Wholesale auction companies seeking to reinvent amid change

The wholesale auction landscape is undergoing a transformation as the business grapples with a major digital shift, new competitors, defecting dealer customers, shrinking vehicle inventories and significant strategy moves by leading players.

While the evolution to digital was already happening, the start of the coronavirus pandemic more than two years ago accelerated the shift to online practices. Production constraints and inventory shortages have further reduced volume and increased prices at auctions. And dealers, stressed by increases in wholesale vehicle prices and higher auction fees, have turned elsewhere when they can — both trying to buy more vehicles directly from consumers and experimenting with new digital sourcing options offered by traditional companies and new rivals.

The developments have major players in the remarketing realm looking at how to reinvent their operations for the long term — and some are making big moves in the hopes of cementing their reach in the evolving market.

"The industry is changing, and it's changing very quickly," said Grace Huang, president of Manheim, the Cox Automotive auction giant.

Manheim has long been the largest of the U.S. auction providers, followed by ADESA at No. 2.

But what ADESA's future looks like is in question after Carvana Co. bought the ADESA U.S. physical auction business from KAR Global in May for $2.2 billion, largely for its geographic footprint and logistics and reconditioning capabilities. Some dealer and automaker clients have moved business away from ADESA.

With the divestiture, KAR is putting its full faith behind developing its slate of online dealer-to-dealer auction services. Zeroing in on that is key to the company's future, KAR CEO Peter Kelly has said.

"We intend to execute a focused digital strategy to capture what we believe to be considerable opportunities for growth, both in and beyond our current market," Kelly said last month.

KAR surprised investors, analysts and customers with the sale of ADESA's 56 sites. But the proceeds allow the company to pay down debt and focus on capturing more of a fragmented digital wholesale market.

Manheim also has leaned into the digital transformation — though not to the point it would sell its own physical sites, Huang said. The company currently has the largest auction network in North America, with 82 traditional sites.

"Our physical space is not just about the auctions," Huang said. "Our physical space is really, for us, a key asset that we plan to have forever. We don't have any intentions of selling it."

Still, about 80 percent of Manheim's inventory is sold to digital buyers, she said. Before pandemic shutdowns that began in March 2020, that number was slightly above 50 percent.

Huang said she's confident Manheim is poised to easily navigate further shake-ups and shifts in the remarketing industry. Cox has invested both in Manheim's digital capabilities and in developing used-vehicle sourcing tools for some of its other businesses. Manheim is currently spending time and money to prepare its operations for an influx of electric vehicles as EV volume is expected to increase dramatically.

Manheim also could see more dealers and automakers gravitating to its sites and services in light of the ADESA U.S. sale. Customers that leave ADESA U.S. now that it's owned by Carvana, the online used-vehicle upstart viewed by many as a competitor, could turn to Manheim.

In addition to the pandemic and digital shift, a long streak of elevated wholesale vehicle prices and low supply define the auction industry at the moment.

Fewer vehicles were leased as the pandemic began, meaning fewer are coming off lease now. And many off-lease vehicles don't ever make it to auction as consumers increasingly buy out leases. Dealerships also are more likely to exercise their option to buy off-lease vehicles turned in with them.

Rental companies, struggling to replenish their fleets, are hanging on to vehicles longer instead of sending them to auction. Dealers also are more likely to keep vehicles for inventory instead of sending them to auction.

J.D. Power estimated that volume at traditional auctions was at 64,276 vehicles for the week of May 16, down from 111,876 vehicles for the same week in 2019.

"We're not seeing nearly the same level of 1- to 2-year-old vehicles kind of flowing through the lanes," said David Paris, senior manager of market insights at J.D. Power Valuation Services.

On the price side, wholesale used-vehicle prices rose steadily the past two years, reaching an all-time high in January 2022, according to the Manheim Used Vehicle Value Index. The index, a measure of wholesale used-vehicle prices, rose 57 percent between March 2020 and May 2022.

A big reason for the wholesale shake-up is that dealers' habits are evolving as they scrounge for inventory amid dwindled supply.

Dealers increasingly relied on the used-vehicle business to shore up sales in 2021 as the ongoing supply chain issues resulted in vast new-vehicle shortages. They ramped up their inventory search efforts, with some telling Automotive News they traveled far and wide to auction houses in hopes of finding good used vehicles.

Dealers also have realized they can turn to a burgeoning host of online options when traveling to an in-person auction becomes inconvenient — for example, if gasoline prices are too high, there's bad weather or they fall ill.

While some dealers still prefer in-person auctions, they're more comfortable with online options "because, frankly, they had to get comfortable with it, or they were not going to be able to source inventory in certain parts of the country" because of COVID-19 restrictions, said Garrison Hudkins, vice president of Southern Auto Auction and president-elect of the National Auto Auction Association, the trade association representing more than 355 U.S. and international auctions.

Even so, current NAAA President Charles Nichols told Automotive News that dealers have been "pretty darn resilient" navigating the altered remarketing environment.

"We actually have seen a lot more dealers, from a much farther distance, sourcing cars," said Nichols, also president of auction company BSC America. "The demand for used cars has been so high across the whole country that it's really blown our minds away about how far somebody will come to buy a car."

Dealers also have turned up their efforts on sourcing vehicles in other ways — through trade-ins and buying directly from consumers, for example. Many have opened their own vehicle buying centers or scour social media for cars to buy.

Some dealers cite long travel distances to auction locations as their reason for new procedures. Others are trying to avoid high wholesale prices and auction fees.

Stuart, Fla.-based Wallace Auto Group has gone so far as to run its own auctions once a week during the pandemic. It had already been staging such auctions for several years but increased the frequency of auction dates because of demand from its bidders.

"It's just like any other auction system," said Bill Wallace, president of his namesake auto group. "We just have found it more cost efficient to do it ourselves, rather than take it to an auction."

New and growing competitors also are remaking the wholesale industry.

Dealers are experimenting with sourcing vehicles through different channels — new tools to help them buy directly from consumers that are being offered by companies such as CarGurus, Cars.com and Cox Automotive.

Other wholesale disrupters include ACV Auctions, an online wholesale marketplace for dealers that went public in March 2021, and XLerate Group, which merged with America's Auto Auction in December 2021 to create a network of 39 auction sites that became the third-largest auction group in the country.

Still, auction executives say in-person auction lanes will stick around — but with modifications. Many dealers will keep using them because they like them, they said.

"People are taking the time to reinvest in their businesses because they're playing the long game," NAAA's Hudkins said.

"They're looking around the corner, saying what's going to happen in one, three, five years. As an industry, where [can we] position ourselves to continue to serve our customers in those time frames."