Digital Auction Startups Disrupt Wholesalers, Not Auctions

If you’ve bought a used car, there’s a good chance it originated from a wholesale auction. Approximately 13 million vehicles are sold via U.S. wholesale auctions each year, with most sold at physical or in-person auctions. In an attempt to disrupt the auction space, investors poured billions into 20 startups that built digital platforms with promises of lower fees, greater convenience, and higher selling prices. But five years later, only five of these companies remain, as competition, limited vehicle supply, and profit constraints hamper their growth.

Auctions Experience Major Changes In The 1990s

To understand the attempted disruption of wholesale auctions, you must first understand their history. The auction industry began in 1945 after two brothers from Manheim, Pennsylvania sought a better way to exchange used cars. The first auctions featured large parking lots, fast-talking auctioneers, and buying and selling was done in person. And for the first 60 years after its inception, the auction business model didn’t change since automakers and dealers did not care about used cars.

For most of the 20^th century, automakers and new-car dealers treated used cars as the “black sheep” of the business. For every used vehicle sold, they perceived one new sale was lost. In fact, many franchise dealers (i.e., new car dealers) wouldn’t even sell used vehicles. But by the 1990s, industry shifts encouraged automakers and dealers to rethink used cars.

American automakers lost massive share to Japanese automakers in the 1980s, in part, because Japanese imports lasted longer, were made better, and had higher resale values. The Japanese forced all automakers to look at ways to make the quality and resale values of their vehicles better. This sentiment shift was combined with the boom in new-car vehicle leasing, which became an effective way for automakers to push new-car sales and required high vehicle resale values to keep lease payments low.

As manufacturers sought ways to improve used-car resale values, the auctions were tasked with finding ways to support their effort. One tailwind was the Internet. In the late 90s, dealers began bidding for vehicles via the Internet, which increased transaction prices due to more bids. Higher transaction values improved resale values. The second tailwind was data.

Manheim Auctions, which was and still is the largest vehicle auction, had a treasure trove of auction transaction data. My former colleague, the well-known Wall Street analyst Maryann Keller who passed last year, devised an idea to use Manheim’s data as an economic indicator for financial analysts. This gave way to Manheim’s Used Vehicle Price Index (UVPI) and Manheim’s Market Report (MMR). UVPI and MMR quickly became the standards to gauge and track used vehicle wholesale values.

Armed with data from Manheim and its competitor ADESA, which created its own data sets to compete with Manheim, automakers and dealers demanded that wholesale vehicle values meet or exceed the historical auction prices they saw online. This meant auctions needed to optimize their business models to ensure sellers could achieve desired prices. Some auctions consolidated ownership rather than change their models. But for Manheim and ADESA, it created an arms race to create the first instance of digital-only selling.

ADESA, Manheim, and a smaller auction named SmartAuction (a division of GM at the time) sought new ways to auction late-model cars via the Internet. They wanted an approach that was cheap, efficient, and scalable. Given that most institutional cars were late-model vehicles under warranty, and their conditions could be guaranteed, the risk of buying sight unseen was palatable for bidders. Thus, large institutional sellers (e.g., lenders, automakers, rental car companies) were targeted for these low-cost-digital-only platforms. ADESA and Manheim heavily competed to earn institutional business with low fees and advanced technology.

ADESA’s platform, OPENLANE, dominated the off-lease space. Manheim had less off-lease business, yet made up the loss with share from other large sellers, like rental companies. But the digital-only institutional space was a zero-sum game with low profits. Excluding SmartAuction, which was only responsible for GM cars, no other entrants could compete with Manheim or OPENLANE for the digital-only institutional volume, so the growth of the space was limited.

Startups Emerge Targeting “Dealer-to-Dealer” (D2D) Wholesale Vehicle Space

While the physical auction model evolved significantly, including the introduction of Internet bidding for physical auctions and the advent of digital-only platforms for institutional sellers, the auction industry never introduced digital-only buying and selling for franchise dealers. By 2015, entrepreneurs sought ways to change this by introducing “dealer-to-dealer” digital auctions.

Each year, franchise dealers were selling 9 million used vehicles to buyers in their wholesale channels. These vehicles, known in the industry as “wholesales,” often originated as trades to retail dealers and were then “wholesaled” to other dealers. Dealers sold half of these wholesale vehicles via physical auctions with Internet-based bidding. The other half were sold to wholesalers – a shady market that was rife with fraud.

