By: Phil Kernen
In 2021, the U.S. recorded 40.6 million used car sales, more than 70% of total vehicle sales and leases. Many used car sales still occur on the corner lot or between individuals, but a growing number of sales are online through a small group of market makers.
Competition exists in different forms. Cox Automotive, privately owned, and KAR Auction Services (KAR), automotive marketers that run online whole-car auctions for non-totaled cars, control about 70% of their market. They sell fleets that need to turn over, cars with abandoned leases, or cars donated through charity auctions that are in good working order. Used car dealers will buy cars from other dealerships, using the auction dealers as middlemen who collect their cut for bringing buyers and sellers together.
Over the last several years, finding good used cars has become more problematic for everyone. Growing demand with unchanged supply drove used car prices higher. With fewer new cars produced, purchasers turned to used car markets instead. For the same reason, owners of leased and other used vehicles held on longer, forcing whole-car auction companies to pay higher prices for any inventory. KAR makes just under half its revenue on auction proceeds, but most of its earnings come from the side services they provide, including dealer financing and helping complete steps required to close the purchase.
However, online car auctions aren’t limited to non-totaled cars. Copart is the more significant part of a more interesting duopoly that operates auctions for salvaged vehicles. 75% of supply comes from insurance company customers, with banks, finance companies, charities, fleet operators, dealers, vehicle rental companies, and individuals providing the rest. Totaled vehicles are transported to massive lots outside major urban centers to await sale.
Interested parties include dismantlers who will sell valuable parts and scrap the rest and resourceful repair shops with the right skills to repair and resell. They also include foreign buyers whose home country may have different rules about totaled cars or who may be playing geographic arbitrage for hard-to-find models. Copart earns a commission on each sale and offers ancillary services like bidding software, associated technology, conducting inspections, and handling title exchanges to close car loans and complete the sale.
IAA, spun off from KAR in 2019, is the smaller part of the salvage auction duopoly, with significant differences between the two. Copart operates internationally, while IAA operates primarily in North America. Copart owns its land and operates with no debt, while IAA owns very little of its land and operates with high debt loads. Copart was on the leading edge of technology in the industry, entering the pandemic online while IAA worked to catch up. Copart’s market share is more than 50%, while IAA is around 35%. All these distinctions explain Copart’s better performance and higher valuation since IAA became an independent company.
Competition is thin in online salvage auto auctions because barriers to entry are high. Salvage dealer licenses and demonstrating compliance with environmental regulations are required. And it’s hard for a new dealer to gain broad liquidity, to bring together the most cars and the greatest buyer interest to ensure the highest price.
A business built to handle totaled cars faces unique risks. Cars are getting safer, and industry observers expect autonomous vehicles to reduce accidents and the number of totaled cars. However, miles driven in the U.S. and worldwide continue to grow by 1-2% per year. And when accidents do happen, the associated components are much more expensive, increasing the odds of a repair quickly exceeding the car’s value. Rising repair costs partially explain the higher total-loss rate rising from 5% in 1980 to 20% in 2020.
All the preceding examples are considered business-to-business or wholesale platforms. Online car dealers like Carvana, CarMax, and Vroom focus on retail buyers for sales. All three are customers of the whole car auctions and thus pay the higher used car prices. To reduce acquisition costs, they are trying to increase inventory through trade-ins which makes them a competitor to whole car auctions in those instances. Retail online car dealers have little interaction with salvage auction platforms.
The used car sales slowdown into 2022 is a reaction to earlier high prices now moderating. With new car manufacturers struggling to bring production lines up to capacity, demand for used cars will remain strong. The best digitally and financially positioned online platforms will come out ahead.