“Gross is just a state of mind!” That is a common phrase that dealership management has heard preached and had proven time and time again throughout the years. Often indeed, it is just a matter of asking for more, or negotiating with more confidence. It can be as simple as working from retail as opposed to cost. It is a topic that has been discussed in both our 20 Groups and by sales trainers for years. For Special Finance departments unfortunately, it often is more than just asking or holding for more. The difference between the benchmark gross profits which exceed $3000 and more common ones of half that amount is found generally in two areas – the inventory as it compares to the available lender’s guidelines, and, the way the deal is structured by the Desk or Sales Manager.
This month I promised a number of the Special Finance Managers that I have worked with that I would make inventory the subject of my column. (I will save deal structure for next month.) Inventory most certainly is a critical issue. Of the seven key elements to success, I rate inventory the second most important. Yes, just ahead of personnel. Make no mistake; it certainly takes people – well trained people - to run a successful Special Finance department. However, you have quite possibly seen this situation repeated in your own dealership: A skilled sales person works with a customer that the Special Finance Manager has approved through a number of lenders. The customer has the required cash down payment and all the required documents. However, no vehicle exists that allows the dealer to both structure the deal to meet the payment call and allow the dealer a satisfactory profit – or any profit at all. The sales person is frustrated, often mistakenly blaming the Special Finance Manager for their “inability” to get the deal approved.
Then, of course, there is the other side of the coin. You have no doubt seen it. I observed it yet again recently in a large dealership where I was working onsite. They had just hired a new salesman. It was his first day on the floor. This person barely knew where the bathroom was located, and had never worked in an automobile dealership in his life. The second customer he greets after some cursory training (and with the Desk Manager directing his every move) selects a vehicle that becomes a $4000 gross profit deal.
One situation yields the skilled-veteran muttering unpleasantries under their breath. The other situation has the proverbial “Green Pea” swearing this is the greatest business in the world. Is it the skill of the personnel? Of course not. It is the inventory.
Whenever I see below-average gross profits in Special Finance departments, the very first place I look is at the inventory they have available for sale. The same goes whenever I have inexperienced Special Finance managers telling me that they need to find better lenders (even though they are already working with some of the best in the market). They mistakenly feel that it is the lender that is making offers at 110% or 115% of NADA Trade is really the limiting factor in their ability to get deals approved. Upon further investigation, the true problem is not with the lenders (it seldom is) but the fact that all of the dealership’s inventory is on the books for $1000 over NADA Trade, and/or is so expensive that none of it falls in a lender’s sweet spot – the $275 to $375 monthly payment range.
Between our 20 Group clients and those that visit us through AutoDealerDaily.com, often one of the biggest conflicts that exist within the sales department of dealerships is the one between the Special Finance Manager and the Used Car Manager/Buyer. The Special Finance Manager is continually pleading for more lower-priced inventory, with a lot-ready inventory cost of at least $500 less than NADA Trade. The Used Car Manager/Buyer retorts that “You can’t buy the type of cars that we sell at that price!” Both are right. What the Used Car Manager/Buyer doesn’t realize is that even though the vehicles that he or she is buying are good values and likely excellent inventory for the conventional Used Car Department, the fact that they are “on the money” has little to do with the ability to sell them in Special Finance.
Stocking for Special Finance has little to do with what the vehicle is worth when it crosses the auction block, but everything to do with what the lenders will finance them for. Often these values are drastically different, and generally the Used Car Buyer is not using – or even carrying - the same book that is used in the Special Finance Department and by its lenders. Until the buyer gets on the same page as the Special Finance Manager, ultimately the department is doomed to lower grosses and missed deals. My suggestion to Special Finance Managers is to do what I did for so long – either create a grid comparing book values to the cost that a unit may not exceed when it is being purchased for Special Finance. The other option is to compare the book values for select vehicles that sell well in Special Finance to the Manheim Market Report showing what they average selling for at auction. Where you see a “spread” in your favor between the two, note the vehicle and what the maximum inventory value should be. Both of these tools can easily help the Used Car Manager/Buyer, especially if they are looking at makes or models that they are not particularly familiar with.
In the conventional retail world, gross indeed is often just a state of mind. It is the ability for a salesperson to put aside his or her personal feelings or fears and negotiate with confidence. When it comes to Special Finance however, while sound negotiating is certainly important, much more so is the inventory that is available. If it has been purchased with the department’s needs in mind, and is owned for less than NADA Trade (or Kelly Book Wholesale depending on which book the lenders are using), good things will happen – especially higher grosses. It really is more than just a state of mind!
