Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:0:05:26} I'd love to start off with a big picture question; what are some of the strengths and weaknesses of ACV?

{audio:0:05:38} Number one is they were first to market and they did a strong job with the product they put out. The competition that came in after them, namely TradeRev, was more geared towards Canadian dealers. The process that ACV rolled out was more in line of what the dealers were accustomed to, as opposed to what the competition was doing, even with BacklotCars which ADESA purchased later. It was no longer the quick auction; it was a 72-hour auction, and most auctions would end within 15 or 16 hours. It was a different process, and having to make dealers adapt was hard enough moving from in lane, but then to have them change their process was harder. ACV came out of the shoe quick and did a great job building the product and a process similar to what dealers were comfortable with.

{audio:0:06:41} Any other strengths you care to mention? 

{audio:0:06:49} Their arbitration policy is strong. It has some flexibility but doesn't follow NAAA. They have their own process and with their flexibility for their larger accounts, they're not afraid to take a car back or bend the rules slightly for big dealers.

{audio:0:07:15} Any weaknesses you care to highlight?

{audio:0:07:18} With any company that dominated the market for so long, they tended to back off the pedal as far as the reps were concerned. I can give plenty of examples where we were able with BacklotCars to get in and get some wiggle room and get our product out there and try to expand on it. They weren't there as often as they used to be. Maybe they had reps covering bigger territories, but I can remember plenty of conversations where they said they hadn't seen their rep in six months, while we were there.

{audio:0:07:56} Any other weaknesses you care to mention?

{audio:0:08:00} There were issues with R&R arbitration because they did not have any physical spots like ADESA did with Backlot and TradeRev. They took an arbitration, so where are they keeping the cars, but that was only what I had heard of, so I haven't experienced it personally.

{audio:0:08:21} What is your opinion on the shift of wholesale auctions from physical locations to digital? Will we see more transition to digital over the next five to 10 years?

{audio:0:08:48} Yes, if you look at what KAR Global did, they were all in. They bought TradeRev and BacklotCars for over 400 million each, so they put almost a billion dollars into the digital market and sold off their physical auctions in North America. They're betting heavily that it's going to be 80% of the market in the next few years.

{audio:0:09:23} 80% in the next few years; where would you say it is currently?

{audio:0:09:27} Including lease turn ins and some of the other stuff that they do, over 50% is now digital in one form or another.

{audio:0:09:44} I'm thinking about the market of 11 million wholesale cars. ACV does 100,000 or something like that, so they have high single digit market share. Who else has the remaining share?

{audio:0:10:17} I can speak about what we were seeing at KAR, which was over 50%. Our other company handles all the lease turn ins, a lot of which is marketed digitally to the dealers. Over 50% were not run through the auction.

{audio:0:10:10} Does that include leases?

{audio:0:10:48} Is there a way of thinking about purely in the wholesale dealer to dealer, how penetrated digital is?

{audio:0:11:00} How penetrated it is from dealer to dealer?

{audio:0:11:04} Yes, for wholesale dealer to dealer.

{audio:0:11:08} I'm not sure the exact number, but I have to think it's 20% to 25%.

{audio:0:11:15} That makes sense given you have a few different players.

{audio:0:11:21} There are also dealers’ groups that have the closed circuit where they're going dealer to dealer digitally, either through their DMS or through a website that they're using to swap.

{audio:0:11:38} Is that in bigger dealer groups?

{audio:0:11:42} If we think about the digital wholesale a few years out, who do you see as being the strongest competitors?

{audio:0:11:59} The strongest competitors I see right now is ACV leading. CarOffer is coming along, as is BacklotCars, but I don't understand why Cox hasn't jumped in more. If they seriously put some money behind something, they will turn the business on its head. I'm not sure what Carvana will do with ADESA, and if that will drive more dealers towards digital because they don't want to buy from the competition or if they'll start to come up with a process that's digital as well, to not to have to run the cars through the lanes. They might give themselves some sort of shift where they can do a percentage of digital and a percentage of physical, seeing they're already in that space. There will probably be some changes over the next few years.

{audio:0:13:00} Can you walk me through the nuances of the different business models in the digital space, how Backlot might differentiate from ACV, CarOffer and CARWAVE who they recently acquired, and how Manheim's digital is different?

