Used car sales are growing across the US, and businesses from Autonation to CarMax, Carvana and Buffalo, New York-based used car startup ACV Auctions, are benefiting.
Patrick T. Fallon | Bloomberg | Getty Images
For at least a couple of weeks in the worst case Covid-19 ACV Auctions was faced with a challenge that no start-up can handle with certainty: All core customers are no longer allowed to be open for business operations. When car dealerships were closed in the US, the Buffalo, New York-based used car market technology company that works with franchise and independent auto dealers was in a situation its CEO George Chamoun now remembers as “slightly scary”.
But like many surprise stories about pandemic surprises, this time of uncertainty and existential crisis sparked a boom in buying and selling used cars. Used car sales boomed in April and May as there was a shortage of new cars from car factories to reach dealer lots and consumers were more cautious about spending on large items. This has continued into the summer and fall, with the last two months, August and September, seeing the highest used vehicle inventory rate in six years, according to Edmunds.com.
“It wasn’t just a return to pre-Covid,” Chamoun said at CNBC Evolve virtual event Thursday, which focused on midsize businesses. “We are selling higher units today than before Covid.”
In June, consultancy AlixPartners estimated that due to lockdowns, the full auto factory restart schedule, and a global decline in consumer confidence by 2022, it was expected to see 36 million new car sales down from 2019 worldwide by 2022. In the US market, the company forecast a sales market for new vehicles that will decline by around 3.5 million vehicles year-on-year, although this outlook depends on the recession not prolonging. Car manufacturers like GM have become more optimistic in their comments since the Qid Covid-19 Nadir, but even before Covid-19, the used car market was more than twice the size of the new car sales market.
Autonation and CarMax have stepped up their used car efforts, and their stocks rallied sharply from the Covid-19 stock market low in March. CarvanaUnlike ACV Auctions, which goes straight to consumers when it comes to selling used cars with no dealer in the middle, inventory has soared from a low of $ 30 in March to over $ 200 today. Another online rival, Shift, plans to go public soon through a special purpose vehicle, which has been a widely used way of going public for private companies since the market began to recover.
The trends overseas are similar, with recently UK-based private online car sales company Cazoo Doubling the rating.
Carvana, the online used car market that cuts the dealer out of the sales equation, has been booming since the March shutdowns, but ACV Auctions, which works with dealers to sell used vehicles, has seen sales boom too, according to its CEO.
The used car market in the US is already estimated at 41 million units a year, and Chamoun says some of the changes sparked by the pandemic will continue to accelerate. The strength of consumers in the used car market shows that Americans want to continue to own vehicles in order to take children to soccer or to work. “Vehicles are the second greatest asset that we as consumers buy. So it’s really important and will be important to the economy.”
ACV Auctions has 700 inspection teams and 100 regional managers who work with auto dealers in the United States to buy and sell used vehicle inventory. The company had to stop quickly because traders were no longer able to perform physical auctions during the Covid-19 shutdown.
Digital acceleration goals in the business compressed from years to months have been a major theme of the coronavirus economy across various sectors, and in the auto sales market, more and more dealers are accepting the move to digital, Chamoun said, which is a significant behavioral change for the market.
Traders have been going to physical auction venues for a long time, and business changes don’t happen all at once, Chamoun says, but when traders suddenly couldn’t go to a physical auction anymore, that changed how traders behaved and made more of it the market, the ready to sell digitally and bid and buy vehicles online. “Both supply and demand are accelerating retailers’ transition to digital,” said Chamoun. “We’re going to see a major shift to digital over the next few years. That doesn’t mean cars aren’t much in one physical location, but dealers will want to buy online and bid online,” he said.
The start-up that became Buffalo’s first “unicorn” – a start-up valued at over $ 1 billion in late 2019 – had to invent new technology tools to support this shift in the used car market.
A tool was created to scan a car title and create an electronic recognition of the documents so that the title process between buyers and sellers and ACV can take place in a digital environment.
A method of scanning the undercarriage of vehicles, called a virtual elevator, was also invented to capture thousands of images of the undercarriage of vehicles to make the used car inspection process more transparent in a virtual environment.
