Disruptions shift focus away from auctions

The wholesale landscape is quickly evolving as auction volumes wane, dealers ease their reliance on buying vehicles in physical lanes and auction companies rebalance their traditional and digital offerings to stay on top of market shifts.

The coronavirus pandemic and resulting new- vehicle production snags have forced a prolonged disruption for auctions, dealers and others involved in the wholesale industry.

For auctions, vehicle volumes were roiled by shutdowns and fewer repossessions early in the pandemic; volumes are still being compressed as the pipeline of off-lease vehicles shrinks, rental companies keep vehicles in their fleets longer and consumers hang on to their cars longer.

For dealers, the disruption has cemented their interest in online auctions, peer-to-peer digital sourcing options and — perhaps most of all — buying more of the used inventory they need directly from consumers. The latter approach especially gained popularity as wholesale vehicle prices spiked in 2021 because of the shortages. Wary of slim pickings at auctions and mindful of the cost of traveling to them, dealers are increasingly skipping such buying trips.

"Even more frequently, the customers themselves are selling their car directly back to us or trading it back to us," said Bill Wallace, president of his namesake auto group in Stuart, Fla. "The availability of those cars eliminated a lot of what we used to buy at the auction."

The shifts have auction company leaders on their toes as they pivot to keep pace with dealers' evolving sourcing preferences and digital auction demands. The changes come as they also scramble to prepare for an influx of electric vehicles to their auction sites, another disruptive shift in motion.

"Dealers are getting more intelligent," Alex Yurchenko, Black Book's chief data science officer, told Automotive News. "They have to get inventory, and they go directly to consumers, they go to repair shops, anywhere the consumer has a car."

The National Auto Auction Association said 11.6 million vehicles entered physical lanes and digital auction lanes at its hundreds of member companies in 2021, down from 13 million vehicles in 2020 and 16.5 million in 2019. Not all those vehicles sold. NAAA compiles the numbers by surveying its members.

Sales at physical auctions have also dropped, according to Black Book's Yurchenko, decreasing significantly since the start of the pandemic from about 11 million vehicles in 2019 to less than 9 million in 2021.

J.D. Power's AuctionNet, which tracks more than 80 percent of the nation's daily auction sales, reported that annual volume at major auction houses dropped from 6.9 million vehicles in 2019 to 5.8 million in 2020 before jumping back to 7.6 million in 2021. Sales volume for the first eight months of 2022 has tumbled sharply, down 29 percent to 3.8 million vehicles.

Meanwhile, the number of vehicles sold through other channels is growing. Yurchenko estimated that volume sold on dealer-to-dealer platforms has at least doubled from 2019 to 2021, though he didn't provide actual numbers.

Two major acquisitions have altered the wholesale market in 2022.

Carvana Co.'s May purchase of the ADESA U.S. auction unit from wholesale giant KAR Global sent waves through the industry. The blockbuster deal solidified the online retailer's status as a wholesale player and triggered backlash by some dealer and automaker customers which left ADESA auctions. Carvana even pointed to "attrition of certain customers" post-acquisition to explain in part a volume decline of almost 10 percent for ADESA's marketplace unit between 2022's first and second quarters. Some buyers and sellers that left ADESA did return after the transaction closed, and some large commercial sellers later bumped up the number of vehicles they sent to ADESA, according to Carvana.

The other big move occurred in December when auction company XLerate Group acquired America's Auto Auction. The combined entity rebranded under the name America's Group in 2022. As a larger player, the 39-auction company aims to nab more market share in the shifting wholesale space and overtake ADESA U.S. in annual vehicle sales, company executives said.

Chuck Tapp, America's chief revenue officer, told Automotive News the company is tailoring itself specifically to dealers, who supply the vast majority of the vehicles it sells.

But dealers continue to accelerate their hunt for inventory beyond auctions.

Highland, Mich.-based LaFontaine Auto Group, for instance, has changed its entire acquisition approach the last few years. Before the pandemic, LaFontaine acquired roughly 40 percent of its used inventory from auctions, Max Muncey, the group's senior manager of corporate communications, told Automotive News. That has dropped to less than 10 percent today in part because of the retailer's late 2021 creation of an internal used-vehicle buying center team to shore up supplies when new-vehicle inventory availability was at a near-standstill. That team purchases roughly 300 vehicles a month, Muncey said, and LaFontaine intends to expand the team and grow that monthly figure to 1,000 vehicles.

LaFontaine also has supplemented its inventory by buying 2-year-old vehicles coming off lease and retailing the vast majority of them as certified pre-owned vehicles — an expanding practice by dealers that wholesale experts say is contributing to a lag in the volume of younger vehicles at auctions.

Dealers could see at least three more years of scarcity for vehicles 3 years old and younger because of the decline in new-vehicle production that started in 2020, Cox Automotive Chief Economist Jonathan Smoke told Automotive News last month.

Direct acquisition strategies, such as buying centers, are increasingly being adopted by dealers. Since 2019, Germain Motor Co. has opened 10 such centers dedicated solely to buying used vehicles directly from customers, slashing the company's reliance on vehicles purchased at auctions, which made up about half of its used-vehicle inventory five years ago.

Wallace estimated 25 percent of the used vehicles his group retails are now coming from auctions. A decade ago, that figure was closer to 50 percent, he said.

"There's no question that the auctions are supplying less and less to all the retailers," Wallace said. "We hear that from the auctioneers themselves; we hear it from our buyers."

Wholesale used-vehicle prices declined through the summer, but retail prices at dealerships have mostly remained elevated.

That could change rapidly as autumn progresses, Smoke said, predicting that dealers will likely reduce retail prices to move aging inventory as they do not want to record losses on vehicles purchased at higher wholesale prices earlier in 2022.

Grace Huang, president of auction giant Manheim, told Automotive News she knows dealers are getting creative and looking to "get inventory wherever they can." But even if dealers reduce their reliance on traditional auctions, Huang said she believes Manheim and its parent company, Cox Automotive, will still gain business through other offerings, such as Cox unit Kelley Blue Book's Instant Cash Offer valuation tool.

"Our view of the world is we want the inventory in the right channels for our dealers, and we still get to monetize that inventory, but it may not come through the auction lane," Huang said.

The efficiency of the auction process through which inventory can be obtained quickly will keep dealers coming back to auctions despite the shifts, NAAA President Garrison Hudkins told Automotive News.

"As we look forward, what I see and what I've seen in our own business is actual growth," said Hudkins, who is also president of Southern Auto Auction in East Windsor, Conn. "We've seen more dealers from further away either attend online or in-lane at our facility."

Off-lease volume may be paltry now, especially as more dealerships stock their lots in part by buying a higher proportion of those vehicles turned in at their stores, but those vehicles should eventually return to traditional auctions in higher numbers, said Charles Nichols, NAAA chairman and president of auction company BSC America. Repossessed vehicles are starting to pop back up in the auctions in bigger numbers, too, he said.

Above all, as the wholesale market shifts, auctions are prepared to continue to invest and adapt, whether to volume fluctuations or EV technology, Nichols said: "We're in this for the long haul."