{audio:0:13:29} Manheim and BacklotCars are not pure auctions; they're more marketplaces like an eBay Motors where you can get a buy it now and put a price out there. Dealers have more time to do some research on the vehicle, where an ACV have timed auctions, so you're either in or out. With a marketplace, you can do your research and perhaps try to wholesale or sell the car before you purchase it, which gives you some flexibility. CarOffer is diving into the dealer's inventory and is putting those vehicles out there for other dealers to buy, which is slightly different. Right now, it seems like instant auctions seem to carry slightly more weight and dealers seem to like it more. ACV run what they call true auctions with no reserves on the price. They do a good job of marketing that and it gets dealers excited and it gets buy-in. It gets them used to doing digital auctions short term and hopefully, long term, they can convert that to users.

{audio:0:15:00} Can you dig a little more into CarOffer? How does that business model work?

{audio:0:15:10} I haven't used CarOffer but my understanding is that you can take your inventory and put it out there, and other dealers will look at it. Many of those vehicles might be 60 or 90 days old or dealers had off brands where a Honda dealership is trying to sell a Ford Fusion because they've taken in a trade. They're not sending it to auction because they feel they can get more from it, and it's probably front line ready. Then a dealer can make an offer on it, which once accepted, they'll send an inspector out to do his due diligence to ensure everything is okay. There is more of an understanding of what the true vehicle is, as opposed to running this red light or green light, and you're stuck with a minimal amount of arbitration rules that you may have some recourse on.

{audio:0:16:06} It seems like that is for nearly new cars?

{audio:0:16:17} Why would a dealer prefer to use Backlot versus an auction from ACV?

{audio:0:16:38} When we approach dealers about what that market looked like and what the value prop was for BacklotCars, it was truly, here's the car. It's going to be up there, that auction could end in an hour, it could end in 20 minutes, it could last three days, but if you are interested in the vehicle, you have time to do research on it. You have time to look at it and follow it. The inspections were also different. ACV is more of a physical inspection, 35 pictures of the interior and exterior, where the inspection on the BacklotCars were more mechanical, which is why you see older lower priced vehicles. BacklotCars do a mechanical inspection for the cheaper inventory, where ACV would run a $150,000 car and get bids on it, which wouldn't occur on BacklotCars. 

{audio:0:17:50} The arbitration was less with Backlot Cars because they were older vehicles and we would do our arbitration solely on the mechanical pieces of the vehicle, not if it had a scratch or a ripped seat. For the dealers who were selling, that marketplace gave them more reach. If a dealer missed an auction by 20 minutes because he wasn't logged on, here if that vehicle is in a marketplace, dealers have more time to see it. If I'm not on the app Tuesday morning when it launches, but I happen to jump in Tuesday night, I still have exposure of that vehicle to a bigger dealer base. That was the theory behind it.

{audio:0:18:38} Is CARWAVE the one that is closest to ACV as far as pure business model?

{audio:0:18:52} How would you view their relative strengths and weaknesses versus ACV?

{audio:0:18:57} Their strength and why KAR was interested is that they own the California market.

{audio:0:19:04} Is there real value to having scale in a certain market?

{audio:0:19:10} I think it brought instant revenue. I'm guessing it was limited dollars right away, but in general they own that California market. They felt we tried to penetrate that market and struggled, even starting with TradeRev and it was easier to buy the company that owned that market. I know they had Arizona and Texas which are big markets for the auto industry. ACV was an East Coast company so they were slightly slower to expand into that market. It was an opportunity to get a quick foothold into a market that was important to KAR at the time.

{audio:0:19:55} Given they are so strong geographically, how does CARWAVE expand more to become a national player?

{audio:0:20:11} I don't know that because the directors on this side never had any interaction with CARWAVE. Talking to people from that market, they love the platform. I don't know why and I couldn't tell you enough about it, but dealers were entrenched in it and loved the way it worked. They were embedded and weren't changing. It was hard to break into that market is all I know about it.

{audio:0:20:46} If this is a better platform, would it be something that if KAR put the heft behind it, dealers would be receptive to switching from ACV or running both at the same time. I’m curious about the ability of CARWAVE to be the winning digital player.

