Connecting the Dots
Finance Companies Concerns Mean on-Target Inventory is RequiredSuddenly it became crystal clear. Well, maybe not crystal, but for the first time in a long time, I really get it. I understand the special finance landscape from many of the finance companies’ perspectives, which also gives me a leg up on trying to help give dealers better guidance.
I recently spent what seemed like a year in New Orleans during the 2009 NADA Convention. I attended the convention as I always do with two goals in mind. First, it is the only time of the year where a number of our all-important advertisers are together in the same place so it gives me the opportunity to walk the Expo floor and thank them for their all-important advertising buys. Without them, there are no magazines. The second focus is to spend as much time as possible with the auto finance companies that are focused on the special finance space.
This year, probably due to the lack of dealers in attendance, I was afforded about 12 hours of one-on-one time with the executives of Capital One, Chase Custom, CitiFinancial, Drive Financial and Westlake Financial. First, this was a treat, as in some cases it meant free food and/or drinks. But much more importantly, it gave me a chance to understand their predicaments caused by the economy, shareholder pressure and market uncertainty. The flight home gave me a chance to assimilate all the information and reinforce my game plan. Since in most cases I am not at liberty to divulge specific comments, I can say that all parties certainly helped shape my understanding and any comments following are not tied to any specific person.
My first takeaway is that the SF industry is blessed by some very talented individuals. I have no sense whatsoever that the Peter Principle has taken place where management has risen to their highest level of incompetency. They get it.
Next, with differing ownership, domiciles and capital sources, there are different pressures or opportunities for each company. However, at the end of the day, these decision makers must all coordinate their teams, review their analytics, set forecasts and budgets acceptable to their boards, then find a way to ensure the plan is executed to achieve the needed results. Simple, huh?
What didn’t dawn on me throughout all these years is that unless these individuals have compensation clauses that reward them significantly for achieving their plan – besides ongoing employment – they live in a very different world than that of the entrepreneurial auto dealer and the incentive-driven compensation plans that permeate dealerships. Basically, what I am saying is that to rise to the level that these individuals have achieved is no small task. Their situation is different than that of a dealer or SF manager who gambles thousands of dollars on an ad campaign or buying leads; that dealer or SF manager can at least expect direct and tangible results of some kind.
I spoke with one exec about subprime used car leasing. It is something that I have felt was viable for over a decade, even back when I was getting paid to sit on a SF company board of directors. (Why I feel so is a totally different column.) In any case, the one company that comes to mind that currently does this is AutoTrakk. I was sharing this thought with one of these execs when they pointed out that not only did my comments make sense, but they had actually considered it. There are obstacles involved. First, it would take selling up the money chain. This chain kicks outside the auto finance company side of the conglomerate and goes to the big suits sitting on Wall Street. If they are successful in selling it, they must guarantee it performs as presented. If it doesn’t, you see the end of a stellar career with the company, along with the well-deserved income, the health benefits, retirement, et al. I asked, however, what the reward would be if it worked as anticipated. The answer was a pat on the back, maybe a small year-end bonus increase and encouragement to “Keep it up!”
Having lived in the entrepreneurial world my entire life, one forgets that this is the way of corporate America. After thinking about it, how on earth could I blame them? As I said, I really respect these individuals and their career accomplishments. Every dealer looks at risk/reward when he or she buys or trades for a used vehicle. You don’t overpay or over-appraise without direct consequences. In that light, how can you possibly blame execs for erring on the side of caution to protect themselves – especially in these days where the banking and finance sector are under intense media and government scrutiny?
In another light, one exec pointed out something to me that I am sure holds true throughout the industry. In relating it back to my BHPH operation a decade ago, it made great sense. The finance company has a comfort level of risk assigned to every deal. Pick a number (they didn’t put one on it), but just say it is $7,000 per deal. I pick that because if a deal is based on a vehicle with a $10K average trade, the finance company advances 110 percent plus tax, license and back-end product, the dealer bought the vehicle for $9K and the customer had a $1K down payment, the end amount financed would be around $14.5K. If that contract defaulted immediately, the vehicle would be lucky to net $7,5K after the repossession costs, reconditioning and auction fees.
How that relates to you is that with the wild fluctuation in auction prices over the past 12 months, what the finance companies are trying to do by adjusting advances (among other things) is maintain or reduce that risk. They certainly understand and expect the dealer to make their money, but the finance companies have to be comfortable with their level of risk. With known risk, you can price virtually anything. The problem today is that it is increasingly difficult to forecast risk, which makes pricing a deal a whole new animal, hence the swings (usually downward in recent times) of the finance programs available.
So, why do I offer these over-simplified discussions? To help dealers and SF managers to better understand their environment. A better understanding allows better decisions on the part of dealership employees and thereby better success.
To be sure, there are many dealers having success in this environment. Yes, they are the elite organizations, but it just goes to prove that the talented can achieve in any market. It also reinforces the fact that if you really want to take advantage of the SF market in your area, the rewards are still worth the efforts. You simply must have a plan. That first plan needs to revolve around your inventory.
Those of you who have been reading my writings for years know how important I feel proper inventory is to the success of SF. It is more so today, yet I talk with dealers every day who still just don’t get it. I have been saying for months that this is the time to be nimble with your inventory—very nimble. You need no more than a 30-day supply. You do need to know what the credit demographics are for the customers who have been coming into the store, and which finance companies will finance them. Define them by tiers, determine what percentages of your customers fall into each of those tiers (that are approvable) and then buy your inventory to fit those programs and maintain it there. Don’t change it unless you are able to move your available customer base up- or downstream, or suddenly a finance program becomes available (or goes away) that changes the available approvals.
By doing this, you will most likely see you don’t need a slew of $14,000+ vehicles. Most often, this process becomes an eye opener as to why you may be having trouble structuring deals that yield approvals at acceptable gross profit levels. Usually I find it is the combination of vehicle and deal structure that keeps deals from getting approved.
What I don’t want to hear is that you can’t find the inventory. That story is as old as the hills. When someone makes a true commitment to find the appropriate inventory, it is amazing how quickly it can happen. It is uncanny how one dealer can claim the inventory, purchased at the right price, is impossible to find yet the dealer a half mile away can buy it all day long. It is available!
The business has changed. It has gotten tougher – much more like it was 15 years ago. Finance companies and banks are reviewing their positions every day. Are you? The question to ask yourself is, if the industry has changed, what have I done to change with it? Start with your inventory and make sure it is spot-on. You will be amazed at the difference it makes in putting deals together—and not just SF deals.
Until next month,
Swapalease.com’s latest report show U.S. lease approval rates improved slightly to 70.9% in October following a 3.9% dip in September.