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Special Finance Benchmarks Drop as Finance Companies Tighten Programs

2008 has proven to be a tumultuous year in the special finance industry. Finance companies that serve the industry have found the capital market very challenging, as Wall Street investors have turned up their noses at anything that includes the word “subprime” since the debacle in the mortgage industry.

As a result, the industry has seen significant players such as HSBC and Triad exit the market, and others such as AmeriCredit and CPS have drastically cut their originations. Finance companies as a whole have tightened underwriting guidelines, reduced advances, increased fees and raised interest rates. In addition to all that, approval rates have dropped and dealers have found it increasingly difficult to maintain traditional conversion rates.

At the recent 2008 Special Finance Convention hosted jointly by Auto Dealer Monthly and Special Finance Insider, the industry benchmarks for the current year were announced. Over 20,000 transactions from reporting dealers were analyzed by Greg Goebel Training and Consulting, including the periods of March through July 2008, and for the first time since SF benchmarks have been calculated, the target numbers have fallen. And they have fallen substantially.

Benchmarks differ from averages in that they represent the 75th percentile of all dealers, rather than 50 percent as represented by averages. By definition, one in four dealers will meet or exceed benchmark levels and three out of four will fall below them. Furthermore, elite performance represents the top 10 percent of all dealers.

Benchmark conversion rates – the percentage of deals funded compared to the number of leads received – have held fast for over a decade, fluctuating a tenth of a percentage point or so above or below 17 percent, which translates to one out of every six leads/ups received. That has all changed. Tighter finance company criteria combined with some falling lead quality has pushed down conversion rates of all leads and ups to just 13.1 percent, or essentially one out of every eight.

Formerly, it would have taken six leads/lot ups to set three appointments, with two winding up at the dealership and one ultimately resulting in a delivery. In 2008, that ratio has now become 8-4-2-1, with eight leads/lot ups becoming four appointments, of which two (actually slightly less) ultimately present themselves in the showroom and one is delivered.

Deal gross profits have dropped as well, and the disparity between franchise and independent dealers has grown due to a significant decrease in the number of finance companies willing to do business with independents.

When discussing gross profits – whether front-end (the amount of gross profit resulting from the sale of the vehicle, including any dealer or documentary fees) or back-end (includes gross profit from the sale of products in the finance office and finance reserve) – all amounts discussed are those listed on the financial statement. This means any soft packs (soft charges that are used to reduce payable commissions but are not actually charged to the inventory value of the vehicle) have been added back to the deal, resulting in the gross profit actually shown on the financial statements.

Front-end gross profits for franchise dealers have fallen in 2008 to $2,215, down $410 from 2007 levels, or 15.6 percent. Independent dealers, who have traditionally enjoyed front-end gross profits on par with franchise dealers, have felt even more pain as the benchmark for front-end gross has fallen to just $2,121, down $504 (19.2 percent) from 2007.

Back-end gross profits for both franchise and independent dealers have fallen as well. Benchmark back-end gross profits for franchise dealers are comprised of $230 in finance reserve and $415 from all product sales for a total of $645, down $140 from 2007 levels. Independents have dropped to a total of $588 per deal, comprised of $195 from finance reserve and $393 from product sales.

Combining the front-end and back-end gross profit for total deal gross profit benchmarks leaves franchise dealers with total deal gross profits of $2,860 per deal and independents with $2,709. This is a significant change from last year’s total of $3,410 for franchise dealers and $3,345 for independents, or a drop of 16.1 percent and 19 percent, respectively.

Even more telling are the grosses of the elite dealers. Prior to 2008, dealers performing in the upper 10 percent of the industry averaged slightly over $4,000 per deal. This year, those same dealers are struggling to top $3,000 in gross profit per deal.

What all this means is that for every 100 SF leads in 2007, a franchise dealer operating at benchmark performance could expect to sell 17 vehicles with a total SF gross profit of $57,970. Comparing 2008, the difference is staggering. For every 100 SF leads, benchmark performance is now only 13 sales at a total SF gross profit of $37,180—a drop of over 35 percent!

There are some dealers who have been able to maintain volume, but generally, it has been the result of a significant increase in marketing and advertising budgets. Ad spends have increased, since 130 leads are needed in 2008 to deliver as many vehicles as 100 leads did in 2007.

Advertising spends suddenly have begun to near the $400 per car threshold. The mark for franchise dealers is now $369, or 12.9 percent of the total SF deal gross profit, and independents are at $385 per SF deal, or 14.2 percent of total deal gross. The leading contributor to rising ad cost (per unit sold) is the lack of proficiency in turning leads into actual dealership visits.

Historically, benchmark performance meant 33 percent of the leads received would turn into actual dealership visits. Over the past 12 months, for appointments requiring outbound calls, the show rate has dropped to just 17 percent, almost half of the historical average. Whether it is due to pre-qualifying the leads, calling techniques or poorer lead quality, the sudden inability to get the customer into the store has driven the advertising cost per sale up nearly 33 percent.

In the same vein, while it hasn’t directly impacted advertising costs, it is taking more and more effort to reach leads requiring outbound calls. The benchmark has become 9.5 dials to reach the customer for the first time. While this hasn’t driven up ad costs per se, it can cause a ripple effect. Frustration and decreased motivation in those making outbound calls could affect their performance in setting appointments. If they are expecting voicemail or no answer when they make the call, their handling of the call could be impacted when they actually reach a customer. That could result in fewer shows and some dealers will think the answer is to simply purchase more leads.

If there is any good news for dealers regarding expenses, it is that compensation as a percentage of gross remains basically the same, since most compensation plans are generally set up as percentages. The bad news is the SF department managers are likely feeling the pinch as the departmental gross profits fall.

Certainly, 2008 has seen unprecedented events on all fronts. For the finance companies, a faltering economy with underemployment on top of some loose underwriting put extreme pressure on their collectors. The capital markets reacted and the finance company programs scaled back, shifting to lower advances, higher rates and most certainly, tighter underwriting. Finally, with skyrocketing fuel prices, customer demand has softened and taken a 180-degree shift toward fuel-efficient autos.

It is unlikely there will be a quick recovery to reverse this down cycle. Nonetheless, special finance is not going away. This current ebb tide simply means that dealers must be prudent to maximize every opportunity and not lose sight of their fundamentals. While the historical ROI of the SF department may not be present, the gross profits forced to the bottom line still remain very, very valuable.

Until next month,
Great selling!

Vol 5, Issue 9

Originally posted on Auto Dealer Today



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