{audio:0:21:13} It might be. OSF, the digital research company, released a white page report on digital in the spring which I was just reading for my new role here, but a big part of digital acceptance is stronger in the South and Southwest. On the West and East Coast, the Northeast and even the Mid Atlantic, dealers adapt slower. They're using this product so if you can get them to adapt, they'll adapt, but they're kind of set in their ways. In this part of the country, they'll stick with ACV which is a local company. If they do change, they'll probably put both feet in so there's an opportunity to grow. I'm not sure what the best platform is for them currently.

{audio:0:22:18} Is it likely they choose one digital platform or will they work with several?

{audio:0:22:26} It depends. I've had dealers and dealer groups that will run four or five different platforms, and at the end of the day, they'll go with whichever platform gets the best dollar, which causes some issues because it clogs up the platform feeds. There are dealers who send it to whoever gets the top dollar and they'll list it on all of them. There are others who have tried different ones and ACV always got them top dollar, so they won't want to change. Others, who have specific less expensive cars, will go to BacklotCars. The ACV and Cox platforms do well with higher line cars.

{audio:0:23:14} How would you describe the digital offering from Cox and Manheim?

{audio:0:23:24} Dealers that use it love it, but it's very specific. My experience talking to their reps is that it's usually for cars over $30,000. I don't know if that's changed in the last six months, but that tends to be their market because people are comfortable with Cox. If they buy a car and there's an issue, they can arbitrate through Manheim, so there's a comfort level there with the big players.

{audio:0:23:56} If I was a dealer and I wanted to sell, could I copy CARWAVE or ACV and sell it purely digitally from my own lot?

{audio:0:24:12} Yes, that's the model. TradeRev were doing the road to the sale, which was we wanted to capture your vehicle on your lot first, because there was no transportation. The vehicle is still there so you can sell it. The car is up for wholesale but you can still sell it, and if it didn't sell, we would transport it to the local auction, where we would run it through lane to try sell it there, so we had different pathways. Dealers are getting comfortable with not having the cost of shipping, then the car is off their lot, but if they need to retrieve it, that has an associated cost. They also have to pay a fee to run it and there's usually a wash and vac and other additional costs. Obviously, those were great for ADESA because it was additional revenue for them, but the trick was to try get it on the dealer's lot and it was really a race to the car. Whoever could get there first and post it first, probably had the best shot of selling it.

{audio:0:25:14} I've heard about the Manheim Cox thing, that digital is an add-on at the end, if something doesn't sell well through the lane. Have you also heard that?

{audio:0:25:33} My experience with both TradeRev and BacklotCars is that doesn't work.

{audio:0:25:39} I'm curious about what Manheim is currently doing.

{audio:0:25:45} Their digital piece has been to photograph the car on the dealer's lot. Realistically, if you run that thing through the auction several times, the odds of you getting it sold digitally for more money is pretty slim.

{audio:0:26:08} I've also heard that Manheim is probably the strongest player physically, but they're still not that focused digitally; is that your experience?

{audio:0:26:30} Yes, that's my experience. That's why I said if they did pivot and put their focus on the digital piece, they'd be the lion in the den. They could open this thing up, but I'm not sure if they're looking. Think of all the ancillary services they offer in lane. Not only does the buy fee sell fee tend to be more, there is the wash and vac, recon, body work, shipping and trucking. Obviously, there is more cost associated with running an in-lane auction, but there's definitely some ancillary products they pick up running the vehicles in lane.

{audio:0:27:15} You mentioned you expect most of the business to go digital. Qualitatively, what are the biggest benefits for doing digital versus physical?

{audio:0:27:44} Overall cost to the dealer, buy and sell fees are less than in lane fees. Turnover in the auto business is a cash flow business, so you take that trade in and to recoup your profits, you need to turn it quickly if you're not going to retail it. It gives you the option to take a car in on Tuesday, have it shot and inspected on Tuesday afternoon, sold Wednesday and off your lot Thursday morning. Nobody is opening a door or backing into that car. It's one less car you have to move during snow removal and it doesn't start. All of that goes with it if you can turn it quickly, as opposed to the auction which only runs once a week. You sold it on Wednesday and the auction runs on Tuesday, so you have a week before that car runs, then it's picked up and off your lot. You no longer have control on it and you're paying more to run it in lane. Those are the definite benefits up front.

{audio:0:28:54} What about for the buying dealer?

