As the company explained the ongoing financial and marketplace challenges in getting TradeRev’s adoption rate higher, KAR Auction Services is launching a pilot program for the tool that Jim Hallett summarized when presenting the opportunity to dealers by saying, “They said, ‘How can we say no to this?’”

During a phone conversation with Auto Remarketing, Hallett explained the basics of the TradeRev Guaranteed Trade-In Value Offer now being piloting in an undisclosed market so dealers can reach potential customers who leverage smartphone capabilities.

“Basically, a consumer can download the TradeRev app, they can take pictures of the car and load them,” the KAR chairman and chief executive officer said. “Then algorithms we built will give them an instant cash offer. They can take that instant cash offer to the dealer and either get a check or use it as a trade.

“The big benefit here is it creates trust and transparency for the consumer, but it also gives the dealer a lead he may have never gotten on his own,” Hallett continued.

Hallett indicated it took the KAR technology team about four months to prepare the TradeRev Guaranteed Trade-In Value Offer ready for this pilot. Again, he didn’t divulge exactly where the pilot is happening, but the company has high hopes for success.

“We went out in to the market. We called a meeting, bought the dealers lunch and introduced the concept to them,” Hallett said. “Basically, I can tell you that unanimously they gave us the thumbs up. They said, ‘How can we say no to this?’ Our only deal is you have to be a TradeRev dealer for us to send you the lead.”

Also on the call with Auto Remarketing was KAR executive vice president and chief financial officer Eric Loughmiller, who added: “We have a situation where one of the best ways we can help a dealer is having a firm number on a trade-in. That allows the dealer to execute the transaction, or for us through TradeRev, to agree to a value on the trade-in.

“If you think about what the dealers are pressured against, he’s guessing on wholesale value and closing a retail transaction. If we can eliminate one of those variables, that can improve the profitability of that dealership if he can make fewer mistaking on valuing that trade-in,” Loughmiller went on to say.

Cost of growing TradeRev

Before having a conversation with Auto Remarketing, KAR hosted its quarterly conference call with investment analysts who quickly picked up a specific element contained in the company’s vast financial statement. KAR acknowledged that it incurred an operating loss of $53.0 million for the year, which was attributable to the rollout of TradeRev.

In his opening comments, Hallett immediately addresses the matter.

“Given the impact that TradeRev is having on our performance, let me give you more information on this important initiative for KAR,” Hallett told Wall Street watchers. “During my time at the NADA Convention in January, it was reinforced that a digital transformation is happening throughout the entire automobile marketplace. Franchise and independent dealers are investing in digital platforms. Consumers are seeking tools that make the car buying experience more efficient and more transparent. And the time to execute within the automobile ecosystem is clearly being reduced and this transformation is happening in the wholesale marketplace as well.

“Clearly, dealers are looking to move trade-ins faster at the highest possible value and the TradeRev technology enables dealers to do this within hours of the retail transaction instead of days or even weeks in the past. I believe, the TradeRev platform can serve the needs of the dealers, and I’m absolutely committed to winning in this space,” he continued.

Hallett then evaluated on the four-year journey KAR and TradeRev have taken so far.

“First, my expectations of winning the U.S. market has not changed, but we are also finding the cost to launch TradeRev is greater than our initial expectations. I knew that an opportunity like TradeRev would attract competition and it certainly has,” Hallett said.

“Competitive products have been introduced and companies are launching these platforms and have been able to attract venture capital or corporate partners; and while dealer principals can immediately see the value of the TradeRev platform, adoption rate on the dealer’s lot is requiring more direct involvement from the TradeRev team and that is leading to more head count in the near-term to support the launch in the U.S. This has caused us to use more incentives, especially in areas of transportation subsidies to grow this business.”

Hallett then went on to mention what he believes are the key components of TradeRev that supported his assertions. He highlighted that revenue per TradeRev transaction is “in the neighborhood” of $250, which is similar to KAR’s other online offering. Hallett also computed that KAR can achieve gross profit of more than 75 percent on the sale of vehicles when TradeRev reaches the scale KAR is targeting.

Hallett added that KAR transacted approximately 60,000 vehicles on TradeRev in 2017 and approximately 120,000 units in 2018. He expects the sales figure to top 200,000 units in 2019 as TradeRev currently operates in 128 markets in the U.S. and Canada, with the goal of being available in more than 175 markets by the end of this year.

After sustaining a loss of $53 million in 2018, Hallett went on to acknowledge the loss could reach $60 million this year before receding in 2020.

“And as we reach this scale in 2019, I expect losses to be reduced in 2020,” Hallett said. “And I’ve set a goal of achieving breakeven sometime in 2021. Achieving the goal of breakeven will depend on our success over the next two years in entering new markets and reaching scale in a sufficient number of markets. We will also need to see some stabilization of the market dynamics and the competitive landscape to achieve this goal.

“TradeRev was initially launched in Canada, and we have markets in Canada that have demonstrated that they are profitable operations in the local market,” he continued. “And to achieve profitability, we need to reach an adequate scale with customers routinely using TradeRev as an efficiency tool for their operation. We need to increase the number of cars sold per employee in the market to achieve profitability, and our compensation programs for our field employees are aligned with this objective.

“All-in, I am committed to making TradeRev a leader in the dealer-to-dealer space,” Hallett went on to say. “I also see opportunities for TradeRev in other segments of our business and we’ll pursue these opportunities over time. We are aligning the right resources within the KAR organization to support this initiative and recognize the tremendous value that we can create for our shareholders by winning this space.”

Editor’s note: More details and executive comments about other segments of KAR’s 2018 performance and current standing will be contained in a future report.