The Foundation of the Special Finance Department

The Market is Growing - Are You Ready For It?

A self-fulfilling prophecy, a term coined by sociologist Robert Merton, is a prediction that directly or indirectly causes itself to become true, by the very terms of the prophecy itself, due to positive feedback between belief and behavior. This self-fulfilling prophecy  has plagued the special finance departments of auto dealerships for years.

In the second quarter of 2008, the special finance world as we knew it then was rocked. Due to a severe tightening of the capital markets, growing unemployment, and impaired collections due to sloppy underwriting, dealers and managers suddenly found it increasingly difficult to structure SF deals for approval. As finance companies reduced originations (AmeriCredit by 50,000-plus deals per month, for example), the cry became “the special finance industry is dead.”

Some department managers self-prophesied themselves out of a job. After convincing their senior managers and dealer principals that SF was no longer viable and finance companies were not willing to finance the subprime credit customers, their positions were easy to eliminate as dealerships were looking to trim expenses in a declining market. Management didn’t believe SF would work, and guess what? The prophecy became self-fulfilling.

To be certain, the market did become tougher, but tougher isn’t out of business. You have heard me say over the past 12 months that the market had become so easy in 2006 and 2007, a trained chimpanzee might well have been able to get a subprime credit customer financed. Available software such as DealerTrack’s SalesMaker made certain elements of SF, such as application submission and vehicle selection, so easy that virtually anyone could do it without thinking.

For sure, SF isn’t rocket science, but it isn’t just point and click. Technology made it so easy that during the boom times, dealers and managers didn’t have to think much about the customer, the deal or how to put something together that made sense for all parties. Many departments and managers  created in the past four or five years simply did not have to learn the importance of gaining the information behind the application to turn digitally-transmitted data back into people in the minds of credit managers, in order to help them make better decisions. In short, the industry was “dumbed down.”

Dealers became convinced that SF had gone away, and focus or emphasis on it waned. In short, SF failed not because there was a lack of subprime credit customers or finance companies that would make a deal, but because the very first of my 10 Critical Components to SF Success was missing—Commitment.

Just as I have written at two other points in time over the past 12 years, I once again am here to tell you that SF is alive and well. I work with too many dealers who have indeed maintained or grown their SF volume over the past 12 months, as well as their gross profit. What was their key to success? Commitment. When the market got tough, they had a choice—to either sharpen their focus or let it fade. I wrote a year ago that those who survived would thrive. Those words are never truer than they are today.

While today’s economic situation may be unique, this isn’t the first time we have been down this path. I have continually stated that 80 percent of the nation’s dealers have been actively engaged in special finance at some point in time. For one reason or another, only one in five dealers remain active today. The remainder left the market for a sundry of reasons, most all tied to lack of commitment.

What has caused the lack of commitment? Again, a variety of reasons. Maybe the wrong person was hired or promoted. Maybe you went through the time and effort to ramp up a department and the person heading it left for greener pastures, leaving you to fall back to square one. I believe the single biggest reason dealers lose their commitment is because it is the largest profit center a franchise dealer has that does not appear on the factory financial statement. If dealers realized or had an easy and a constant reminder of what their SF department really meant to their bottom line, there is no way they would abandon it.

Why is commitment so important? While we aren’t talking rocket science, I have never seen a SF dealer or department excel without all 10 Critical Components in place. Whether it be the all-important inventory (which has been extremely volatile over the past year), searching for and partnering with the necessary finance companies, or doing what is necessary to drive traffic, it all takes commitment. Keeping personnel focused to quickly fund deals requires commitment. You get the point.

We have just witnessed the largest single purging of the U.S. auto industry’s retail market. Not only does that mean the redistribution of the market share for new vehicle sales and service, but it means the same for used vehicle sales as well. Assuming that the majority of franchise dealers recently phased out sold more used vehicles than new, it is quite possible that the dealers being terminated retailed over one million vehicles in 2008. With the majority of SF sales being pre-owned vehicles, it would mean that market share of SF is about to shift significantly.

With the purging, it is also time to look forward, not backwards. We are past the bottom of the market and moving into the summer selling season. It is time to remember why you entered the SF market to begin with. It is time to commit the people and the resources necessary to take advantage of the opportunity presented by this shifting market share.

If you still are not convinced, think this through with me. Compared to today, one year from now, do you think there will be more or fewer people with damaged credit than today? Given the current unemployment rate and the fact that the manufacturers just added another 100,000 people to the unemployment rolls by closing their retail dealers, there is only one possible answer. Look ahead even further; will there be more or fewer people with subprime credit in three years? What about five?

If you believe consumer credit will worsen and you haven’t made the commitment to restart or re-energize your SF efforts, you are essentially making the statement that you are resigned to losing market share. If you don’t have a good solution for converting a SF customer today, and more of your future customers will have subprime credit, then how do you intend to maintain market share?

The benchmark SF total deal gross profit is still well north of $2,500 per deal. If your store is delivering 100 new and/or used units per month without the benefit of a focused SF effort, and just 10 percent of your customer base becomes subprime, the lack of commitment would mean 10 fewer deals per month and $300,000 less in gross profit in one year.

It is far easier for a dealer to rationalize why their efforts in special finance have failed than it is to fix the problem. It is often difficult to admit one’s own failures. Even if that isn’t difficult, the task of identifying and changing the issues that caused them in the first place is.

Don’t let another month pass having allowed something else to be more important. The subprime customer and the SF industry are both alive and well. Make the commitment to lead the market, and make sure that market share shifts towards you. You will be handsomely rewarded when it does.

Until next month,
Commit!