{audio:0:28:59} The buying dealer has no schedule, so doesn't have to be in three separate auctions on Tuesday, Wednesday and Thursday. Everything is online and he can bid on multiple cars and auctions simultaneously.

{audio:0:29:14} You mentioned 20% staying physical. Given these advantages, why would anything stay physical? What is the benefit?

{audio:0:29:34} There are several reasons. Dealers are still under the impression that they'll get more if they run it through a physical auction. There are dealers who purchase that don't buy digital that only go to the physical auction. Part of the physical auction too is you go there and Ford, Honda and GM are running. The leasers are running there because those still aren't on a digital platform yet. So dealers feel if those are still drawing buyers to the auctions, they have a chance if they could follow them in lane, or the larger dealers that are still running physical, can get more for the car.

{audio:0:30:16} You mentioned that at Backlot you did more mechanical inspections; what is ACVs reputation for the quality of their inspections?

{audio:0:30:36} It varies by dealer, but in general they are happy with their inspection. When you go to the physical auction, the dealer and auction puts a 4.1 on the vehicle and the dealer looks at the car and drives it and goes, this is a two. So it varies car to car, inspector to inspector and auction to auction. There is probably more consistency because it's one application that the inspectors use. Whether they like it or not will depend on the dealer, but there's more consistency in how they do their inspections.

{audio:0:31:31} You also mentioned that some of the way of doing digital is via the DMS. Are you seeing DMS players making a move into the digital auction space because they already have a tech footprint in dealerships?

{audio:0:31:55} I haven't seen it yet and CDK probably still own the majority of the market. I'm not sure what Reynolds and Reynolds are doing now they've sold. I worked for CDK for six years so I was in that world. I don't think dealers have a lot of confidence in DMS providers, as far as what they do outside of providing DMS, so I don't see that as a big play that anybody is going to get excited about.

{audio:0:32:28} If the big dealerships groups are auctioning amongst sites in their own group, how are they running the technology on that? Are they using a platform?

{audio:0:32:52} They'll use a platform. TradeRev had the ability to almost set up a closed-circuit auction through the DMS. They pulled the vehicle through the DMS then it would go up on a timed bid and dealers within could bid on it. The nice part about the closed circuit is that vehicle is out there. 

{audio:0:33:22} If a dealer in New Jersey had a question about a vehicle in Pennsylvania, they could still pick up the phone, ask questions about and bid on it, but it gave them the opportunity to see the vehicle. It's right there as opposed to one used car manager calling another to describe it to them. If they had a small question about something, they could pick up the phone, email or interoffice them, but the ability to get all the inspection items in one place, sped up the process and made them a little more successful. It is someone else's platform that I've seen so far, but it's a great way of doing it in my opinion.

{audio:0:34:13} Now that Carvana has made that acquisition, how do you see the share of the ADESA physical business developing over the next few years?

{audio:0:34:35} I can tell you that dealers don't want do business with Carvana because they feel it's their competition. Carvana has been a thorn in their side for a long time, so they're not going to jump in bed with them right away. I also know that the physical auction piece has a lot to do with the general managers of the auction. It's very much relationship-based. They hold the relationships and it's their job to keep those, especially the larger dealer groups, letting them know that even though Carvana owns it, they're still doing business with the same people they've always dealt with. 

{audio:0:35:13} I'm sure that's the approach they took to it but the other side is Carvana were storing cars at the New Jersey auction which I was involved with, as well as the Long Island, Concord Boston and Syracuse auctions. Because they are just a website, they don't have physical auctions, they were spending money with us to do the recons, wash and vacs, mechanical and body work. That was money they were spending with us but now they own that market and have the physical presence. The value in ADESA was not only the relationships but the real estate and ability to have large lots with mechanics, body shops and recon in place. It's instantaneous and was a huge value to Carvana in the long run. What they do at the auction piece will rely on what the GMs are able to do at the physical auctions themselves.

{audio:0:36:18} ACV doesn't have any physical locations; is that a negative for them?

{audio:0:36:35} It depends how they spin it. If they want to go after the younger generation of dealers who are progressive, they can spin that they're not your dad's auction. You still get some of the older dealers who are staunch and they're going to Southern Auto Auction in Connecticut every Tuesday, and on the way home they're going to hit the casino with their buddies and come back. That's still there, but the more progressive dealers no longer want anything to do with physical auctions. If they never have to smell the exhaust fumes of a physical auction again, it will be too soon. If you spin it the right way, it could be positive.

