CARMEL, Ind. -

KAR Auction Services chief executive officer Jim Hallett is bullish about the prospects for independent dealerships — not only for their retail performance, but also on the potential for these stores to acquire highly desirable off-lease vehicles coming down ADESA’s lanes.

Hallett made his assertions earlier this week when KAR released its first-quarter financial report. He referenced data from CNW Research that indicated independent stores sold more than 1 million vehicles in March alone, and their first-quarter retail sales total climbed 4.8 percent year-over-year, more than what was generated by franchised dealers and private-party transactions combined.

“We hear a lot about the franchise dealers and the number of (certified pre-owned) sales that are taking place,” Hallett said. “I would point out that let’s not take our eye off the independent used-car dealers.”

Hallett continued to reference independent dealers when he mentioned growing off-lease volume, which the company thinks will steadily rise as the year unfolds. He thinks that volume will expand to a point where not all off-lease units will end up either at the grounding dealership or in private-label sales available only to franchised stores.

“We spent considerable time talking about the increased supply causing more off-lease vehicles to get to the physical auction, and we do expect that this will occur throughout the balance of the year for a couple reasons I’d like to point out,” Hallett said.

“No. 1, we’ve said that franchise dealers won’t be able to handle all of the volume that’s coming their way,” he continued. “And I want to make sure that we understand that I’m not suggesting for a minute that the franchise dealers aren’t going to buy as many of these cars as they have in the past. In fact, I could suggest that they may even buy more of these vehicles.

“But when you look at the total number of vehicles that are going to arrive off-lease, I believe that, ultimately, these franchise dealers will reach a capacity where these vehicles will eventually make their way to the physical auction,” Hallett added.

The KAR boss explained his other reason was connected to ADESA’s Tom Kontos and other industry experts projecting that end-of-lease residual values will exceed market values for the foreseeable future.

“I think that more of these dealers will pass the car at the point of being grounded to the point that they will go into the funnel. And as they work their way through the funnel, more will eventually get to the physical auction,” Hallett said. “So with that said, I think we'll just have to wait and see how that plays out over the next few months.”

And what might happen during those next few months could be positive for dealerships, especially independent stores, according to Hallett.

“The franchise dealers that population isn’t growing. There’s only so many franchise dealers in the country. I believe that they can only handle so much volume, and at some point, they reach capacity,” Hallett said.

“As you know, those cars go into the closed environments first, and that’s where your franchise dealer primarily buys these vehicles,” he continued. “Then I think what will happen is those cars are going to going to the open online sales. When you go to the open line online sale, you go from just those franchise dealers and you add 37,000, 38,000 independent dealers who are now eligible to buy those cars in an open online sale.

“Then obviously, when you get to the physical auction, again, that vehicle is now available to all those independent dealers, as well. So that's a long way of confirming that, yes, I see more independent dealers getting to more of these off-lease vehicles,” Hallett went on to say.

So when should independent dealers who use ADESA auctions begin to see more off-lease vehicles in the lanes?

“I think the indication is going to come here in the next 60 days or so that we’ll start to see what percentage eventually makes their way to physical and what percentage are being bought by independents,” Hallett said. “I do believe that once these vehicles do get to the physical auctions, there will be a higher percentage of those vehicles being bought at the physical auctions by the independent dealer.”