Editor's Note: This is the first in a three-part series on the auto auction operations of KAR Auction Services. Part II discusses the alignment of sales forces at KAR's ADESA and TradeRev business units, and Part III discusses potential expansion.
It’s about generating more revenue per unit.
That will likely be one theme for the auto auction side of the house at KAR Auction Services, amid a wholesale market environment where dealer consignment may get stronger, commercial consignment could see some flattening and prices are easing.
A big focus for KAR, says chief financial officer Eric Loughmiller, will be providing ancillary services in the wholesale marketplace and driving additional revenues per unit.
“I think what you’ll see for us is growing dealer consignment, relatively flat commercial volumes, but increased revenue per transaction in the physical auction, because the Carvanas, the CarMaxs, they want retail-ready cars,” Loughmiller said in a phone interview shortly after KAR’s quarterly earnings call earlier this month. “The wholesale prices are dropping; so, they want those cars, they'll pay actually more if they're ready to go on the front line and be sold over the next three days.
“So, it’ll become to us an RPU story,” Loughmiller said, referring to revenue per unit. “I see revenue growth for KAR coming because of that growth of RPU on the commercial (side) and growth in volume on dealer consignment.”
Added KAR chief executive officer Jim Hallett, who was on the same phone interview: “More of these cars will get to the physical auction and when they get there, we're going to do work on them because dealers want them retail-ready.”
Speaking of the “RPU story,” revenue per unit at ADESA’s physical auctions was up $43 in the second quarter, growth KAR attributes primarily to gains in ancillary services.
Meanwhile, physical auction revenue per unit was $879 in the first half of the year (excluding purchased vehicles), up from $829 a year ago.
A historical data chart in KAR’s Q2 earnings slides shows ADESA’s physical RPU (excluding purchase vehicles) climbing each year since 2014, the first year of data provided. For full-year 2018, physical RPU was $844, up from $775 a year earlier.
Physical auctions ‘have a long lifeline’
To be sure, the physical auction market is still massive. In the first six months of 2019, the ADESA business unit at KAR sold 1.109 million units at physical auctions, up from 1.107 million in the first half of 2018.
In the second quarter, there were 553,000 units sold via the physical channel at ADESA auctions, up from 550,000 in Q2 2018.
“Listen, physical auctions are still blowing and going,” Hallett said. “They have a long lifeline here and they're not going away anytime soon.”
Later in the interview, Hallett would add that in the long run there will be a transformation to digital.
“But I believe a physical auction has a lifespan that outlives that time that it's going to take to transform,” he said. “This thing’s not going to go away in the next two or three years.”
And the stats behind that sentiment are still strong.
A historical data chart in KAR’s Q2 earnings slides shows ADESA’s annual total volumes (physical or otherwise) increasing each year since 2014, the first year included in the set.
In 2018, ADESA’s total volume was 3.472 million units. Through six months of 2019, ADESA’s total volume is at 1.94 million, up from 1.785 million in the same period of 2018.
Hallett said he sees these total volume numbers continuing to climb, with dealer consignment likely to increase and commercial consignment flattening.
“They’re starting to flatten out,” Loughmiller said, referring to commercial numbers. “I think in total, because of our strong presence in the commercial space with OPENLANE, we have a chance to increase modestly if the market stays flat.”
However, it should be noted this is coming from a high perch for commercial consignment. Through six months, there has been a 12% uptick in institutional volume (looking at total volume at ADESA).
Dealer consignment mix was down to 39% in the first half, compared to 42% in the first half of 2018, as the “continued off-lease increase displaced dealer consignment,” KAR said in its slide notes.
Stay tuned for Parts II and III of this feature series.