LAS VEGAS -

When you think of a digital versus brick-and-mortar business model, consider Amazon and Walmart.

While pieces of their operations may lean more heavily either direction, neither is completely physical nor completely digital.

Peter Kelly, who is president of KAR Global, uses that analogy to illustrate the operations of the auto auction business. KAR is the parent company of the ADESA auction chain, among a slew of other brands in the wholesale and automotive technology space.

“I’m a believer in a long and healthy future for physical auctions. I think the right answer in our industry is a combined digital-physical offering,” Kelly said in a February interview at NADA Show 2020 in Las Vegas.

“At the end of the day, I think you need both,” he said. “I think companies like Amazon and Walmart have both. They’re not internet or physical — they’re both. And I think the exact same applies in our industry.”

To extend Kelly’s analogy, Amazon purchases are made digitally, but there are brick-and-mortar fulfillment centers; as for Walmart, you can buy goods online and in store. The latter certainly exemplifies a digitization of options in a traditionally brick-and-mortar business.

Within the auto auction world, Kelly believes there will be an evolution in the type of experience a customer has at a physical location.

“And it’s going to evolve in an ever-more digital direction, through things like VirtuaLane and a more digital auction experience overall,” he said. “I think you’re going to see initiatives from us that further the development of those ideas in 2020.”

The VirtuaLane program to which Kelly refers have sales take that place at ADESA’s physical auctions and have the same bidding process as a traditional brick-and-mortar auction sale — including auctioneers, ringmen and bidding dealers. However, no vehicles run through the lane. The vehicles are shown on a big-screen monitor at the respective auction site.

Such efforts are emblematic of the digitization of the business at ADESA and KAR Global as a whole.

ADESA sold 3.78 million vehicles in 2019 and 58% were sold online, according to slides accompanying KAR’s latest earnings materials.  That’s up from 54% a year earlier and 46% in 2017.

KAR has made it a priority to have fewer vehicles run through the lanes, both for the sake of safety and for business sense.

“So, we’re pushing that agenda forward. There’s a pace at which our customers are willing to accept those changes — we get that. But we want to continue to push the envelope,” Kelly said. “And frankly our testing of the concept tells us you can do that in these VirtuaLane formats and get as many buyers, as good a value, as good a customer experience or maybe even better in some cases for those types of transactions.”

Again, Kelly finds the physical auction space to be a “very strong channel” for the company, though moving to a “more digital direction” within that brick-and-mortar space.

At the National Auto Auction Association Convention in the fall, KAR chief executive Jim Hallett emphasized the need, for safety’s sake, to stop running vehicles through lanes at auto auctions.

That is likely not an overnight endeavor. But ADESA president John Hammer said the technology for an all-digital ADESA is there. However, the company doesn’t, by any means, see brick-and-mortar locations disappearing.

“We envision (the physical auto auction, in our lifetime, still being there, because commercial accounts don’t have a place to park thousands of cars” and many dealers may prefer to get cars off their lots or don’t have the capacity to store cars, Hammer said in a February interview in Las Vegas, shortly before NADA Show 2020.

The company has the technology to handle such digital sales at physical locations, Hammer said, and is in fact, doing so, a la the aforementioned VirtuaLane.

Is a 100% digital ADESA auction in the cards?

ADESA’s chief rival in the physical auction space, Manheim, converted its Tucson, Ariz., auction location into a 100% digital format last year, utilizing a four-lane setup where cars are parked in designated spots and sold to buyers both physically present at the facility and online. An auctioneer has them up for sale digitally through oversized monitors that include enhanced images, barcode price scanning and condition report info.

Buyers and sellers can participate in person at the auction or online through Manheim Simulcast.

Asked if there were plans for ADESA to do the same, Hammer said, “We have some that it’ll be natural for us to do that. We have locations that are very suitable for it being all digital. But for the most part, we’re letting the customers drive us where they want to go with that.”

He gives the example of OEM clients that have put a big emphasis on safety and moved increasingly digital.

“And what they’re learning is, there’s really no advantage to run the cars — statistically the numbers that get in the auctions are the same, no matter what. So why take the risk?” Hammer said.

“More and more we have dealer customers that are getting interested in that as well. I can see it transitioning, but we’re not out forcing that change on our customers.”

While ADESA does not yet have any all-digital auctions, 29 locations have the VirtuaLane option. There are some where VirtuaLane has close to a 50% share of volume, said Kelly, the KAR president.

“We are looking at some purely digital auction concepts. I think what needs to happen is, you need to have good digital platforms for buyers  (so) when they’re looking at the data, (they) can get a good sense of what is this vehicle and do I know what I’m buying. And likewise on the seller’s side,” Kelly said.

“I think we’re very close to being there already,” Kelly said. “So, I don’t think that’s a huge step from where we are today.”

