Are You Missing One of the 10 Critical Components?

As I write this, the calendar is turning to February, meaning the peak special finance season has just begun to take off. Some dealerships have been focusing on this for the last two months, making sure that all 10 Critical Components for Success in SF are in place. Regardless of whether the overall auto industry is up or down, this is always the time of year that SF departments, if properly set up, should have a bonanza, setting the rest of the year up for success. Hopefully, your dealership is one of those that have been focusing on SF. If not, by the time you read this, you will be in the home stretch of peak season. Fortunately, you still have an opportunity to take advantage of the SF market for the rest of 2011, and it should be a strong one all year.

If you have read many of my columns over the years, you know inspiration is continually provided to me by the dealers I work with, whether through their challenges or successes. This time it is a success, and I love to talk about success stories (after all, that is what Auto Dealer Monthly is all about). Also, you know I seldom name names, but this northeastern group will know exactly who I am referring to!

Prior to visiting this dealer last fall, I had them provide the customary data I dissect before I make my visit (better to save the valuable time for when I am on-site). In this case, I discovered that the stores were very efficient with prime and Tier 1 (near-prime) credit, pretty efficient with first-time buyers, but woefully inefficient with Tier 2 (traditional special finance) and Tier 3 (higher fee financing) the bread and butter for SF.

What is really significant is that those two credit tiers account for at least 30 percent of the organization’s floor traffic, which is a considerable number. If all else stayed the same, including traffic, simply increasing the conversion of that traffic to benchmark percentages at benchmark gross profits would add an additional $80,000 per month in gross profits.

What does it take to convert at benchmark levels? The answer is usually simple and nearly always found in the 10 Critical Components. Something is always missing. It may be one component or it could be many, but if corrected, your deliveries and your gross profits will always rise.

In the case of this particular dealer, the two missing components were inventory and deal structure. The dealer didn’t really have any pre-owned inventory in stock to accommodate the programs of the SF companies they were using, in particular with Tiers 3 and 4. Without the inventory, it is nearly impossible to structure deliverable deals. Even if you can, the gross profit in the deals will then be almost nil.

One way to overcome inventory issues is to structure a deal with a substantial down payment. When a deal is structured properly, the greater the down payment is, the higher the gross profit will be. In the case of this organization, most deals were not being worked backwards from the available advance, and more importantly, the down payment requested in the initial deal structure was basically what the finance company would require for a minimum down payment.

The result of these two scenarios was that, much more often than not, customers were simply being shown vehicles that were too expensive (often new) for the programs available for customers in the lower credit tiers, and SF managers were asking for down payments that were the minimum required for approval. Remember, minimum doesn’t guarantee a deal. For example, a finance company may say the minimum FICO score they will approve may be a 520, but only a very small percentage of the deals they approve are actually 520s.

So what do you do if you find yourself in this situation? First, you must look at your inventory. You can’t simply flush what you have away, but you don’t need to make more of the same mistakes. Examine what finance company programs you have available, add to them if need be and determine what the optimum inventory is for these programs. Focus on that inventory and buy the quantity that makes sense for the number of opportunities you see each month for each SF credit tier.

I couldn’t count the number of used car managers and buyers over the years who have told me, “You can’t buy that in this market.” I have never had one prove me wrong. Is it hard work? Sure it is. At my dealerships, we would often have to bid on 10 vehicles to buy one. The key is, we were trained to not buy outside those parameters, and that discipline paid off in deliveries and gross profit.

With the proper inventory, you simply have to focus on your deal structure (assuming you have the other eight components in place). In the case of the aforementioned organization, that meant increasing down payment. As I’ve written for years, if I ever saw my dealerships’ grosses suffer, I first looked at how much down payment was initially suggested to the customers on the last five deals delivered.  Generally, I’d find that the deals were written at the SF company’s minimum required. If it was less than 25 to 30 percent of the purchase price, I generally didn’t have to go any further. It is much more difficult to start out at a SF company’s minimum (say, $500 to $1,000) and raise the customer to a $2,500 down payment, than it is to start out at $4,000 to $5,000 and go down.

Going back to the dealer at hand, New England was brutally hammered by snow and ice in December 2010 and January 2011, so the stores have had an uphill battle. Additionally, this dealer had a lot on their plate. The locations each had other components that needed to be addressed. With multiple rooftops about an hour apart, their successes couldn’t necessarily be contemporaneous, but it was close.

Through focusing on stocking proper SF inventory that fits both the credit demographics of the customers coming to the dealership and the finance companies servicing them, their inventory improved immediately. Through daily training of both the management and sales teams, deal structures also improved immediately, especially the cash down. Since that happened, and in spite of the limiting weather, their SF delivery percentages (especially in SF Tiers 3 and 4) have skyrocketed, along with their deal gross profits. With that, confidence has grown, as has morale. That is called momentum, which I am sure will carry them right on through the rest of 2011.

Where does your dealership or department stand? Are you firing on all cylinders during peak season, or do you feel you are still missing opportunities? If it’s the latter, do you have a plan to identify and correct the Critical Components you’re missing? All indicators point to a very strong subprime credit market in 2011. Make sure that at the end of this year you are not one of those saying, “I wish we would have …” but rather one who is celebrating and saying, “I love it when a plan comes together!”

Until next month,
Work your plan!

Vol. 8, Issue 3