New Vehicle Sales at Record Levels in SF
The past 18 months have proven to be historic times in the automobile industry, and that certainly holds true for the special finance segment of the market. The three “Cs” – capital, collections and collateral – all experienced significant if not total deterioration during some or all of the past year. As a result, finance companies continued to exit the market, and those that remained continued to shrink advances and increase pricing while trying to live within their own resources.
With finance companies leaving the market, many independent dealers have found themselves on the outside looking in as many lost some or all of their traditional SF finance companies that had allowed them up-front advances similar to franchise dealers.
The “have-nots” have been impacted by two other scenarios: record high incentives on new vehicles and the infamous Cash for Clunkers program, which excluded pre-owned vehicles. These two factors have caused a significant difference between the benchmarks of franchise and independent dealers.
At the recent 2009 Special Finance Convention hosted jointly by Special Finance Insider and Auto Dealer Monthly Magazines, the industry benchmarks for the current year were announced. Included were nearly 6,000 transactions from attending dealers and those reporting to Greg Goebel Training and Consulting during the periods of March through July 2009. For the second consecutive year, key analytics fell. The good news is that the trend seemed to bottom out in April, and the same analytics have buoyed slightly over the last 90 days, indicating that the SF market has indeed stabilized.
One important note as we discuss these statistics: keep in mind that benchmarks differ from averages in that they are the 75th percentile of all dealers rather than 50 percent as represented by average. By definition, one in four dealers will exceed benchmark levels and three out of four will fall below them. Furthermore, elite performance represents the top 10 percent of all dealers.
Let’s start with perhaps the most significant trend – the overall mix of special finance business among the reporting dealers. Most likely mirroring the perception of the SF business by dealers and managers, SF volume fell in 2009 to just 24 percent of overall retail sales. This is down more than 50 percent from 2007, when SF comprised 52 percent of all reporting dealers’ sales.
As mentioned earlier, there was a significant split between franchise and independent dealers. Due to the high incentives and Cash for Clunkers money available, one out of every three SF deals delivered in 2009 was for a new vehicle, according to the numbers reported by franchise dealers. The benchmark rate was nearly 35 percent. This compares to just 10.7 percent in 2008.
With the disparity in vehicles being sold, there was a similar disparity in transaction prices. The average franchise dealer had a transaction price topping $17,000, while the independents fell below $13,000.
Interestingly, total deal gross profits were very similar; the averages between franchise and independent dealers came in just $20 apart ($2,032 and $2,052 respectively). How they arrived at their gross profits was significantly different, as the average franchise F&I gross profits were nearly 50 percent higher than their independent counterparts. Benchmark total deal gross profits fell from $2,860 in 2008 to $2,682 in 2009, now consisting of $2,015 in front-end gross profit, and $667 in F&I gross profit.
While gross profits have slipped, conversion rates (the percentage of deals funded compared to the number of leads received) remained consistent in 2009. Last year, after conversion rates had held fast for over a decade (fluctuating a tenth of a percentage point or two above or below 17 percent) the conversion rates fell to just 13.1 percent. In 2009, they remained in the same ballpark at 12.8 percent, which is basically one sale out of every eight total SF opportunities.
In-store conversion rates (sales compared to number of walk-in, repeat, referral and be-back opportunities) actually increased significantly in 2009. While the traffic dropped year-over-year (111 versus 127 opportunities), sales actually increased from 27 to 29, meaning dealers were converting over 26 percent of the time.
On the other end of the spectrum, the conversion of SF leads (e-leads, credit-hotline leads and phone ups) fell dramatically. Many dealers blamed the trend on some of the new “cut-rate” lead companies that appeared on the scene; they felt these companies were churning or manipulating the data on e-leads to sell the same lead multiple times. Whatever the case, the benchmark closing ratio on e-leads fell again in 2009 from 10 percent down to 8 percent. More telling is that just two years ago this metric stood at 13 percent and four years ago above 17 percent!
As indicated above, the benchmark conversion ratio on e-leads fell even more, down from 10 percent to just 7 percent. In 2005 this stood at 18.6 percent. The data reported by dealers showed a wide disparity among closing ratios on e-leads, even among dealers operating at elite levels. That data certainly would seem to confirm there is a difference in e-lead quality and providers. It would appear that some dealers opted to use the strategy of quantity over quality, seeking less costly leads but purchasing more of them; the number of e-leads worked year-over-year increased nearly 27 percent, while at the same time the cost of the e-leads dropped 50 percent from $22.79 per lead in 2008 to $11.32 in 2009.
A secondary factor to the drop in closing percentage among SF leads could well be found in staffing, as dealers were under severe economic pressure to do more with fewer people. In 2009, the number of SF opportunities worked by SF personnel jumped to 103 per person. Where historic numbers have for years indicated that the typical salesperson can effectively work an average of 75 opportunities per month, SF personnel in 2009 have been asked to work at a level more than 37 percent above that standard. More telling is that this level of work is a full 45 percent higher than what SF personnel were working just one year ago. Therefore, it could certainly be argued that the drop in conversion rates may well have been affected as much by the inefficiencies of having to handle the increased quantity of leads per person as it was effected by the quality of leads.
Not surprisingly, advertising and marketing expenses decreased significantly again in 2009, whether measured as a cost per sale, advertising cost as a percentage of SF gross profits or sheer dollars. From a cost-per-sale basis – probably the best metric to use at this point with falling gross profits per unit sold – ad costs dropped to just $287 per SF unit sold, down a full $75, or 20 percent, from one year ago! Surprisingly, even with shrinking gross profits, ad expenses as a percent of gross profit also dropped two full percentage points from 12.7 percent down to 10.7 percent, as expenses fell from above $24,000 down to $19,492.
Advertising mediums are in flux as well. For the second straight year, two of the stalwarts of SF advertising – direct mail and e-leads – have seen significant reductions in dollars spent. Since 2007, the benchmark ad expense spent on direct mail has fallen over 50 percent to just $2,047 per month, or slightly over 10 percent of the benchmark dealers’ ad budget. E-leads have experienced and even greater fall, down from $9,806 per month in 2007 to $3,487 in 2009, a 64 percent decline over two years. E-leads now make up less than 18 percent of a benchmark SF dealer’s ad budget, whereas two years ago it was over 28 percent.
Meanwhile, the use of digital media – whether it be separate subprime Web sites, money spent on search engine marketing or optimization, or even direct e-mail – has grown from just 1 percent for benchmark dealers in 2007 ($366) to 12 percent of the benchmark dealers’ ad spend per month. At $2,673 per month, dealers are now spending more on their digital media than they are on direct mail, a trend that doesn’t appear to be slowing down any time soon.
If a benchmark-performing dealer worked 300 leads per month in both 2008 and 2009, the results would not be that dissimilar. In 2009, the dealer would have sold one fewer SF unit (38 versus 39) based on a very slightly lower conversion ratio. Due to reduced total deal gross profits, the dealer would have had total SF gross profit of about $9,400 less ($103,000 versus $112,400), but by doing a better job in containing ad expenses the dealer would have spent $3,200 less, leaving a net difference of $6,200 less in gross profit. Given that dealers are working with an average of at least one fewer person in the department, that $6,200 disappears very quickly between compensation and benefits. In all, most benchmark-performing SF dealers are netting about the same from their operations in 2009; they’re just reaching the bottom line a bit differently.
One thing is certain, in these historic times, those who have held course and maintained focus on their special finance opportunities are still reaping the rewards and should expect to do so for the foreseeable future.
Vol. 6, Issue 10