The typical wholesaler consisted of one employee, who would buy vehicles from one dealer and then flip them to another. While there were exceptions, dealership used-car managers and general managers expected an “under-the-table” cash kickback of $500 to $1,000 for each vehicle they sold to a wholesaler, an amount that was similar to the fees to sell the vehicle at auction.

Recognizing the inherent corruption in wholesale practices, dealer-to-dealer auction entrepreneurs targeted the wholesaler space for their new business models. The startups promised selling dealers higher values for their vehicles by eliminating the “squirrely” wholesaler. In fact, one company founder told me he would bring Google Maps photos of wholesaler homes to meetings with dealer principals (owners). The dealer principals were shocked by the wholesalers’ wealth, making it easy to conclude that their wholesale inventory was undervalued when sold to a wholesaler.

Digital Entrants Disrupt Wholesaler Market, But Physical Auctions Prove More Difficult

As a result of the dealer-to-dealer startups from 2018 to 2020, the wholesaler space crumbled. Many dealers refused to sell to wholesalers or put limits in place. According to Todd Caputo, an industry consultant dubbed the Used Car King and former owner of a used-car superstore, “In general, the days of [the] wholesaler are over with – except for really good ones.” He explained that dealers, on average, decreased transactions with wholesalers from five to less than two. But for the dealer-to-dealer models to achieve the growth promised to investors, disruption of wholesalers was not enough; they also needed to take share from physical auctions.

While it was easy for digital entrants to disrupt the largely fraud-ridden wholesaler space, taking share from physical auctions proved more difficult. The physical auction model was nearly 80-years-old yet largely efficient. Physical auctions were trusted due to in-person buying and selling, established arbitration, and quick title transfers. They allowed for vehicle parking, storage, and reconditioning or repair services to make vehicles saleable. And, finally, the majority of physical auctions allowed Internet-based bidding, making it convenient for remote buyers even if vehicles were sold on physical lots.

To steal share, the dealer-to-dealer startup founders promised lower fees than physical auctions, quicker turnarounds, and other conveniences. But with all the talk of disruption, the dealer-to-dealer players faced many bottlenecks.

Dealers did not embrace self-inspections, which was a major way in which dealer-to-dealer startups thought they could lower their fees. Buying and selling dealers demanded third-party, in-person vehicle inspections, which were costly. Other areas, like offsite title transfers, are labor intensive and require much handling. Jeff Cunderi, an industry consultant and former territory manager for ACV Auctions, explains, “The virtual auction model doesn’t scale. Issues like title management hamper efficiency.”

In addition to bottlenecks, the digital startups met resistance from physical auctions. Physical auctions responded to disruption threats by lowering their fees, improving digital buying and selling services, and making their business models more convenient. And while it might surprise some, nearly eight years after the introduction of dealer-to-dealer digital auctions, it’s unclear if physical auctions lost significant share to them.

In 2022, the aggregate of physical auctions known as NAAA sold 6.6 million vehicles at an average price of $16.7K, with nearly half of its volume coming from institutional sellers. Adjusting to pre-Covid retail and wholesale market numbers, the volume of physical auctions has actually increased as a percentage of the wholesale market. Based on what we heard, anecdotally, it’s likely that physical auctions lost share to dealer-to-dealer digital startups, but the actual number remains low.

Langley Van Der Kley, GM of Woodbine Toyota, has used dealer-to-dealer auctions in his dealerships. He explained, “In many ways they all see themselves as some sort of tech play, when they are not. It is sad how badly they want to get the multiples of tech when they are, in essence, a traditional business more fully enabled by tech.” Van Der Kley’s sentiments are reflected in the market realities we observed.

For example, one Pennsylvania-based Audi dealer we spoke with, who asked his name not be shared, stated he will only send his low-value cars to dealer-to-dealer startups. He stated, in the past, these vehicles were sold to wholesalers, but since they are low value vehicles, he is more concerned about moving them off his lot quickly rather than getting the maximum price for them.

However, he sends higher-end vehicles (over $20,000) to physical auctions because they bring the highest values. For buying, however, he refuses to visit a physical auction and states he will use digital services instead. Another dealer, based in Billings, Montana, explained to us, “None of these companies [dealer-to-dealer startups] solve all the issues, so I would end up with a more traditional format like [omitted], [omitted], or [omitted] where there are physical locations and online capabilities.”

