March 2012, Auto Dealer Today - WebXclusive
Inventory is the Key
Whether franchise or independent, large or small, domestic or import, highly skilled or not, I see a recurring challenge in the special finance industry where dealers struggle with customers in certain credit tiers. For whatever reason, I have seen more of it lately than I have in many years. Of course, it could simply be more apparent because many dealers now have their departments ramped back up.
It could not have been more exemplified than when I recently talked with four different dealers in two days, all in different markets. The first dealer has one of the top SF departments in the country, two others are skilled but a step down from the first, and the fourth has much less experience. They each said they knew there is more business for them to garner; they just weren’t sure where it was or how to get it.
After talking to the dealer with the terrific department, I quickly determined that they were struggling with their Tier 3 customers, or customers who are a step down from the typical SF customer but above the really rough equity deals of Tier 4 that go to Westlake, Credit Acceptance, Santander’s Drive program and the like. In this dealer’s case, the Tier 4 deals go to their own buy here pay here (BHPH) program. In talking with this dealer, I said I was willing to bet that the dealership didn’t have any inventory to support the finance company programs serving Tier 3. The response back was a smug, “Oh, we have the inventory; we have 380 used vehicles in stock!”
Since this dealer is a good friend of mine and is used to losing friendly bets with me (always for bragging rights and an occasional beverage, not money), I was ready to wager that the dealership didn’t have the right inventory. The bet was on and I volunteered to do a quick inventory analysis. Ten minutes later I had dissected the inventory and found that there may have been nine cars in stock that would work for a Tier 3 customer.
My next challenge to the dealer was: how quickly could one of your salespeople find any of those nine vehicles buried among the 380 used vehicles in stock to show a Tier 3 customer? With the high volume that this department and dealership does overall, there is no way a customer in this tier is going to get worked properly when the salesperson has to look for a needle in a haystack to make a deal.
The next dealer, also very skilled and profitable, had a similar situation. This dealership was doing a pretty decent job with Tier 1 and Tier 2 special finance customers, but the wheels fell totally off when it got to the bottom tiers. Since they don’t do any BHPH sales, they weren’t accomplishing anything in either Tiers 3 or 4. With regards to inventory, they had nearly as much used inventory as the first dealer.
I analyzed their customer credit demographics and learned that nearly 40 percent of their credit bureau pulls involved customers in the bottom two tiers. In examining their inventory, less than 10 percent of it fit those tiers, and worse, it was split between two locations.
The third dealer sold a much lower overall volume and had a much smaller inventory of around 80 used vehicles. I was hopeful when I logged into their ProMax system. However, I quickly found that only one unit of their entire inventory would work with a Tier 4 customer, and there were two in stock that would work well with Tier 3.
By the time I was on the phone with the fourth dealer, before we got very far, I asked to look at their inventory in ProMax. In about two minutes I stated, “I bet most of the SF units you are delivering are new vehicles, right?” And I was right. While they had 100 or more used units in stock, there was absolutely nothing – in any tier – to structure a SF deal with, without having $3,000 or more down.
Without a doubt, Tiers 3 and 4 are the toughest tiers in which to put deals together, but there are many dealers doing extremely well in those ranges. It all depends on the finance companies you have to serve those tiers and how well you match your inventory to those programs. You just can’t find yourself in the position of the four dealers above and expect to achieve a high level of success.
With Tier 4, the buy (or the trade) makes the deal and the down payment makes the gross. I have always said you can never stock too many Tier 4 vehicles. It is always easier to sell Tier 4 inventory than it is to buy it. In this tier, a buyer may have to bid on 20 vehicles at auction just to buy one (discipline and patience are required), so this inventory often becomes comprised of trade-ins. Don’t let that discourage you, however, as this is a major profit center with many dealers.
Tier 3 inventory works much like Tier 2 (the traditional SF customer tier), only with less expensive vehicles. What typically happens in most dealerships is, since less-expensive vehicles are harder to find and easier to sell, they tend to disappear quickly. Hence, without constant attention, a dealership’s lot remains void of them. Additionally, one of the larger-volume finance companies that serves this tier well – Chase Custom – bases its advances on Black Book rather than NADA. Buyers taking the lazy route will purchase vehicles using NADA values, and unfortunately, they find that the difference in the book values is often not in their favor. Then they are stuck.
Yes, these tiers are more challenging and do generally require more work, but the difference between those who are doing well within these tiers and those who are not is that the dealers who are excelling are exceptionally focused on inventory. They are cognizant of what inventory they have and what inventory they need to replace. They resist overloading in the top two tiers, which are relatively easy to buy for, and they instead focus on replacing the units they sell.
One final thought for the month: While I often talk about the various tiers and niches, remember, there is no defined line between the tiers, and therefore the inventory. In fact, a Tier 2 customer at one dealership might be considered a Tier 3 customer at the store right across the street based on available finance companies. In every dealership, each customer stands on his own, and so does the inventory. A Tier 3 customer with a significant down payment on the proper unit might become a Tier 2. Similarly, they may slide to a Tier 4 on the wrong vehicle.
To excel in Tiers 3 and 4, you must first pay constant and close attention to the quantity of inventory you have for those customers, and consistently work to replace that which is sold. You must have patience and use discipline over what you buy. Once you identify a customer, it takes time for a proper credit interview and good decisions to match the customer with the right finance company and inventory. Finally, remember to ask for all the down payment you can. It will be the difference in a deal and a really worthwhile deal.
Use these tips and your department or dealership will experience an increase in SF sales with customers who are already walking through your doors. It’s tough to beat that!
Until next month,
Vol. 9, Issue 1