The Evolution of Automotive Wholesale

We’re witnessing strong M&A momentum in the wholesale/remarketing space. Just in the last 12 months we’ve seen:

• KAR Global acquire CarWave for $450m, which equates to about $4,500 per car sold
• KAR Global acquire Auction Frontier (for $80m in cash and up to an additional $15m) to take control of their Simulcast technology
• KAR Global acquire BackLotCars in September 2020 for $425m, which equated to about $2,700 per car sold
• CarGurus acquire 51% of CarOffer in December 2020 for a total implied valuation of $275m, which equated to about $3,900 per car sold
• ACV go public in March 2021 at a?$4.8b valuation; implying about $12k per car sold
• Independent auction chain The XLerate Group in July 2021 acquire Liquid Motors for an undisclosed amount
• CarLotz go public in January 2021 at a market cap of $1.4b; a good portion of their investor deck (link) focused on allowing commercial sellers to achieve retail pricing, and bypass the traditional auction channel entirely

What’s fueling this interest?

For one, ACV Auctions came on the scene and was able to aggressively take dealer consignment market share away from the physical auction players, who were ill prepared. ACV did this by a hyper-focus on the user experience, making it VERY easy for a dealer to have their vehicles inspected and listed on ACV. ACV runs short 20-minute online auctions, which provides certainty if the car sells. They?also deliver a much more cost-effective alternative than consigning to the traditional auction channel.

Both ACV and CarLotz have now focused their gaze on the commercial vehicle segment. If they can succeed in taking market share in this area, it will cause more pain for the physical auction incumbents.

Manheim has reacted by increasing investment in their own technology, as well as the significant acquisition of Fyusion in January 2021 (undisclosed amount, but probably close to $200m).

KAR Global retreated TradeRev back into Canada, and declared BackLotCars as their online dealer to dealer platform in the U.S. But now they’ve made another bold move with the acquisition of CarWave, at a valuation higher than that of BackLotCars. This signals KAR’s seriousness in competing with technology-first disruptors like ACV.

(Remember that KAR Global made a significant investment of $210m in Openlane back in 2011, and as a result has the majority of the “upstream remarketing” business, even today.)

CarGurus made the bold move (for an advertising classified/marketplace player) of acquiring upstart CarOffer. In addition to helping dealers acquire used inventory from other dealers, CarGurus recently started helping their dealers acquire inventory from private sellers. CarOffer already has dealer “buy lists”; they should be able to help those dealers acquire vehicles from both other dealers’ inventory as well as directly from consumers.

It is likely that we’ll see other marketplaces like Cars.com, TrueCar and Autotrader react to CarGurus’ move, but we may see build/buy/partner moves from each of them before the end of this year.

The challenge that these third party classified marketplaces have is that they feel the pressure to evolve towards full digital retailing, to enable their dealer customers to compete with the likes of Carvana, Vroom, Shift and now CarMax. Compelled to make not insignificant investments in Digital Retailing while at the same time attempting to help their dealers better source inventory may split their strategy, focus and resources.

Where do we expect to see entrepreneurs innovate (and VC money follow), specific to wholesale/remarketing?

1. Online Marketplaces: the big numbers paid for BackLotCars and CarWave mean that we’ll see more entrepreneurs launch B2B auction platforms for dealers. Dealers will continue to have a confusing array of B2B platforms to choose from.
2. Condition Reports: Despite numerous attempts, we still don’t have a “bulletproof” universal condition report standard to provide the bidding dealer confidence in both the cosmetic and mechanical condition of the vehicle. There are a few companies focused on damage recognition based on photographs, and others working to diagnose mechanical condition based on an OBDII scanner. We’re certain to see continued innovation in these areas.?
3. Consumer Sell Options: Consumers now have more opportunities to get a “cash backed” offer for their car sight unseen. I expect more innovation to provide consumers with transparent options to get a fair value on their vehicle, while helping dealers more efficiently source the vehicles they need to drive more profit.?

It’s an exciting time to be in the wholesale space -- an area that hasn’t been known for its pace of innovation. Back when I was at Manheim 20 years ago, I overheard the President of Manheim said that “we’re only going to invest in technology to get cars into the physical auction lanes.”

How times have changed.

Let the wholesale/remarketing innovation and M&A continue!

Steve Greenfield is CEO and Founder of?Automotive Ventures, LLC, helping entrepreneurs raise money and maximize the value of their companies. He has over 20 years of experience in the automotive technology space. He started his career in 1999 selling software to car dealers, and has overseen more than $1 billion in automotive technology acquisitions.

Note:?This article was?originally published in the?Automotive Ventures September Newsletter.