The more things change, the more they stay the same. Whether it has been in my Special Finance seminars, or in my AutoDealerDaily.com e-mail box, questions and issues with inventory never cease.
Gasoline prices are nearing $4.00 per gallon. Value pricing on domestics is causing wholesale price on used vehicles to fall faster than an express elevator. All in all, it has caused great consternation among many dealerships.
“What works?” the queries come. Other questions include “What should we be buying?” “What will stay ahead of the book?”
While the questions are different, the same issues come from seminar attendees – talented SF managers – struggling with average deal gross profits that are well below the industry benchmarks. Dealers and SF Managers aware of this fact, look for the magical lenders or techniques to add the additional $1500 to $2000 per deal. I often get the deer-in-the-headlights look when, after asking a couple of questions, I say, “It’s your inventory.”
The fourth quarter of each calendar year always is a challenge in the Special Finance department. The most obvious reason is the approaching holiday season. Buyers that often do not have credit cards, or at least any room left on them, are strapped for the necessary cash to put down on vehicles. No down payment equals no deal.
The other issue that occurs in the fourth quarter is that dealer inventories typically are in the worst shape of the year. The freefall of the wholesale market (which happens every year) somehow always manages to surprise all but the elite of stores. Used vehicle inventories bloat, the book falls and when dealers should be buying, they are trying to work their way out of a jam. That jam can be exacerbated if the dealers have been holding current year used vehicles, which they had been using for “like-invoice” deals, and then get stuck with them when they finally appear in the book.
This year, it is compounded by escalating fuel prices making buyers suddenly more gas mileage conscious. So what is the answer? It’s pretty much the same that it has always been.
Consider that 80 percent of all funded special finance deals still fall below $400 per month. That leaves 20 percent above that threshold, however if you are trying to sell the majority of your vehicles above that threshold, you find yourself boxed in by payment calls. As I always say, it is like trying to put a size 13 foot into a size 8 shoe. Something has got to give.
$400 per month, over 72 month at 20.0 percent APR is roughly the equivalent to selling a car for $14,000, along with the sales tax, license and title, and a total of $2000 back-end products, with $1000 down. That means to achieve the benchmark SF front end gross profit, you cannot own the vehicle for more than $11,400. That, along with the F&I profit on the back end, will give you a $3500 total deal. What happens when the selling price gets north of $14,000? You start to get boxed in by payment calls.
The solution, vehicles in the $7,000 to $11,000 price range, under 50,000 miles or at least with few enough miles to be able to stretch out the term without having to buy it down. These are vehicles you can sell at maximum advance, plus full back-end, and still keep payments at or under $400 per month. The sweet spot for top SF dealers – the average ACV that their SF inventory runs – is just under $10,000. Sure, they have more expensive vehicles, especially when they are working with current year models and like-invoice, but it doesn’t dominate their inventory.
Now let’s move to the folks that are getting caught with a glut of inventory and the falling book. A quick check of Manheim Market Reports show that over the last 90 days, vehicles owned for more than $15,000 have had significantly more depreciation than those owned for $10,000 and under. A 2004 Ford Taurus has had its Manheim average transaction prices drop by roughly $200, while a 2004 Ford Explorer has experienced a $1600 decline. The NADA book has fallen commensurately. The bottom line, the less expensive units that you inventory, the less apt you are to get hurt by the annual Fall slide.
Finally, you can just keep less inventory in general. Many people feel that if they are operating with a 45 day supply of vehicles, they are doing a great job. Yes, that is the benchmark for retail inventory, but I assure you that the elite SF players are operating with closer to a 30 day inventory level.
One of my 20 Group members – operating on the outer edge of efficiency – absolutely freaks out if their inventory reaches a 27 day supply, usually operating closer to a 22 days. They delivered nearly 140 SF units last month, and had about 45 on the ground to sell when I spoke to him early in September. Granted that may be a bit thin, but I assure you, with the glut of used vehicles available, it is much easier for them to buy in a soft market, than to go the other direction. Oh yeah, his grosses averaged well over $4000. This isn’t brain surgery, it is simply discipline.
For years I have preached how important inventory is to Special Finance. It is even more important this time of year! It is during the 4th quarter of the calendar year when the elite SF dealers show their mettle. I challenge you to be one of them!
Vol 2, Issue 10
Auto retail veteran and F&I products expert Paul McCarthy has joined AUL Corp. as vice president of national sales.