Dealer-To-Dealer Auctions Evolve To Find Their Niche… Leaving Opportunity For New Entrants

The dealer-to-dealer space has evolved since its beginnings. The post-Covid used-car supply ended the rapid growth period for these companies, forcing the majority of companies to close or merge with others. The remaining companies have found niches or changed their models to include physical capabilities. Others have simply become an extension of their parent companies.

Some industry participants feel physical auctions might actually gain share in the future as they continue to improve their digital offerings and overall competitiveness. Others feel that physical auctions will lose share. And some feel the role of physical and digital auctions will become blurred, which will force the entire industry to experience consolidation.

While the rapid growth of dealer-to-dealer auctions has cooled, our research suggests the space is filled with opportunity. Fragmentation and high fee amounts ($800 to $1,500+ for buyer/seller combined) provide healthy margins. Other factors, like the need for value-added services to increase vehicle values, create opportunities for startups. And increasingly diverse sellers and buyers, caused by changing vehicle technology, promise to bring new entrants. But perhaps, most imminently, as used-car wholesale volumes increase, more vehicles for sale will provide a foundation for future revenues for all the players.

Over the next few years, industry observers will see innovation from startups and existing companies that will take advantage of these opportunities. However, true disruption of the auction space still remains out of sight.

The Five Digital Players Of The Dealer-to-Dealer Wholesale Space

Today, five companies dominate the dealer-to-dealer wholesale space. My consulting team spoke with over 50 dealers, executives, and consultants to learn the details and differentiation amongst them. (Note: In the interest of full disclosure, we do not endorse any of these companies, nor do we have a financial interest in them. The summary information we collected is based on interviews and research from publicly available information.)

1. BacklotCars

Earlier this year, BacklotCars was folded into its parent, OPENLANE. It is now part of OPENLANE Marketplace. The branding change reflects a shift in the company’s strategy to create a unified and streamlined digital wholesale marketplace that provides dealers with pricing and tech tools to buy and sell, similar to eBay but for wholesale vehicles. The company states it “does not want to be [in] the middle of transactions” or have staff that brokers with dealers to lower their prices or increase bids; instead, it aims to provide dealers with data to do it themselves. In 2022, OPENLANE sold 1.3 million vehicles (487,000 via Backlot). The average transaction price for OPENLANE is $17,500. At any given time, 200,000 vehicles are listed in OPENLANE’s marketplace, including 70% of all off-lease cars. OPENLANE counts 50,000 buyers and sellers in the U.S.

We heard:

• OPENLANE offers a wide range of low-end (dealer wholesales) and high-end (institutional sellers / off-lease) vehicles;
• The company prefers a hands-off approach to getting dealers to buy and sell and, instead, focuses on tools and training to “empower” them;
• OPENLANE is commonly cited as having lower selling fees than its competitors;
• Of the data we reviewed, OPENLANE has the highest average transaction vehicle selling price of any company in the space, which reflects its institutional volume.

In their own words:

BacklotCars combines national reach, comprehensive inspections, and flexible sales formats to deliver better outcomes for buyers and sellers. When we launch the OPENLANE marketplace in the US, we’ll combine those benefits with exclusive, first access to off-lease inventory from the majority of OEMs and captive finance companies, as well as rental companies. With all the cars, all the sellers, and all the buyers, all in one place — OPENLANE will be the premier marketplace for used vehicles. – Peter Kelly, CEO

2. CarOffer

CarOffer is a business unit of CarGurus that is tasked with facilitating wholesale transactions amongst the company and its dealers. It also facilitates curb purchases (i.e., cars purchased from consumers) via the CarGurus website. CarOffer is unique in that it offers stock-like trading options for buying cars. For example, dealers can create “limit orders” to automatically buy wholesale cars at prices below ceiling limits via its Buying Matrix product. The company also offers resale protections, like buying security options in the capital markets. In 2022, CarOffer sold 190,594 vehicles. It has nearly 13,000 buying and selling dealers.

