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 Bio

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

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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.

You were about to mention the second channel, the commercial side of the ecosystem.

The other way a new car gets into the used car ecosystem is through sale by the factory to fleets, which is a huge business in this country. There are several large companies who manage fleets for businesses, such as ARI, Element and LeasePlan. They buy cars from manufacturers and put them into service for their commercial entity customers who need cars to run their businesses. The other way is those cars are sold new into rental car fleets. Some rental car companies buy the cars outright and some lease them.

Generally, what happens with fleet cars is the asset gets depreciated. Unlike a consumer, who may want to trade their car in every few years for a new one because they are bored with their old one or want the new features and gadgetry, better fuel economy and safety, those fleet cars mostly go to auction because they are not the type of vehicle from a mileage condition standpoint a consumer wants to buy.

One notable exception is Enterprise Rental Cars who run their own dealer lots called Enterprise Car Sales. They take the best of their rental car fleet and sell direct to consumers. That model has been attempted by other rental car companies such as Hertz, who tried it for a while but have recently closed all their sales locations. There is a notion among the rental car companies that they ought to be able to do it themselves but they are really not good at it. Enterprise have been the most successful at taking cars out of their rental car fleets and selling them to consumers. Generally speaking, a vehicle is sold by the factory into a fleet.

Whether that is a managed fleet by a company like ARI or Element, or a self-managed fleet like a rental car fleet or a government fleet, those cars are used up. Their life cycle at the point of sale is at a point where a consumer probably would not buy that car and they get sold at auction. That does not mean they do not end up in the hands of consumers, but the way they end up there is from the auction to a used car dealer. Many of them end up at independent used car dealers, because independent used car dealers do not have as much capital to expend on stocking their inventory with late model lower mileage more expensive cars. Their target for buying used cars is more down market.

There are three channels a used car is funnelled into the ecosystem; the grounding dealer who takes back a leased vehicle, the captive FinCo or new franchise dealer network, and the whole car auctions which end up having some commercial dealer vehicles.

You touch on an interesting point when you bring up leasing, because that sits in the middle. Leased cars are sold by a franchised dealer. They are not financed but leased and there is a whole separate ecosystem in place to handle those off lease units. The two major players in the whole car space are ADESA and Manheim who have separate systems in place with leasing companies to deal with those cars. I prefer to treat leasing separately because the car and the process is unique. It is different from the financed side where, typically, the car is traded in by the consumer.

That off lease vehicle has a deadline. When you lease that car, you are signing up via contract with the manufacturer to only put a certain number of miles on it. There is a penalty if you do more. You typically sign a 24, 36 or 48 month lease term and you know there is a deadline on that car. Generally speaking, while some consumers buy their car off lease, most of the time they have leased a car because they want another new car at the end of their lease term. That leased vehicle comes back into the OEM franchised network as a known quantity. By that I mean, you know, generally, how many miles are going to be on it. You know the condition of the car because it has been maintained at the franchised dealer as part of the leasing contract.

So you know the residual value?

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Carvana, KAR Auction, & The Used Car Ecosystem

November 16, 2020

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