The AMP audio engine profile tool can be attached to the engine of a used car and lets both ACV and a dealer listen to the engine to ensure there are no potential issues.
During the first few weeks after the coronavirus shutdown, Chamoun said his job was just trying to keep everyone calm as no one knew what would happen next to the mood of traders or consumers. But that has changed. “What we really saw was strength.”
Selling cars online is not entirely new. Special cars were sold on platforms like Ebay For years, dealers have had the ability to sell cars online in a pre-Covid-19 contactless experience. However, according to Ivan Drury, Senior Manager of Insights at Edmunds.com, the pandemic was a next level event. Some consumers would like to continue to interact in person and test up to 10 cars, but the Carvana and CarMax models are taking advantage of eBay’s used car listing and making it more popular for commuter cars.
“These are vehicles from point A to point B,” said Drury. “It’s an ongoing trend. Will we see online sales grow at the level of Q2 2020? No. At the same time, it has accelerated every retailer’s efforts to really strengthen that part of the business.”
More and more consumers are interested in used cars in a weaker economy, and the new online models are offering something local dealers often can’t: a variety of models and custom features that can be shipped to different states. “When it comes to state availability, inventory and shipping, this has been made a lot easier,” said Drury. “There was such a drought in the used car inventory even when I went to buy from a local dealer.”
The online experience also eliminates the “high pressure situations” at retailers that many consumers prefer to avoid. “You control the flow online,” said Drury. That control advantage includes the ability to split parts of the car buying and selling process like trading a current vehicle and adding it to the used car market – 45% of new car sales are based on a trade-in as part of the financial volume equation. “You can now do this online instead of having to trade with a dealer … you can see what the dealer is offering compared to online so you have more control over each component,” he said.
But the auto consumer expert stressed that online businesses like it Carvana and Shift Technologies remain small relative to the overall size of the used car market. Carvana sold a total of several hundred thousand units in 2019 and a little more than 55,000 in the second quarter of 2020. This is a used car market that has over 40 million units annually.
“They are gaining ground and there is a lot of market for them to do business in, but not everyone does,” said Drury. He estimated the combined sales of Carvana and Shift to be less than 1% of the market.
He also warned consumers not to assume that online businesses are always the most competitive in price. Online competition is a good thing for consumer pricing options in general, but in some cases online sellers charge a premium for their service, inventory, and shipping between states. This means that with a contactless online experience from a local dealer, consumers should always check that the same vehicles are not available at a lower cost.
“Casting a wider network can help you get a better price,” said Brian Moody, executive editor at Autotrader.
He said the big problem in the used car market right now is high demand. Lately, used car prices have gone up and not gone down over time and this is something that is rarely seen in the market. Prices have dropped a bit since the summer, but Moody said buyers should “not look for deals”. Rather, they should focus on getting what they want. “I would look around … but don’t be surprised if you end up paying more than expected for a specific car you want,” he said.
Many local dealerships that sell online have virtual walkaround technology, home test drives, and deliveries. You also have the advantage of having access to a service department. “The local dealer is not entirely out of the game,” he said.
Especially for consumers interested in newer models between one and four years old, dealer inventory will be higher and they can offer you certified used vehicles, in some cases with lower APR funding.
“People want to buy cheaper cars, but so many people are going for a lower price range that there are fewer units and you have to buy older models to get cheap used cars,” said Drury. “Don’t discount the local dealer,” he added.
Even the auto experts find it difficult to navigate their personal consumer life in the current used car market.
Drury was recently in the used vehicle market but bought new ones because he said the prices of the used vehicles he was interested in were high and the incentives offered with the new vehicles were good. Towards the end of the calendar year and when models for 2021 show up, prices for models for 2020 may become even more attractive.
Buying a new car always means more spending and savings of $ 12,000 to $ 15,000 on some used car models. However, when a consumer’s budget is flexible, buying a new car can be the right decision. “I spent $ 10,000 more than I wanted, but with the warranty and other benefits and new technology it made more sense,” said the Edmunds.com expert. “There used to be a simple answer, but not now.”
Autotrader’s Moody said his current lease didn’t expire for another year, and that’s a good thing in the current used car market. “I’m relieved, relieved that I don’t have to make a decision in this turbulent environment. People pay more for used cars.”