Several years ago, I got into a friendly debate with Bill Wittenmyer from ELEAD1ONE. Bill had just performed a dynamic presentation on “How to Market to Millennials” at an Internet Battle Plan conference. In my trademark devilishly antagonistic Ziegler fashion, I told Wittenmyer that Millennials were the most worthless, lazy, know-it-all, entitlement-based, unmotivated generation in the history of the world. I said that most Millennials lived in Mom’s basement on a pullout sofa playing Xbox well into their 30s. Why market to anyone who doesn’t want and can’t afford your products?
I cracked up when manufacturers came up with “youth” vehicles like the ill-fated Scion lineup. Millennials didn’t buy them, but old people did, and every unit they moved represented an unsold Corolla. For several years, the factories and dealer groups eagerly hired every new-age jackleg quasi-consultant trainer with a snake oil program on how to sell and market to Millennials.
The point I’ve been making all along is still true: Millennials are just people, and they’re going to grow up and mature, as we all have. Stop trying to define a generation as if they are sideshow freaks and new-age nutcases. There was a time when you might have said I was a hippie. I remember the older generation was horrified at our beliefs, lifestyle and behavior. Guess what? We turned into them.
The latest research indicates that upwards of 78% of Millennials now own a car, and another 12% are in the market. They are also more likely to lease than almost every other demographic than superprime (780-plus) credit customers.
So the basement dwellers of the recent past are moving out, buying cars and homes, holding down jobs, getting married and raising families, and moving to the suburbs. Some of them are even grilling on the weekends. I’ve written about this repeatedly and, once again, history and current events are proving me right.
It’s the Lease You Can Do
You heard it here first: Certified pre-owned leasing is the next big thing, and you need to get onboard before the train leaves the station. This is the next hot ticket and a real alternative to high-risk, long-term traditional financing. This year, Ally Auto, BMW Financial Services and Toyota Financial Services all jumped into the game with leasing programs for CPO units.
Now that car sales have peaked and we’re entering the downhill side of the cycle, your finance sources are getting nervous. You’ve probably noticed your most dependable buyers have stiffened up and are not buying loans as deep and loose as they were a few months back. You can’t blame it all on the election. As they said in The Lion King, it’s the circle of life. When sales contract, financing tightens up. With 40 years in the car game, I’ve lived through this predictable cycle enough times to see it coming with greater clarity. No, I am not a pessimist. It’s just the reality of the business.
Loan defaults and delinquencies are beginning to creep up. Ford Motor Credit — which, according to my sources, had been approving anyone who could fog up a mirror — reports they originated 20% fewer loans in the third quarter of 2016 than they did in the same quarter a year ago.
No matter how much your lenders tighten up, the problem remains that your sales department has gotten weak on getting real cash from the customer. Down payments are the key to curing everything that’s wrong with the deal.
The lenders are mostly concerned with hyperextended terms that have stretched as far as 96 months. The risk is outdistancing sanity. Besides that, extended terms are killing the future market. The risk is amplified when a car is held as collateral on a loan that doesn’t reach equity for more than 5.5 years on average. And to compound the risk, most of these loans are already overadvanced because the lender financed the customer’s negative equity on top of the new loan. This is a situation banks and finance companies refer to as “declining asset performance.”
I know what you’re thinking. “Ziegler, you’re full of it. Everything’s going to continue to be great and we’ll sell record numbers with record profits.”
I hear you, but I must say you’re wrong. You know why? Math.
Leasing always pumps up the market in the short term until it reaches critical mass and begins to overpower sales. Then off-lease units flood the market and cause the kind of crash we’re experiencing right now in the pre-owned market.
As I write this, leasing accounts for about one-third of all retail sales, up from 27% a year ago. Lease returns and fleet buybacks have flooded the market and driven prices way down with a glut of late-model inventory. That will always be the legacy of leasing, another predictable cycle. The lessors will now have to withdraw, back off and regroup for a couple of years.
That’s why CPO leasing is the next best thing. If you have access to a program, you need to get enthusiastically involved and committed. Train your people and ride the wave all the way to the beach.
Disreputable, Dishonest, Bogus and Deceptive
I like to believe I have made a difference and that I will leave a legacy when I finally decide to step off the stage. The one thing I’ve always cherished is my reputation. You won’t find anyone who can righteously say anything about my character or ethics. Even though my numbers and profitability have always been extremely high, I always did it with integrity and ethics.
I have said it in every seminar, speech and class, and I will tell you right now: There is never a need to lie, cheat, deceive or misrepresent yourself to sell cars and finance. If I think you’re a crook, I will personally run you out of this business. That’s why I get so angry whenever I see a story about how some dealer, somewhere, is being prosecuted or investigated by a government agency or sued by a car buyer for doing something criminal.
I am currently working with nearly 100 companies that own car dealerships. Some of them are single, family-owned stores and others are big corporations. The processes we teach and enforce are legally and ethically compliant, and “enforce” is the key word. I do not believe any dealers (or at least not many) tell their managers and employees to do illegal things and mistreat consumers. Still, you’d be amazed how many managers and salespeople have to get their throats stepped on to make change happen.
Most recently, we’ve seen the federal regulators, state attorneys general and regional DMVs investigating, prosecuting and fining car dealers for crimes and practices that are well known to be illegal. What in the hell are these idiots thinking?
The be-all, catch-all blanket charge that most regulators look at is something called “deceptive trade practices.” The standards read differently in every state and are, in my opinion, deliberately vague so regulators have a broad brush to bring charges against dealers. In essence, a deceptive trade practice is anything you do to confuse, mislead or deceive the customer in your advertising, in the showroom, or in the box.
