Carvana, KAR Auction, & The Used Car Ecosystem | In Practise

Carvana, KAR Auction, & The Used Car Ecosystem

Former Vice President of Strategy & Marketing at KAR Global

Learning outcomes

  • How the type of inventory and residual value defines the sales channel
  • How grounding dealers vs institutions sell off-lease vehicles
  • Link between the vehicle residual value and the distribution channel
  • Challenges for KAR and Manheim shifting online
  • Opportunity for Carvana to source new types of inventory
  • Evolution of Carvana and the power of scale
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Executive profile

Joseph Bannon

Former Vice President of Strategy & Marketing at KAR Global

Joseph has over 20 years experience in the used car auto ecosystem working across both consumer and wholesale channels. He is the former VP of Strategy at KAR Global, the parent company of leading whole car auction company ADESA, and previously worked as Director of Strategic Planning at Cox, parent of Autotrader and Manheim, the largest competitor to ADESA. Joe has a unique perspective of the used car ecosystem having spent a decade scaling Autotrader working with dealers and consumers before moving to the whole car auctions at Manheim and the salvage market at both Cox and IAA. Read more

Joe, how would you describe the used car ecosystem?

It is very dynamic but a lot of what happens in the used car ecosystem is set in motion by the way it was sold as a new car. There are two primary channels in the United States because around the world it functions differently. With the exception of Tesla, a new car has to be sold by a franchised new car dealer and there are laws and regulation around the delivery and sale of those vehicles. Franchised new car dealers purchase new cars from the factory which produces them and sell them on their lots.

The other channel is more commercial where those new cars sold by franchised dealers are primarily sold to consumers like you and I. There are many new cars sold into commercial fleets, be it rental cars, government or business fleets. A government might have a fleet of trucks they use to service a municipality.

They are primarily financed, with very few sold for cash as not many people can afford to do that in this country as the cost and price of a new car has continually increased. The average price of a new car is $35,000. The other method is leasing, where the residual value of that car at the end of the lease is taken off the top of the total MSRP for that vehicle, with the balance being financed. It is like a long-term rental. Those are the two main ways cars are sold in this country; either financed by a bank or leased. There are other edge cases how cars are used.

We are seeing some subscription models but those are just getting started. I will focus primarily on financing and leasing. Once that car is in the hands of a consumer and is driven, a financed car average loan period is over 60 months or five years. Generally, a consumer who finances a car for that long will get tired of it before the finance term is up. You want a new car every couple of years so that car is traded in. Those trade-ins enter the used car ecosystem and can be resold in several ways.

The dealer who takes that trade-in can keep it and resell it as a used car on their lot. If that year/make/model is not appealing he will move it into the wholesale ecosystem in several ways. The primary method is through an auction and, until recently, those were mostly physical. The dealer transports the car to a physical Manheim or ADESA auction, which are the two biggest players. Other used car dealers bid on that car and buy it to take back to their used car lot to resell.

We have recently seen some disruption in that car dealer to auction marketplace, from upstarts who are enabling that whole car auction to take place online. There are a dozen or more in North America. The one that gets the most press is ACV, but ADESA has their own solution called Trade Rev and Manheim has Manheim Express. There are a handful of other smaller players such as BacklotCars, Appraisal Lane and CARWAVE. The premise behind digital wholesale auctions is the dealer doesn't have to take the time or effort to transport the car to the physical auction. It can be sold at wholesale right on the dealer's lot, with an app on your smart phone. You take the pictures with your smart phone and launch the car into an online auction, right from your dealership.

That is just getting started in this country but it’s growing and will disrupt physical whole car auction businesses. Once that car reaches a physical or digital wholesale auction, other used car dealers bid on it because they are looking for inventory to supply their used car lots.

What can Trade Rev or ACV do to be so much more efficient? You mentioned the dealer doesn't have to transport the car to the auction; is that the auctioneer's responsibility or does the dealer have to pay for it in some way?

It is the dealer's responsibility to get that vehicle to the used car physical auction and it is both time consuming and costly. The way around that, if you are still keen on selling your car at a physical auction, is to involve the services of a wholesaler. There is an entire industry around physical used car auctions from service providers who make their living by picking up cars from used car dealers and taking them to auction. You can outsource that process of selling used cars at auction by using a middle man which is a wholesaler, who will arrive with a flat-bed truck or car hauler, load up the used cars you do not want to sell and take them to a physical auction.

Generally, it is the responsibility of the selling dealer to get that used car to the physical auction. Only half of the cars offered on any given auction day sell. They are either not what buyers are looking for, the price is too high or the condition is too rough. Even if you take the time to transport your vehicles and spend the money to get your cars to auction, there is no guarantee they will sell.

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Carvana, KAR Auction, & The Used Car Ecosystem

November 15, 2020

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