Auto Dealers Discover Savings by Purchasing Cars Directly from Consumers

In the wake of supply-chain shortages and pandemic-related production declines, auto dealers have found a silver lining by venturing to buy used cars directly from consumers off the street, as outlined in The Wall Street Journal. This strategy not only alleviates inventory challenges but also bolsters dealers’ profit margins and enables them to reduce prices.

While the inventory situation has improved in recent months, dealers continue to prioritize street purchases over traditional wholesale auctions. This is because street purchases tend to be more lucrative, with dealers avoiding bidding wars, fees, and transportation costs associated with auctions. It’s important to note that a street purchase differs from a trade-in, where dealers acquire a car simultaneously with selling a new one.

Consumer behavior has also shifted in favor of selling vehicles to dealers, thanks in part to marketing efforts by online-only dealers like Carvana, who predominantly acquire inventory directly from the street. Shelley Hulgrave, Chief Financial Officer at Penske Automotive Group, a dealership chain, acknowledges this change, saying, «I think they changed the narrative for all of us.»

Houston-based Group 1 Automotive, operating 146 dealerships nationwide, plans to increase its purchases from consumers and reduce reliance on auctions. According to Daniel McHenry, the company’s CFO, these vehicles not only offer wider profit margins but also typically come with higher quality.

Buying a car directly from a consumer, rather than at an auction, can result in hundreds of dollars more in profit when the car is resold, industry analysts and executives suggest.

Auto dealers have an advantage in assessing the value of used cars compared to consumers, allowing them to make competitive offers. According to Sharon Zackfia, Group Head of Consumer Equity Research at investment firm William Blair, «Theoretically, a consumer is going to know less about what the car is worth» than dealers at wholesale auctions.

Data from JPMorgan Chase shows that franchise auto dealers increased their used-vehicle inventory sourced from street purchases from 8% to 14% between 2021 and 2022. Meanwhile, inventory from auctions decreased from 25% to 17% during the same period.

Total used-vehicle sales, including both dealership and private transactions, decreased by 11% in 2022, according to Cox Automotive. Despite this, the shift towards sourcing directly from consumers continues as cars become more expensive to buy and more valuable to sell.

Consumers often opt to sell their vehicles when they have an extra car or because they’ve acquired a new one elsewhere. Some dealers even raise their offers to compete with competitors’ higher prices.

CarMax, a major player in the used car market, has accelerated its efforts to source inventory from consumers. They introduced an online tool in 2021 that provides instant offers to car owners. This initiative has helped reduce prices, addressing affordability concerns for buyers.

Enrique Mayor-Mora, CarMax’s CFO, explains, «It allows us to make a decision around, ‘Do we lower prices? Do we increase our margins? Do we offset inflation?'» During the quarter ending August 31, 2023, CarMax reported a 7% decrease in used-vehicle sales compared to the previous year.

CarMax now obtains over 70% of its inventory directly from consumers, including both trade-ins and street purchases, up from about 35% before the introduction of instant online offers.

The pandemic’s inventory shortages prompted Group 1 to increase their purchases from consumers. In 2021, they began providing customers with appraisals during service visits, offering a convenient way to assess the value of their vehicles. About 10% of Group 1’s inventory comes from auctions, while 70% comes from trade-ins. Street purchases account for a significant portion of the remaining inventory.

Penske Automotive also embraced the trend, sourcing 13% of its used-vehicle inventory from consumers in 2022, up from 4% in 2020. The company attributes about 10% of its current inventory to street purchases. According to CFO Shelley Hulgrave, consumer demand remains a driving force behind their commitment to off-the-street purchases, anticipating that this behavior change will endure for quite some time.

Amidst the evolving landscape of the auto industry, a groundbreaking solution Carment is set to revolutionize how auto dealerships handle payments in the annual used car market, which accounts for 35.7 million sales. The Carment Instant Payment Platform, powered by Visa Direct, is designed to provide a seamless and efficient payment experience.

Its defining feature is the real-time fund transfer capability, addressing the pressing need for immediacy in today’s market. Car dealerships can now move money between accounts in real-time, reducing time-related costs and streamlining operations. In an era where consumers demand rapid results and time is of the essence, this solution bridges the gap in payment transactions, which often stretched by 2-5 business days.

As auto dealers continue to adapt to changing consumer preferences and market dynamics, innovations like the Carment Instant Payment Platform offer a glimpse into the future of the industry, where efficiency and immediacy reign supreme.