ADESA pushes virtual business: Carmel firm expands Internet car auctions

As rituals go, bidders at wholesale auto auctions have a lot in common with scouts for baseball teams who troll the fields for prospects.

These old salts of their trades often can be spotted in baseball caps that cast a shadow over droopy-but-keen eyes. A toothpick twitching in the corner of the mouth belies a mind focused intently on its prospect-whether it’s a pitcher on the diamond or a Pontiac puttering down an auction lane.

“You pick up paint damage, mismatched tires, mismatched wheels,” said Gary Chandler, general manager of Jim Hadley Chevrolet in Madison.

But an increasing number of car-dealer scouts are doing what would be unthinkable in baseball and to some old-timers in the car auction business- acquiring prospects over the Internet.

Carmel-based Adesa Inc. said about onethird of the lanes at its 39 wholesale auctions nationwide, including its giant Plainfield facility, are equipped for online bidding.

Its online bidders typically are car dealers sitting at desks hundreds of miles away. They can’t see the orange-peel-look of a bad paint job or smell the interior of a smoked-in Subaru.

Still, roughly 7 percent of vehicles passing through those Internet-wired lanes now are purchased over Adesa’s “LiveBlock” Web site, according to the nation’s largest publicly traded wholesale vehicle auction.

Adesa plans to take LiveBlock to the next level during the second quarter, when online bidders will be able to simultaneously bid on vehicles at many of the company’s U.S. auctions.

Today, online bidders are able to access only one auction at a time.

The new format will allow an online bidder to tap into as many as a half-dozen simultaneous auctions. Video images will be splayed across the side of the screen showing cars rolling down lanes at each auction, whether a Mercedes in Phoenix or a BMW in Dallas.

The number of auctions in which a bidder can participate will be limited largely by the auction schedule and one’s ability to multitask.

The software is free to dealers and other Adesa auction customers.

Company executives declined to disclose sales of vehicles sold over the Internet since the site was launched last year, only that it amounts to a sliver of total Adesa sales, which totaled $228.5 million in the third quarter.

“Fee income is very insignificant at this time,” said Roger Laurendeau, director of ebusiness for Adesa.

Rather, the company said, the benefit from online bidding is likely to come in the form of higher auction prices. The more a vehicle fetches at auction, the bigger increment Adesa is able to collect in auction fees.

“It’s all about eyeballs on cars,” said Tom Kontos, the company’s vice president of industry relations and analytical services. “The more bidders you have on any product, the more the likelihood you will find that one bidder that is able to pay the highest price for that unit.”

Many of the vehicles at Adesa auctions come from rental car and corporate fleets.

For some dealers looking to pick up cream puffs for their used-car lots, online bidding has been a time saver-especially for dealers in smaller cities.

Hadley Chevrolet’s Chandler said his crew would spend an entire day driving back and forth from Madison to Adesa’s Plainfield auction, not to mention the cost of gas and wear and tear on the car.

“We bought nine cars yesterday,” he said recently. “It’s just a lot more economical for us.”

Buyers have the vehicles shipped to their lots or can pay Adesa to have them delivered.

Chandler said the online descriptions of vehicles could be more revealing than what one of his scouts might spot. The LiveBlock description of a car to be auctioned at Adesa’s Cleveland auction, for example, listed exterior damage: “Front bumper cover chipped less than 1 inch; front hood previous repair; front roof dent 1-3 inches; front windshield pitted.”

Other dealers say Internet auctions are better suited for supplemental purchases of used cars.

“Our preference is, when possible, to still go to a live sale,” said Tom Martin, owner of Bloomington Ford. “We’re picky about the cars we buy.”

Missing a defect in a car can come back later to bite a dealer. A discerning consumer on a used-car lot might not be willing to buy a car with a cigarette burn in a seat, at least not without a big discount.

Martin said his confidence in online bidding depends on accurate vehicle descriptions and how well auction firms recondition the vehicles. So far, “[Adesa’s] cars have been as advertised. They’ve done a good job of reconditioning. That’s key when you’re bidding. You’re a little bit blind.”

The auction company claims its highspeed Internet site has an average time delay of one-quarter of a second.

It also has applied the technology to its salvaged-auto auctions, the difference being that many of the cars are wrecked and can’t be driven through auction lanes. So during an auction, a van equipped with a wireless camera zooms up to the vehicle and feeds the signal back to the Internet.

Adesa executives won’t say what the company spent to acquire the Internet bidding system from a Canadian firm.

Use of online bidding is greater in Canada, Adesa said, in part because many car dealers there are in remote areas.

Adesa was spun off earlier this year from Duluth, Minn.-based Allete Inc., whose holdings include electric utility Minnesota Power. As part of the separation, Adesa last June completed an initial public offering of 6.25 million shares, with proceeds of $136 million.

The shares trade on the New York Stock Exchange under the ticker symbol KAR. Lately, Adesa shares have been trading at about $20; their IPO price was $24.

In the first nine months of 2004, Adesa posted a profit of $83.4 million on sales of $706.8 million. That compares with $90.2 million in profit and $694.1 million in sales for the same period in 2003. Comparisons are difficult, however, because of the costs related to the spin-off from Allete.

But from now on, the company no longer has to send cash back to its former Minnesota parent.

“Every nickel that we generate as free cash flow, we can reinvest,” said David Gartzke, Adesa’s chairman, CEO and president.

The company’s two major sources of revenue are auction and related services, and dealer financing of purchases. Both posted double-digit gains during the third quarter-28 percent and 13 percent, respectively.

Hurting the auction industry, however, has been a downturn in the supply of lowmileage, off-lease vehicles to feed auction lanes. Adesa said that was partly to blame for a 1-percent decrease in the number of used vehicles it sold in the first half of 2004 over the same period in 2003. With many automakers in recent years granting huge cash rebates and low- or zero-percent interest rates, more new-car buyers are financing cars and are forced to keep them longer.

Gartzke said he sees that situation turning around, noting an uptick in TV commercials touting 24-month leases. Adesa is second-largest in volume of wholesale used vehicles, behind Atlantabased Manheim Auctions.