We heard:

• CarOffer’s “commodity” approach to buying cars allows automatic buying, which is helpful for inexperienced or time-constrained used-car managers;
• It offers dealers liquidity by generating instant cash offers for any used car in the dealer’s inventory;
• Its product, known as OfferGuard, allows dealers to “return” vehicles for up to 45 days, which is helpful for vehicles that cannot be retailed or for cases of buyer’s remorse;
• CarOffer integrates the CarGurus’ platform to allow dealers to buy directly from consumers (aka curb purchases) and compete with similar services offered by Carvana.

In their own words:

Through our automated and efficient platform, dealers are no longer bound by time or geography. They have the ability to buy, sell, and trade with dealers nationwide, using a platform that’s working on their behalf 24/7. We eliminate most of the manual tasks associated with the dealer-to-dealer transaction and streamline the processes for our partners. – Bruce Thompson, CarOffer, CEO

3. EBlock

EBlock began in Canada as a digital-only platform. It later transitioned to offering both digital and physical auctions – including reconditioning services. The motivation to include physical auctions was primarily to gain institutional volume while also being more sensitive to dealer needs. EBlock offers traditional run lists that feature digital-only and physical auctions. In 2022, EBlock sold 192,615 vehicles with an average transaction price of $15,081. It has nearly 13,300 buying and selling dealers.

We heard:

• EBlock offers a digital and physical footprint capable of optimizing physical “compounds” based on opportunities in select markets (e.g., West Coast);
• It maintains a strong Canadian footprint;
• It offers reconditioning services for physical units;
• The scheduled run lists, with 60-second auction slots, are preferable to sporadic auctions.

In their own words:

EBlock is the only auction platform connecting land and technology through a combined, real-time dealer-to-dealer digital auction that allows dealers to buy and sell cars at EBlock physical auction locations and online in a single auction experience. With set auction times, run lists, and cars bought and sold in 60-seconds, EBlock’s platform simulates the physical auction environment with a powerful end-to-end experience. Whether physically or digitally, EBlock empowers today’s most innovative dealerships and wholesalers to buy and sell inventory in less time – Lisa Scott, EBlock, President

4. Manheim Express

Manheim Express is a business unit of Manheim Auctions, the largest digital and physical auction company in the world. The company’s digital offering intended for the D2D space is called Manheim Express. The unit was strategically designed to complement, rather than cannibalize, its parent auction services. Manheim allows cross-platform buying and selling, but certain areas (e.g., arbitration, inspection reports) vary based on where the vehicle is listed. While Manheim allows dealer self-inspections, nearly 95% of vehicles listed include independent inspection reports. Manheim has over 76,000 selling dealers and 100,000 buying dealers. At any given time, it has over 300,000 vehicles available for sale. In 2022, it had 3 million U.S. transactions with 73% of them originating from Internet-based bidders (including vehicles sold at physical auctions).

We heard:

• Manheim was cited as having the most reliable inspection reports and inspectors;
• Dealers regularly stated that Manheim brings the highest values for dealer-owned vehicles sold via its platform. According to Manheim, on average, its vehicles sell for 2% higher than other marketplaces. (Note: We cannot substantiate Manheim’s claim, but dealers did consistently rate Manheim as bringing the highest values.);
• Manheim provides the largest quantity of vehicles to buy;
• Its KBB Instant Cash Offer is helpful in generating consumer purchases to assist dealers in competing with similar services from Carvana;
• It offers robust data tools and analytical capabilities for selling and buying dealers to gauge values.

In their own words:

“Hands down, Manheim brings together the most buyers with the most sellers, fueling the industry’s largest and most vibrant wholesale marketplace. Our relentless focus on enabling clients to transact whenever, however, and wherever they want is supported by continual investments across our digital and physical properties, which remain unmatched in the wholesale industry.” – Zach Hallowell, Senior Vice President, Manheim

5. ACV

ACV was the only company that did not respond to our request to participate in this article. ACV is known for its 20-minute and Smartphone-based auctions that can occur at any time, including weekends and holidays. According to its public financial reports, in 2022, ACV Auctions sold 546,088 vehicles with an average transaction price above $15,000. It has 14,452 sellers and 10,285 buyers.

We heard:

• ACV has a very aggressive sales team that will do almost anything to get dealers to “move metal,” including fee negotiation, brokering a deal between dealers, or pooling groups of vehicles;
• It sends “aggressive” inspectors to dealerships in order to get cars listed as quickly as possible (or before a competitor can list them);
• ACV offers no-reserve auctions with values that are guaranteed by the company.