The FTC is on a tear, and they are prosecuting dealership employees, fining the owners, and even revoking their business licenses. But the regulators aren’t uncovering unheard-of practices. It’s the same déjà vu nonsense over and over again. The headlines just have different names in them.
In late September, the FTC brought a long list of charges against Sage Auto Group, which operates nine stores and multiple franchises, including highlines, in and around Los Angeles. … California again? Why is it that all these stories seem to come out of California, New York and New Jersey? Is it because they have the tightest and most aggressive regulators and investigators? We’re basically talking about the same laws in all states.
The investigation into Sage appears to have started with complaints of “yo-yo” financing and progressed from there. Yo-yo financing refers to delivering a car at a lower interest rate than you know the customer qualifies for with the intention of bringing them back and recontracting the deal. Some of the accounts I have read said employees even told customers the dealership was legally allowed to keep their down payments if they didn’t sign the new contracts.
All that is illegal and carries criminal and civil penalties in all states. You could go to jail, Buttercup!
No FTC investigation would be complete without a good, old-fashioned charge of payment packing, and the case against Sage is no exception. Let me be clear: You cannot quote a payment to a customer that includes optional products, even if you tell the customer that payment includes them. You must give the customer a base payment at a base interest rate and tell them they can buy the car for that.
The FTC’s complaint alleges that some Sage employees, presumably the F&I managers, told the consumers they had to take the products because they were required by the bank or finance company buying the deal. They are also accused of telling some customers F&I products were “complimentary.” Raise your hand if you think that’s illegal!
The complaint rounds out with alleged violations of the Truth in Lending Act, Regulations Z and M, and the Consumer Leasing Act; specifically, failing to clearly disclose required credit and lease information in advertising. The FTC’s statement also describes the ads themselves as deliberately deceptive, quoting payments, terms and prices that were not actually available, disguising leases as sales, and being specifically designed to mislead “financially distressed or non-English-speaking customers.”
Finally, and perhaps inevitably, the FTC said that Sage employees wrote bogus reviews on review sites to overpower negative reviews inspired by all those alleged deceptive trade practices.
OK, I know, you’ve seen it all before. But if the FTC’s charges stick, Sage will be held out as an example of a dealer group that (allegedly) committed nearly every illegal act known to our business.
In fact, the only one the FTC left out is “powerbooking,” another outdated practice by which F&I managers overstate the customer’s income or the vehicle’s trim level or equipment to boost the loan advance. This is a serious crime, and dealership employees have gone to prison recently for falsifying applications.
All these violations carry different levels of penalties. With four different government agencies watching dealerships and lot lawyers filing consumer lawsuits, if your managers and employees are not doing their jobs by the books, you are facing huge liabilities. Fines have recently gone into the millions, and that’s in addition to the cost of restitution.
As for Sage Auto Group, who knows? Maybe the feds got this one wrong. All I can say to the owners is good luck, guys!
Read Between the Lines
Stick with me on this one for a minute here. I’ve written repeatedly that the big public companies would be slowing down acquisitions for a number of reasons, and could even start offloading underperforming assets — in other words, any store that isn’t meeting their performance standards.
That, to me, is humorous, because I believe almost every dealership owned by a public company is underperforming. Those owners tend to trap themselves in cycles of chasing new gimmicks and new technologies, losing money, then being distracted all over again by the next shiny object. These are not well-oiled machines.
Not I’m not saying every company that owns multiple dealerships is chasing every goofball concept, questionable vendor and happy-clappy process. But those that are doing that are experiencing monumental failures as they continue to lose profits and market share as they swirl down the karmic toilet.
Last month, I wrote about “The Big Talent Drain” in the dealership management ranks. I mentioned that the big publics can’t continue buying because there’s nobody out there qualified to run the stores at the executive level. With lowered compensation and reduced profitability, the best people have left the business, and there’s nobody on the bench to put in the game.
But that’s only one reason new acquisitions are reversing. It’s obvious that car sales are on the eve of a market slowdown. It’s time to contract and get lean.
I just read that Mike Jackson announced AutoNation will dial back acquisitions and ventures into new conquest markets. I have written about this repeatedly, and it is a little vindicating to see my observations verified by the source.
This by no means implies the publics will not be acquiring new dealerships. It simply means they won’t be conquesting new markets outside of their current sphere of influence, and they will be more likely to dump underperforming assets to preserve capital. The recent buying sprees have left most of the big players with depleted cash reserves.
No Slowdown in Sight
This year marked a milestone in my life. I sold my first car in 1976. There’s so much history, so many people, so many situations and battles fought over the last 40 years I’ve been in this business. I have been keynote speaker at 98 state dealer conventions, presented workshops at 14 NADA conventions, and found a home at four major industry publications. I’ve set up camp in more than 1,000 showrooms in every state except Alaska. I’ve worked with old dogs and young pups, teaching everything from the Internet to the lost arts of finesse and persuasion.
As a dealer advocate, I have always stood up for you, even when it hurt me, and I appreciate all the support you have shown me in return. I could go on for many more paragraphs about everything I’ve done or experienced professionally over the last 40 years, but some things are more important. For example, I met my wife, Debbie, 34 years ago, when I sold her a car. We will celebrate our 32nd anniversary this month. Next month, I will celebrate my 70th birthday.
Flying around the country used to be glamorous. Now, with five million Delta miles on the odometer, it’s starting to wear on me. I keep telling Debbie I am going to slow it down, soon — until I get a call from another dealer, 20 Group or convention organizer. Next thing you know, I’m on another plane and staying in another hotel.
Seventy is a big number. I really do intend to slow it down next year. …. Hey, don’t laugh, I mean it this time. You’ll see! Meanwhile, keep those calls and messages coming, and don’t forget to find me on Facebook. The industry is tightening up in more ways than one, and we need to stick together.