{audio:0:37:20} One thing I've heard is for a small subsection of dealers, say an urban dealer with limited physical footprint, there's value to being able to ship the car somewhere else and have it sit at auction?

{audio:0:37:30} Absolutely, especially if you're in the Philly, Boston or New York markets. I'm sure ACV guarantee the car off their lot in 48 hours, so there's a way to approach that as well.

{audio:0:37:48} How would you compare arbitration rates on digital versus physical?

{audio:0:38:02} The arbitration rates are similar but you have to be more flexible on the digital side because the dealer never saw the vehicle. If the dealer is in lane and they've crawled under the vehicle and touched it and did a personal inspection, you can probably be a little sterner with the dealer saying you knew what you got into because you had the opportunity to see it. On the digital side, you have to be more flexible and understanding. I'm not sure what the exact numbers are, but I do know that we were more flexible on the digital than the physical side. You had to be. You'll see more goodwill on the digital side than you will on the physical side.

{audio:0:38:53} ACV is trying to increase the penetration of their own transportation they provision for the dealers. Is that a valuable service for the dealer, being able to use ACV as a one stop shop to say they'll transport the car to the next place for me?

{audio:0:39:15} Does anyone else in the digital space offer that as comprehensively as ACV?

{audio:0:39:24} BacklotCars and CARWAVE do because KAR owns the trucking business. CarsArrive is the platform that all the trucking companies use, so it's definitely a huge benefit and we leveraged that every chance we could.

{audio:0:39:45} ACV is also trying to provide capital to buying dealers through their floor plan financing; could you see dealers buying from a digital company like ACV?

{audio:0:40:04} BacklotCars have a short-term floor plan opportunity. AFC, which is owned by KAR, offers a plan for four or five days at a minimal cost of $20 or $30 so it allows the dealers to move vehicles without floor planning it, or they're short on floor plan, but need to pay for the car before it can be picked up. If ACV wants to get into full-fledged floor plan, now is the time to do it because recourse is almost zero. Floor plan companies have never been more profitable than during the last two years.

{audio:0:41:00} One of the debates on the whole digital space is the impact of the overall macro environment, the fact that used car supply has been so tight, whether that is a headwind or a tailwind for the auction business; I'm curious on your thoughts there?

{audio:0:41:32} It's currently affecting them negatively because they're not having repos, lease turn ins or rental car business, which has always been a strong provider of revenue for the auctions. The digital space isn't getting any of that now so it's not going to affect them, but it's been an issue for physical auctions for several years.

{audio:0:42:00} I've heard it's a tailwind as used car pricing has gone nuts and there is some benefit from the buy side fees. I've heard it's a headwind when many dealers instead of wholesaling a car, retail them on their own lot. Are you seeing evidence of that?

{audio:0:42:26} Usually what happens is many new car dealers are self-insured on their warranty, which only cover a car up to 80,000 miles, so anything above that they would wholesale the car. Now they're keeping cars and putting through the shop and you'll see that if it costs less than $1,500 to make the car front line ready, they'll keep it, and those are cars they would never have kept before.

{audio:0:43:01} That would obviously be a headwind having lower supply at auctions?

{audio:0:43:06} Correct. Traditionally, independent dealers had those cars but they no longer have access to them.

{audio:0:43:13} What is the reputation of ACVs management team in the industry?

{audio:0:43:22} I have not heard anything positive or negative on the management side.

{audio:0:43:28} ACV currently wholesale 600,000 cars; will they have more or less market share in five years?

{audio:0:44:20} If the market doesn't shift or change, they'll have more market share. They've done a good job adjusting and adapting to entice dealers. They've been very good with their marketing but if Cox or somebody else jumps in, you don't know what that market is and will the used car market come back and will there be more cars for them to sell? That's the only way. They're either going to have to grab more market share or more cars and it doesn't look like there's going to be more cars out there in the near future. They have some competition they need to outrun.

{audio:0:45:00} The most likely way ACV would struggle would be Cox making an aggressive entry into the space; is that fair or is there something else?

ACV Auctions, Backlot, CarOffer, & US Wholesale Auto Competition

Former Director at KAR Global, Backlot Cars

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