Operational Benchmarks Indicate Subprime Rebound is Real
The Phoenix has risen – special finance has risen from the ashes!
OK, that may be a bit of an overstatement, but certainly after nearly a year-and-a-half of bad news, that seems to be the perspective of many dealers who have struggled with subprime credit customers since the fall of 2008.
Annually, since 2004, I have published the operational benchmarks for the special finance industry. These benchmarks have been calculated using data submitted to me by dealers either reporting in advance of Auto Dealer Monthly’s annual special finance conferences or through my private consulting practice. As has become tradition, the results were announced at the 2010 events, which took place in Dallas, Texas; Washington, D.C.; and Indianapolis, Ind.
Before discussing these results, it is important to note the difference between averages and benchmarks. An average is just that – the sum of the data divided by the number of dealers reporting. It is truly the midline. On the other hand, the benchmarks are calculated at the 75th percentile, meaning that we first determine the averages, then eliminate any data below the average and find the average of the remaining data. By definition then, one in four dealers will operate above benchmark level, and three in four will operate below it.
Certainly 2010 has provided a reversal of fortune for SF dealers, with nearly all key benchmarks showing improvement over not only 2009 but 2008 as well. To analyze the trends, we will start at the macro level with the statistics dealers look at most often – how many units they sold and how much money they made.
Starting with sales, dealers have reported an uptick in volume. The benchmark for SF sales soared to 76 per month in 2010, an improvement of 12 percent over 2009 and the highest it has been since 2007. My theory last year that the 2009 totals were an aberration due to the Cash for Clunkers program was apparently correct as sales patterns have returned to what I consider the norm in 2010. New units had historically made up somewhere between 10 to 15 percent of all SF sales, but in 2009 they jumped to 25 percent of the total volume. This year the 76 monthly sales consisted of eight new vehicles and 68 used, or about 12 percent of the total SF units sold.
What about gross profits? Over the past two years, front-end (the vehicle sale price less the vehicle cost, all reconditioning and any finance company fees) deal gross profits fell more than $600 from a high of $2,625 per unit in 2007 to $2,012 last year. This year the benchmark rose to $2,168, an increase of nearly 8 percent. While that is good news, I can say that if I had used the data provided solely in the prior 30 days that the benchmark would have likely been yet another 10 percent higher.
The average back-end gross profit, which is derived from the sale of all finance and insurance products as well as any interest reserve earned from the finance companies, was one benchmark that fell in 2010, continuing the overall trend since 2005 of a general decline. This year the benchmark for back-end gross profits fell to $638 per unit sold. Adding the front-end and back-end deal gross profits together gives you a total deal gross profit per SF unit sold of $2,804. While this is certainly a long way from 2007 when the total deal gross profit benchmark was $3,410 (and a time period during which I felt the finance companies’ criteria were so lax a trained monkey could structure a profitable SF deal), it definitely is improving, and the truly elite SF dealers are already averaging over $3,000 per copy.
So, SF departments are selling more units and they are earning more gross profits. How are they doing it? For starters, and in my opinion due to the “new” special finance customer (those consumers who previously had prime credit, have good income, but have suffered from a foreclosure, mortgage modification or delinquency), dealers are doing it by selling more expensive vehicles.
As I discussed in a previous column, finance companies are reporting average loan statistics with the highest amounts financed and the longest terms I have ever seen in SF. As you would expect, the benchmark sale price reported by dealers skyrocketed. Consider that in 2009 when new unit sales were 25 percent of all SF volume (double the norm), the benchmark vehicle sale price came in at $13,755. This year, even with the new/used sales ratio returning to normal, the benchmark jumped $1,863 (13.5 percent) to $15,618! The peak for this benchmark had previously been $14,301 in 2007, so this definitely puts SF sale prices at unprecedented levels.
How else are dealers obtaining higher gross profits? Certainly through asking for and getting more cash down. The benchmark for cash down (not including trade equity) rose once again to its highest level ever, up to $1,414 from $1,327 in 2009. Keep in mind that Cash for Clunkers would certainly have affected that number in 2009. The benchmark in 2008 was just $1,005, so this should be looked at as a considerable change.
Finally, the last significant sales statistic is the benchmark percentage of total retail sales consisting of SF. In 2009, that percentage had been cut in half, from a high of 52 percent in the heyday year of 2007, to just 26 percent. For 2010 the benchmark percentage has risen back to 41 percent, higher than that of even 2008. It certainly doesn’t take a brain surgeon to understand that special finance is once again not only doing well, but beginning to thrive.
