When you go to buy a car, don’t be surprised if the dealer you’re purchasing it from bought the car at an auction. The “ins and outs” of car auctions remain unknown to many, however they aren’t too terribly complex. Many people have asked me “why do cars go to auction?”
Let’s explore that topic.
The short answer for why cars go to auction is to improve dealership profitability.
Car dealers are in the business of making money, and when they can’t sell a car to a consumer it’s more profitable for them to sell that car to another dealer via an auction, rather than wait for the right consumer to come along. This is an oversimplification, but a good starting point to keep in mind. Generally speaking, dealerships make most all their decisions based off of how it will impact their profitability.
The #1 reason cars go to auction
As pre-owned, and in some cases new car inventory ages (sits on the lot unsold), dealers will often take those vehicles to the auction. Their goal is to turn that “dead” inventory into cash that can be used to buy other cars that they expect to sell faster. But why do dealers do this in the first place? What incentive do they have to get rid of “dead” inventory?
Most dealerships have strict pre-owned aging policies. This means that internal policies dictate how long a used car can stay on a dealership’s lot before it gets sent to the auction. A common practice in the industry is the 60 or 90 day rule.
If a used car isn’t sold within 60 or 90 days (this varies from dealer to dealer) management staff must get rid of the car. They have two options; either wholesale the car directly to another dealer, or more likely sell it at an auction. This is a nonnegotiable policy at many dealerships.
Sometimes dealerships will even send new cars that have not sold quickly enough to the auction. This doesn’t occur often but it happens. The rationale is to relieve themselves of excess new car inventory imbalances or aged new cars, and instead replace them with fresh merchandise that they think will sell more quickly to a consumer. The whole reason cars go to the auction is to ensure inventory balance at the dealership.
Cars go to auction because dealers simply can’t sell them quickly enough to a customer at their storefront. Dealers are incentivized to sell cars sooner rather than later because of carrying-costs that diminish a cars profitability, and pressure from shareholders to show that they’re moving inventory quickly.
It’s important to also understand the pressure investors put on dealers to turn cars quickly. Inventory turn ratios are one of the key metrics dealerships are measured by. In any form of retail you want to “turn” your inventory as quickly as possible. Think for a moment, when was the last time you went to the grocery store and saw brown bananas for sale? In retail you need to price competitively and turn your inventory quickly.
If a dealership isn’t turning their inventory it is a sign to shareholders that they aren’t as efficient or profitable as their peers. With inventory sitting on a lot, the dealer has a significant amount of capital tied up in cars that aren’t selling. That means their money isn’t making them as much profit as it could. Remember, dealerships make nearly all their decisions from this point of reference; how can we maximize profits?
From time to time, dealerships will send customer trade-ins to the auction without first waiting 60 to 90 days to see if the car sells. There are a number of reasons for this.
Dealership staff accumulate knowledge and experience over time. With that experience comes the ability to know which makes and models will or won’t sell at their dealership. Prior experience with certain makes and models may have shown that certain cars simply aren’t popular on their lot, and, like we mentioned above, that ties up space for another vehicle that the dealer could turn a profit on. Off to the auction they go.
This varies from dealer to dealer, and geographic location can play a major role in determining which cars stay and which cars go. For example, a sports car that gets traded into a dealership in the mountains of Colorado will most certainly get sent to the auction. People in that region are looking to buy a 4×4, not a Dodge Viper.
Sometimes a dealership will trade a high line car (Land Rover, Jaguar, Porsche and the like) that is simply too expensive for their taste (they tie up too many dollars in one car), and those cars will be sent to an auction that specializes in those types of vehicles.
Another reason why cars go to auction is that after inspecting a vehicle for road worthiness and determining how much it would cost to recondition the vehicle, the dealer may simply deem it too expensive. When that’s the case, off to the auction it goes.
Often times dealerships trade cars that are too old, or have too many miles. When this is the case, a dealer may have no real intention of keeping the car, and instead they simply ship the car off to the auction as soon as possible. Perhaps a car has a bad CarFax or an unexplained mileage discrepancy, and rather than deal with the hassle of having to explain it to a retail customer they’ll just send it to the auction.
As you can see there are no shortage of reasons why cars go to auction. Dealerships send cars to the auction to get rid of aged units, because they just want cash to buy something different, or merely to balance their inventories for maximum return of investment. The reasons are as valid as they are varied, and the auctions remain a valuable tool for dealerships to use.