It just won't, because even [as] vehicles more and more transact online, they still need a place for all the reconditioning, they need a place to be marshaled, they need a place for storage."

While the number of dealers who make in-person visits to company sites such as Manheim Dallas is a fraction of what it was before the pandemic, Huang said, Manheim is converting those buyers online. Dealers visit Manheim locations before sales to look at vehicles but don't necessarily buy in person if they can do it online. Still, the ability to check out vehicles in person is a competitive advantage as Manheim strives for digital buyers.

"A lot of our dealers do come and review the vehicle, so it is still a very important place, because the cars do end up in a singular location, and it's easy for [dealers] to get to," Huang told Automotive News.

For some dealerships, the combination of physical and online auctions is crucial.

Rush Chevrolet's Gonzalez said his employees visit three local auctions each week but predominantly buy digitally from Manheim.

For other retailers, such as Del Grande Dealer Group, about 90 percent of auction purchases are done online though the group's buyers sometimes go to auctions for large sales, Beaver said.

The group doesn't use digital platforms such as ACV Auctions or BacklotCars as part of its core strategy, he said, though Del Grande is not against using them.

Said Beaver: "Call it one-off here and there, but it hasn't been a big percentage or big bulk of any of the [auction] purchases if we're using them."