3 questions to ask when incorporating Retail Remarketing™

September 3rd, 2020 by

By Michael Bor

While various wholesale channels are an efficient way to remarket large volumes of end-of-cycle inventory, Retail Remarketing™ generates significantly higher proceeds and is playing an increasingly important role in remarketers’ portfolios.

But how do commercial consignors such as fleet management companies and portfolio managers utilize Retail Remarketing™ to decide what vehicles in their portfolio to retail versus wholesale?

3 key drivers of ‘retail vs. wholesale’ decision

When deciding whether to remarket a vehicle through retail or wholesale, remarketers should consider three key factors: potential proceeds from sale, expected speed of sale, and vehicle reconditioning needs.

  1. Potential Proceeds from Sale

The key advantage of marketing a vehicle at retail is the lift in proceeds relative to wholesale channel alternatives, which after all fees is typically $1,000 or more per vehicle. When making the decision between remarketing at retail or wholesale, however, it’s important to weigh the financial upside in relation to the “risk” of each vehicle.

Risk is viewed from the standpoint of the wholesale buyer of a vehicle, who is likely asking themselves “What could go wrong after I buy this car?”

For example, since buyers are making their buying decisions based on limited information and diligence, the car might require more mechanical and cosmetic repairs than originally anticipated, or due to an expedient review, perhaps could be missing a key feature that retail buyers want.

Every vehicle in a remarketer’s portfolio has a different level of risk to the wholesale buyer, loosely related to the vehicle’s age, make and model, miles, trim and features, and condition. Based on that risk, wholesale buyers are willing to pay less or more for that vehicle.

If the risk of a vehicle is moderate to high, the difference between wholesale and retail proceeds will be high and, conversely, if the risk of buying a vehicle is low, the difference between wholesale and retail proceeds will be low.

A vehicle’s risk is generally shaped like a normal distribution curve during its lifecycle. At the beginning of the lifecycle, the risk level is low because the vehicle is relatively new and likely has lower mileage and less wear and tear, reducing the risk to the wholesale buyer that something will go wrong post-sale.

At the end of the lifecycle, a vehicle’s risk is again low because the vehicle has experienced its highest depreciation years and is relatively inexpensive, reducing the buyer’s financial exposure should something go wrong post-sale. At each life cycle stage in between, a vehicle carries varying levels of risk that generally exceed the beginning and ending stages.

As the vehicle’s risk increases, the gap between the proceeds a remarketer can expect from wholesale and retail channels increases, frequently creating a spread of up to $4,000 to $6,000. That premium should entice a seller to remarket at retail instead of wholesale; the larger the spread, the greater opportunity for significantly enhanced proceeds through Retail Remarketing™.

A Retail Remarketing™ business exists to help sellers take advantage of that gap by de-risking the vehicle for the retail buyer. A retail remarketer takes a “high-risk” unit from commercial sellers, inspects, repairs, and cleans it to front-line condition, attaches a warranty, allows test drives, and ultimately sells it at a retail price to the end consumer. The retail preparation process reduces the risk of the vehicle in the eyes of the buyer, who will now pay a premium price. After fees and reconditioning, commercial remarketers typically net more than $1,000 per vehicle at retail versus auction.

  1. Expected Speed of Sale

Speed of sale is also important to most vehicle remarketers.  At CarLotz, for example, the average days to sell for Retail Remarketing™ portfolios is 25 to 40 days, whereas the average days to sell at wholesale can be 15 to 25 days, so auctions on average can offer a speed advantage.

When evaluating the retail or wholesale decision, it’s important to consider the market liquidity on a vehicle by vehicle basis. With roughly 40 million used car transactions every year, consumer demand for straight down the middle cars such as a Ford Fusion, Nissan Maxima, Chevy Equinox, or Ford F-150 is generally strong.

With a robust retail environment, those types of vehicles can sell at retail quickly, sometimes in a couple of days. Less liquid vehicles with weak consumer demand tend to be those with specialty equipment, missing features, offbeat paint colors, or unpopular styling. While these vehicles can still sell at retail, a retail buyer may not emerge immediately, leading to these vehicles sometimes taking much longer to sell. If speed of sale is a key priority, wholesale can make sense for these more unique and illiquid vehicles.

Many progressive remarketers make channel decision by calculating ROI, which factors speed and return together. Let’s say you have a vehicle with a wholesale value of $10,000. If you sell through a retail remarketer for a lift of $1,000 relative to auction, that’s a 10 percent lift in proceeds.

If that vehicle took 30 days to sell, your 10% lift equates to an annualized return on your assets of 120 percent. If the vehicle takes 60 days to sell, Retail Remarketing™ would achieve a 60 percent annualized return. Stretching time to sell even further, if the vehicle takes 90 days to sell at retail, you’d still achieve a 30 percent annualized return. From a pure ROI perspective, a vehicle would need to take many months to sell before the financial benefit of the retail channel fails to deliver a meaningful return relative to wholesale.

Another benefit to remarketing at retail, regardless of vehicle liquidity, is that retail allows you to access a much larger buyer base than the wholesale channel. In the auction environment, you’re typically exposing your vehicles to approximately 50-100 wholesale bidders. In the retail environment, you’re advertising your vehicles to retail consumers nationwide, bringing thousands more potential buyers to your vehicle and enhancing your chances of a satisfactory sales outcome.

  1. Reconditioning Needs

The reconditioning element in the retail versus wholesale decision is relatively straightforward. If your vehicle has significant mechanical or cosmetic issues, it’s probably not well suited for the retail buyer, who has high-quality standards and generally does not want to perform the work themselves. So, what qualifies as significant? Typically, vehicles with a standard condition report of 2.5 or above may be well-suited for the retail channel, whereas vehicles below 2.5 likely make more sense for the wholesale channel. In an upcoming column, we will discuss the reconditioning topic in much more detail.

Special consideration for fleet management companies

One important factor in the retail vs. wholesale decision that is specific to fleet management companies is the type of lease on the vehicle. On a closed-end lease, the fleet management company will reap the full financial benefits of retailing that vehicle for a higher profit.

On an open-end lease, however, the financial benefit to Retail Remarketing™ is either shared with or accrued only by the leasing client. With open-end leases, the fleet management company must educate their clients on the ROI associated with Retail Remarketing™, as they will need to understand that the higher sales proceeds may come with longer days to sell.

Offering open-end lease clients the opportunity to remarket at retail provides the fleet management company’s sales team with an added benefit that increases sales conversion.

Takeaway: With the emergence of Retail Remarketing™, remarketers now have options to maximize proceeds

Until recently, remarketers that don’t operate their own retail stores have been unable to access the retail market for their vehicle sales. With the growth in Retail Remarketing™ options through services such as CarLotz, Shift and other online channels, however, remarketers are increasingly incorporating the retail channel for their end of cycle units.

Most remarketers view proceeds as a key driver behind their remarketing decision, so Retail Remarketing™ has a growing presence in remarketing portfolios. That said, speed of sale, reconditioning, and lease type can play an important role in the remarketing decision and ultimate portfolio return. Evaluating each of these factors on a vehicle by vehicle basis is a critical exercise for remarketers who are seeking to maximize the overall return on their remarketing portfolios.

Posted in Retail Remarketing