As far as what would make a location ideal for all-digital, Hammer said ADESA has facilities where there aren’t typically sales, rather serving as storage yards or reconditioning facilities, where it might make sense to begin a digital-only sale.

All in all, Hammer expects that five or 10 years down the road, an auction may look the same, physical appearance-wise.

“Largely, if you went and looked at them, you might say they’re similar. Still a lot of cars running through the business. I think a higher percentage of them are sold (virtually),” he said. “We’ve seen digital growth every year for as long as I’ve been around, and we’re up to nearly 60% of cars that are sold somehow digitally today.”

While selling digitally is nothing new, Hammer said, “I think that continues to grow. I don’t’ think there’s a year where it’s a hockey stick and it grows substantially. I think it just continues to steadily grow, and more and more things go digitally. But the physical auction’s still needed for storage — there will still be cars that are sold on the physical grounds. There will still be reconditioning and largely it will look at lot the same.”

Aligning the TradeRev, ADESA sales teams

One thing that for sure does not look the same is KAR Global’s approach regarding its salesforce for ADESA and the TradeRev dealer-to-dealer auction product. The company last year it would be aligning the sales teams for those two entities, a plan that officially came to fruition in January.

During a phone interview following the company’s latest earnings call, Hallett explained the inspiration behind the pivot.

He acknowledged that KAR had been operating TradeRev “like a separate company and running it with a separate management team, a separate sales force.”

However, they came to realize that TradeRev is a product, a service, a platform within the larger KAR company — “not a company,” in and of itself, Hallett said.

“It’s just another way to sell dealer cars. And quite frankly, why would we have a separate entity out there selling dealer cars and delivering, I would say, maybe a conflicting message to our dealers that we would be delivering from the physical auctions?” Hallett said.

“So, the lightbulb went on and (we) said, ‘Why can’t we put these two together? Why can’t we have one sales force? Why can’t we have one point of contact for the dealer? Why can’t that one point of contact be able to represent a digital service as well as a physical service and why can’t that one point of contact be able to represent all of our ancillary services, such as finance, inspection, transportation — all the things that go with it? Why can’t we cross-train these sales forces?’ And the answer was, ‘We can do that.’ And that’s exactly what we did.”

The company  launched a “Better Together” program in January, bringing 450 sales representatives throughout North America to Indianapolis for three days of training.

Hallett said he was impressed with the training, but even more so with “how we brought those two cultures into one culture” plus the enthusiasm and determined belief the team showed.

Hammer, the ADESA president, said regarding the alignment, “Dealers wanted simple and easy.”

Now instead of multiple people calling from the same company, there’s one person who can share all their choices a dealer has, helping them better understand their options.

“In the past, I don’t know that they understood it as well,” Hammer said. “They had one person coming in saying, ‘You really need to be selling digitally,’ and another person saying, ‘you really need to be selling physical.’“

The approach now is an “agnostic” one in terms of where the dealer sells. KAR aims to make it flexible for the dealer, based on their needs. 

“We just want to make it easy and get the most we can for your cars. Our go-to-market now is more of that,” Hammer said.

Physical investment, too

Much of the auto auction discussion in the industry (and admittedly, in this article) is around digital.  But there’s a lot of investment on the physical side, too.

Asked how ADESA is investing in physical auctions, Hammer boiled it down to two main areas.

“One is, although it’s physical, we’re investing in technology to support physical while the cars are there. Things like simulcasting in different ways and tying it in with the physical … the other piece is more on the reconditioning side of the business,” Hammer said.

“We see our businesses getting more and more engaged with dealers and commercial accounts and doing more reconditioning,” he said. “The example I’d use there is dealers need to turn cars a lot faster now because margins have dropped pretty substantially for them. So, they look to us to help with that. Some dealers will just say, ‘Can you deliver the car to me ready to go, so that it doesn’t have to sit on my lot any more days than necessary or be on my floor plan?’”

Not only is ADESA doing more reconditioning, there is almost a concierge-like demand from certain dealers.

“Some dealers are even to the point of saying, ‘will you buy my cars for me?’, which is an interesting transition,” Hammer said. “And we do that for some dealers. We basically have a checkbook … we give them analytics and say, ‘These are the cars that we think that best fit your inventory,’ gain their trust, and then they say, ‘go at it.’”

ADESA will buy the cars for the dealer and put them through reconditioning, if the dealer so chooses.

Another key measure in the physical lanes continues to be safety initiatives. Beyond the digitalization efforts, Hammer points to KAR’s leadership in the Safe T. Sam certification program and the company’s safety awareness campaigns

“Our safety over the last handful of years is dramatically improved. Last quarter was the safest we’ve had in our history” in terms of recorded incidents, Hammer said. 

While ADESA has not made any major auction design changes, Hammer said there have been additional bollards, more line painting for crosswalks and testing of lighting on the floor at locations to notify attendees of incoming vehicles.

And all in all, safety might be the most important investment of all.