Special finance opportunities are defined as those SF customers who walk into the dealership due to specific SF advertising, a referral or previous relationship and leads (either attracted or purchased and required the use of the phone). Stating the obvious, it is easy to understand that the conversion ratio of those customers already in the dealership will be higher than those who are just leads and must still be converted into dealership visits.
The benchmark closing ratio for walk-ins remains high in 2010 at 34 percent. The benchmark number of sales of walk-ins (19) has remained essentially static for four years, but the number of opportunities has varied. This year it took a few more customers to achieve the 19 units.
Repeat and referral percentages also have been very static. They have never varied more than about 1 percent from 25 percent, and this year the conversion ratio is 24 percent. The benchmark number of sales of repeat and referral customers remains the same at six.
One oddity is that the benchmark closing ratio on be-backs – those customers who visited the dealership more than once before they purchased – fell again for the fourth straight year to just 15 percent. Three years ago that percentage was a hefty 38!
Leads worked by the phone are divided into three types: Internet leads (whether produced from a dealer’s website or a third-party site), loan-by-phone applications and conventional phone ups.
One benchmark trend that doesn’t show up simply by number is the overall decreased use of third-party Internet leads. While the benchmark number of leads worked was 238, slightly lower than the previous low-water mark of 243 in 2008, it isn’t as if the overall number of leads had been cut in half. To see the rest of the story, one simply needs to look at the amount of money spent on Internet leads purchased. Since 2007, the benchmark spend has dropped steadily from $9,806 in 2007 (which produced 261 leads) to just $3,080 in 2010. Third-party lead prices have not fallen significantly during that time, therefore it is easy to surmise that if the dealers’ cost per Internet lead has fallen from over $37 to just under $13, dealers are mining more and more leads organically rather than purchasing them.
Historically, leads that come to a dealer through their own website are easier to set appointments for and are more likely to show. What is surprising here is that in 2010 the benchmark appointment-set rate fell to just 30 percent (down from 50 percent in 2007). While the benchmark for appointments kept remained steady at 67 percent of those set for 2010, what did improve was the actual sale rate. Of those appointments that were kept, the benchmark closing rate was 46 percent, a big jump over 2009, and 31 percent of all appointments set. Overall, the benchmark closing ratio of all Internet leads rose to 9 percent in 2010 (up from 7 percent in 2009), a definite step in the right direction.
Dealers using infomercials to drive phone traffic directly to their call centers were likely responsible for the significant increase in the overall number of phone ups in 2010. The benchmark rose to 266 (more than Internet leads), nearly three times the benchmark number in any of the past three years. These leads turned into appointments nearly 50 percent of the time, with more than half showing up. While the number sold was more than double that in 2009, the closing ratio dropped to 8 percent, the lowest over the four years compared.
Overall, when aggregating all the SF opportunities – from walk-ins to Internet leads – the benchmark conversion ratio remained at 13 percent for the third straight year, which with the resurgence of special financing, may surprise some people. A leading cause is likely the austerity programs most dealerships enacted in 2009, reducing their overall head count. Currently, benchmark dealers are still having every person work 92 leads per month, well past the level at which the average salesperson can be effective. Until that ratio comes down, overall closing percentages will likely remain at one out of every eight opportunities.
While the makeup of the expenses has shifted over the past three years, the overall benchmark of ad spending compared to gross profit hasn’t significantly changed. Certainly dealers are spending more dollars in 2010, up 25 percent over 2009 to $24,198, but it caused less than a one-percent increase to 11.4 percent of total SF gross profit.
The biggest change over the past four years, aside from the decrease in third-party Internet leads, is the pronounced drop in the use of direct mail. Benchmark dealers spent just $509 per month in direct mail. Their comments were that most of their direct mail was being generated internally rather than outsourced, and it is a pittance compared to the $4,166 spent on direct mail in 2007.
Overall, the benchmark cost per lead remained low at just $37, while the most important number – benchmark cost per sale – came in slightly more than 10 percent higher than 2009 at $318 per SF unit retailed.
Without a doubt, the 2010 SF benchmarks indicate good news and would likely look even better if examined just 60 days later. Following the interaction with the attendees at the Auto Dealer Monthly SF Conferences this year, there is no doubt in my mind that even some of the elite dealers took their eyes off the ball in 2009 as the market recoiled. Many returned home knowing a revisit of the basics is all it will take to increase sales and gross profits even more. Use this information to model and analyze your current status and plan for future success. Consult the chart on page 26 of the October 2010 issue of Auto Dealer Monthly for more detailed information, and as always, if you have questions please feel free to contact me at Greg@AutoDealerMonthly.com.
Vol. 7, Issue 10