The "A" Word in Remarketing Can Be a Great Teacher
Those deep in the business will fully understand the impact of the "A" word, but those further detached may not have a clear picture or realize how valuable of a tool it can be, despite some negative connotations. However, like any tool, when used properly and for the right outcomes, you can achieve great results and be better off because of it.
Jason Herman
9/26/20235 min read
Every business has that word or term that can make people uncomfortable and may even be a bit rude to talk about in certain company. When it comes to selling used vehicles for commercial consignors, the special word has to be arbitrage or the “A word.” For every person who doesn’t like to talk about it, there’s someone who doesn’t really understand it or its potential, but let’s be real, it should be a consideration in the remarketing & automotive finance businesses and for good reason. I would argue you shouldn’t fear or ignore it, but learn to use it to better understand your business & the strengths & weaknesses of your industry partners, dealers & their best practices, & how to improve your results. Like any tool, when used properly and for the right outcomes, you can achieve great results and be better off because of its availability.
For those of you less familiar with the term & concept, let me give you the quick, high-level definition. The idea is simple, but much harder to master and use to your benefit. It basically is what we refer to when a consignor sells an asset and then it is resold, usually within a short period of time, by your original purchaser in the same or another similar wholesale channel or location. Sometimes the resale results in a gain over what they purchased it for and sometimes a loss.
Arbitrage is often measured as a percentage of what you have sold. That could be a percentage of what is sold in total and/or at a particular location or through a certain overall channel. More important than the percentage is what is the average gain or loss (keep in mind, these are gross numbers) of the arbitrage through these channels or locations, how did the resale location differ from where the asset was originally sold, and how long did it take for it to occur after the original commercial consignor’s sale. The longer it takes, the more likely that reconditioning and repairs are being done is the thought process there and the same can be said for vehicles moved long distances to different markets. A quick resale in the same location or nearby is what can be most alarming to a consignor versus one that occurs a month later and/or is moved a good distance. All of these lend themselves to learning opportunities for the consignor to either validate your current strategy is achieving what you want or provide insights into how you can improve your results by making changes to your strategy and/or your sales channel utilization.
Arbitrage is a natural part of a wholesale business and you’ll almost always have some. How much depends on many micro and macro factors. It has been around for years. In fact, I remember my older brother, who had his own used car dealership when I was growing up, talking about how he was making a living practicing it. I had no idea how it would impact me later in life, but it was interesting learning the dealer’s perspective for many years before I was even charged with remarketing vehicles for a bank. As I got older and got into remarketing, it made for some interesting debates around the holiday dinner table.
Arbitrage occurs for a couple of different reasons. Here is a brief summary of some of them:
1. It is a natural part of selling something at a wholesale price. Others will attempt to resell vehicles to other wholesale participants for more money. It happens in many industries, not just automotive.
2. Seasonality & market changes can play a part. When in a “normal market,” there are better and worst times to sell assets and it may vary by asset location or type of asset.
3. Some consignors are not into reconditioning their vehicles and just want to move assets as fast as possible (a topic for another article). Arbitraging dealers buy vehicles cheaper because they need work and they develop processes, procedures, and staff to recondition vehicles to then be resold in the same or another wholesale channel for more money as quickly as possible.
4. Not all wholesale channels have the same reach or exposure as others. If a buyer knows this and can buy in one location and resell in another with a larger audience or even an audience more in tune with the product being sold than where it was originally sold, they have the potential to profit from their expertise and the risk exposure they take on.
When I got into remarketing in 2000, there wasn’t a lot of talk about measuring arbitrage, but as time went on, it became a greater focus for all three parties in the remarketing game, consignors, auctions/sales channels, and dealers. It wasn’t always easy to obtain arbitrage data and some industry players have attempted to keep it private, as some have expressed it provides a one-sided view and can alter fair competition. For most sellers, even today, getting a complete picture of how much and where is not realistic. However, once executive leadership of banks and other commercial sellers learned of sources to obtain arbitrage and had a basic understanding, they became very insistent on seeing it on a regular basis, as it was often perceived as a measure of how much money was left on the table. As a result, many remarketers had to develop strategies to reduce it, or at the very least, explain why it may be occurring and what it would cost to reduce it.
Having 0% arbitrage is not a good thing either though, as some sales channels you can use may provide no arbitrage, but limit your ability to increase your asset values with a restrictive audience. As I said, it is a natural part of selling in a large wholesale market to have some, but there are things it can teach a consignor that they may not be aware of. Things like are we reconditioning properly, do we have the right auction lane placement & selling time, are we properly evaluating and flooring assets, does the particular auction or channel I am using to sell match up well to the preferred wholesale buyer of the product and the buyer most willing and able to compete for your particular assets, and is the channel you are using doing everything in their power to market your offerings and to develop new technology to increase your reach and resulting retentions, to name just a few important ones. It should be noted that technology improvements, like the ever-changing nature and improvement of upstream remarketing and the expanded popularity and necessity of online bidding at physical auctions, have leveled the playing field and made arbitrage more difficult for buyers. Not all technology platforms are created equal though, so you must do your research and continually verify results, nonetheless. Market factors and economic influences (like a recession or a pandemic, for example) can also dramatically alter the landscape for arbitrage to occur more or less frequently.
As I said at the onset, arbitrage is a simple concept with a lot more complicated factors to understand, and it requires expertise to make the most of it. Instead of being a taboo topic or something to ignore, I think it is an important consideration in any remarketing strategy that should be measured & the causes researched regularly. Further, if you depend on others to sell your assets, you should make sure your remarketing partners are keeping tabs on it and providing you updates on how often your product is being arbitraged and any suggestions they may have for improving your retentions with lessons learned from the data. If I can help in anyway with understanding or analyzing arbitrage and the ways you can use its teachings to better your results, please don’t hesitate to reach out. Have a great week!