The Subprime Element

In the Ray Laks Family of dealerships, subprime business has been a factor for years. In 2001, Terry McCormick, the current general manager of Ray Laks Mitsubishi, was brought in to spearhead the implementation of a subprime department in Ray Laks Mitsubishi in West Seneca, N.Y. In the first six months of business, the department retailed an average of 15 to 20 subprime units per month.

Three years later, the department was regularly retailing 50 to 60 subprime units per month, and Dealer Ray Laks saw potential for a second subprime department. In 2004, McCormick opened another subprime department at the Ray Laks Acura store just 10 miles away.

Over time, the group created a reputation for being able to help subprime customers through a strong referral program and consistent advertising. Now, they’re regionally known for being able to help people with less-than-perfect credit get into a new car. McCormick said the Mitsubishi location, which is a rather small store, is the largest subprime dealer in western New York. Between the two stores, Ray Laks retails between 70 and 80 subprime units each month; for the calendar year 2007, the group retailed 920 SF units, an average of 76 cars a month.

Around the dealership and region, the Ray Laks special finance departments are known as Ray Laks Resale North (the Acura location) and Ray Laks Resale South (the Mitsubishi location). Both locations have a separate, dedicated special finance sales force and a SF manager.

The South location, also the flagship SF location, is managed by McCormick and does about 70 percent of the group’s subprime business, usually selling between 49 and 56 SF units per month. Currently, there are five people in the SF sales force at this location.

The North Resale store, which is located in Williamsville, N.Y., sells the remaining 21 to 24 special finance units. Since McCormick also performs duties as the GM of the Mitsubishi franchise, this location has a special finance manager, along with three dedicated SF salespeople.

Local Branding at its Best
When it comes to advertising that generates results, Ray Laks’ Resale locations have branded themselves quite well in their community. Generally, radio spots and referrals generate the most business. According to McCormick, who has advertised the store’s special finance department since it’s implementation, the dealership’s SF advertising had been “pretty consistent month-in and month-out” with local advertising. He works with a local, urban radio station and gives the station an annual budget that they break down monthly, so the dealership commercials are on the radio on a regular basis.

Also, McCormick set up a referral program to present to subprime customers after they’ve purchased their vehicles. “We have a big referral program here … when the customer leaves, we give them business cards and coupons to refer a friend.” Initially, it spawned a few sales a month, but it grew over the years, and McCormick estimated that 25 percent of all subprime sales are now credited to the dealership’s referral program.

Another contributing factor to their SF sales totals is the dealership’s 30-second television spots. McCormick and his team work with a local television station to produce their commercials. While they come up with their own ideas, they work with the same TV station and camera guy every time to “keep the same feel” and present a “consistent message” in every ad.

Ray Laks Family of dealerships also generate quite a few leads from their family of Web sites. McCormick estimated their sites generate approximately 100 special finance leads per month, and these are quality leads that have filled out online credit applications. His Web site subprime leads close much better than the prime leads submitted on their site. Between both Resale departments, they close about 30 percent of special finance leads that are generated from the online credit applications.

The most recent addition to the Ray Laks Family of Web sites is the site It was launched in early May and is now being included in the dealer group’s advertising with hopes of driving more business – both prime and subprime – to the store via the Web. McCormick, who came up with the concept in early spring, said, “We just launched the actual Web site, so we’re just tweaking it right now. We’ve been getting a lot of hits.”

One thing the Ray Laks Resale locations don’t rely on is third-party leads, which is something many SF departments work with fervor. McCormick said, “We have [purchased third-party leads] in the past, but we haven’t had great success. We find advertising in the local market [to be] much better.” Neither location has a business development center (BDC) or call center; instead, both rely on a switchboard to handle and direct all calls to salespeople and other departments.

All in all, McCormick keeps his advertising cost per sale down in the subprime departments. He said, between both stores, he contains the advertising budget to about $20,000 a month, well below data reported by NADA. According to 2008 NADA Data, franchise dealers selling between one and 149 units per month spent, on average, $25,480 a month on advertising for the calendar year 2007.

Experienced Inventory Buying
Sometimes experience reigns king in this industry. McCormick has two used car managers with extensive experience in buying inventory, particularly inventory to meet the needs of his subprime customers (and the parameters of the subprime finance companies).

McCormick said his two used car managers “are constantly on the road purchasing vehicles, especially for the subprime market. Plus we take in whatever we can on trade.” He added that his buyers keep an out for specific that are selling well in the subprime market.

They do have certain mileage restrictions and, of course, look to keep the vehicles they purchase at auction back of NADA book. “They’ve been doing that for a while and [know] what’s hot at the auction,” said McCormick. He added that his buyers also look to places like Enterprise, which is known to have late-model, low-mileage vehicles, to stock the Ray Laks Resale lots.

Another avenue the buyers travel is the information highway online. McCormick estimated the buyers purchase about 25 percent of the dealership’s inventory via online auctions. He added that the dealer group is looking to increase the amount of inventory purchased through online auctions.

Surviving Market Changes
Currently subprime business has been strained due to the current state of the economy. McCormick said, “It’s affected out sales. What we’re having to do is kind of switch gears a little bit … because of the tightening up of the purchasing policies of the banks. It’s affecting everyone.” Before finance sources started getting leery of the subprime market, McCormick and his subprime team had over 20 finance sources to turn to when working SF deals. Now, he currently uses about 12 finance sources to make subprime deals happen.

He continued, “There seems to be two types of lenders right at the moment. One is the lender that you need a lot of money down – $4,000 or $5,000 down … the other [type] is looking towards people that have a couple of problems in the past but they haven’t had the repossessions and the bankruptcy. So we’re gearing our advertising towards that a little more, to—what we call … the semi-subprime.”

“At the moment, we’re exploring every single avenue for subprime … We’ve got to leave no stone unturned,” explained McCormick, who’s specialized in the subprime market since 1996. He said, as far as financing practices go, “I think the most radical changes I’ve ever seen in the business have been in the last four or five months.”

While tough times have affected the number of lenders Ray Laks Resale locations have to choose from, the good news for McCormick and his crew is that their SF sales totals have remained steady with last year’s average of 76 units. Perhaps the referral program and consistent local branding of Ray Laks is paying off.

Special Finance Insider Vol. 2, Issue 4