The Eve of Destruction
One of the greatest protest songs inspired by the Vietnam War was “Eve of Destruction,” written by P.F. Sloane and sung by Barry McGuire in 1965. To a young, impressionable Jim Ziegler, the lyrics just grabbed me, as many anthems from that period were prone to do. Every line and every word of that song were warnings that we were at the brink of total collapse. And, well, that song was designed to cash in on the universal paranoia of the time, and it worked. I guess that’s why they call my age bracket the “Live for Today” generation, because all we were told is to not expect a tomorrow.
I guess I thought the song was appropriate as the presidential election draws near, because no matter your party affiliation, as a nation, we’re starting to feel that way again. Doom and gloom fill the airwaves and the Internet. And it really doesn’t matter who gets elected, because the other side has spent millions telling us the end is near.
Well, as an industry, we’re way ahead of the curve. Cars are selling while the rest of the economy continues to tank. As a matter of fact, August was incredible. But will it last?
The current administration likes to hold up General Motors as a banner of victory because it pushed the auto bailouts through and the government now owns a large share of the company. Keep in mind that I am an advocate and supporter of the bailouts. It was necessary and appropriate, which is something Mitt Romney and I violently disagree on. However, I have a problem with government ownership and the political influence on GM’s operations and direction.
I guess I’m wondering what percentage of GM sales are fleet sales to the U.S. government. I mean, here we have corporate management tap-dancing to the tune of the political masters. Take the Chevy Volt. I have gone on the record as saying the Volt is the best hybrid on the market today. It’s better than the Toyota Prius and any Honda offering, but that isn’t enough.
See, no matter how good your hybrid product is, Toyota owns the category by reputation and because of its dedication to the technology. It’s in its genes, its DNA.
But let’s take a step back. Hybrids aren’t selling. Heck, they aren’t ever going to take a big percentage of mainstream sales, no matter how hard the political machine tries to shove it down the public’s throat. I doubt that GM would have pursued the Volt if the government hadn’t influenced it to do so.
Bottom line, it’s a niche market product appealing to a niche market clientele. And, as we all know, Toyota has the majority of that very thin slice of the market sewn up.
With my 36 years in retail automobile sales and marketing, it’s safe to say I’ve seen the trends and cycles that seem to endlessly reoccur and repeat themselves. One of these recurring mistakes is highly subsidized leasing. I can hear the howls and protests now, but, hey, sometimes the truth hurts.
Leasing is great for dealers, and it usually gives the consumer a lot more car and a defined trade cycle. Shoot, I’ve sold more leases in my career than some dealerships do in a year. However, leasing almost never works out for the lender, the manufacturer, or whoever ends up insuring the residuals. And the manufacturers know that.
To me, leasing is a mechanism that allows manufacturers to cook the books so they look good for the stockholders (or, in GM’s case, the voters) for a limited amount of time. But as we all know, the true value vs. the residual value comes to roost the second that vehicle comes back.
Leasing also is a way to unload your mistakes, or to turn lemons into lemonade. That’s why you’ll see a manufacturer promoting a ridiculously low payment with a tremendously inflated residual. They just want those vehicles to fly off dealer lots as quickly as possible. Remember, on the books, it looks as though the OEMs profit from lease volume. They count leased vehicles as an asset at the residual value listed on paper, even though they know they’re going to be losers when they come back.
Subprime Heating Up Again
The statistics are moving faster than I can track them, but it’s clear subprime has found its mojo. There was a time when I could recite percentages of how many people had subprime credit scores. We called those individuals “bogues,” “bandits,” “roaches,” and “get-me-dones.” I’m sure there are some new names out there to describe the credit-challenged, and I won’t defend the labels we give that customer segment. But I will say there are two faces to today’s subprime customer.
See, there are some people who have severe credit challenges because of a situation or event beyond their control. Then, there are those subprime customers who are habitual abusers. They repeatedly default on every second chance they’re given, and they’ll sign anything.
Most of my career in dealer management was spent in F&I. My specialty was getting the difficult deals done. I’ve always said the most profitable skill in finance is not selling the products or holding the rate, but rather the ability to get the paper bought with the least conditions and at the best buy rate.
Problem is, interviewing customers and deal structuring is a lost art, as more managers just shotgun the deal out to lenders through DealerTrack or RouteOne. And they’ll accept whatever call they get back. Most F&I schools don’t even teach managers how to rehash a deal anymore.
Remember this: It was subprime mortgages that brought down the economy in 2008 and tainted the credit segment for all industries. That’s why subprime auto lending all but disappeared. But all indications are that subprime auto finance is back. Subprime isn’t back for all industries, but auto was able to prove during the credit crisis that it doesn’t operate like the mortgage industry. And that’s what’s attracting investors to this segment.
Traditional lenders have already returned auto financing to pre-recession levels, even though it appears the recession is still with us. With that said, you can expect the credit market to open up even more in 2013. That means your dealership needs to be totally tuned in, trained and prepared for the subprime business.
I can’t tell you how many dealers tell me they don’t want that business in their showrooms. Excuse me, but it’s already there and you’re missing it. So jump in and create a department that specializes in subprime. That business is about to explode. It’s highly profitable and you can bet your competitors are already eyeing it.
And here’s why that market is so profitable: If a car is sold and resold five times before it’s scrapped, the used-car dealer who sold it for $2,000 made more profit than the new-car dealer who originally sold it for $30,000. That is why I have been encouraging dealers I work with to keep older, higher-mileage cars for resale rather than wholesale them off to people who will hit a profit home run when they resell them. There are some great companies offering high-mileage service contracts for older cars, too.
And that’s why I believe we’ll be seeing more franchised dealerships going beyond secondary lenders and starting their own buy-here, pay-here operations. Some dealers might even incorporate related finance companies as Lynn Hickey Dodge did in the ’90s.
What you need to do first is create the department, hire the right people, and send them to specialized training. Your traditional F&I schools are not teaching the skills they need. If you are the dealer or operating as the general manager, you may want to consider going to school yourself.
Next, get new lenders that specialize in the subprime market. Most secondary sources that buy the deepest are portfolio lenders that are investor-driven. Thirdly, be sure you have the right inventory for this segment. These are cars you might not ordinarily keep in inventory. We’re talking about units you can buy cheap and book high.
Lastly, dedicate a budget for advertising to this unique market. Buy the right software and hire the right consultants and trainers.
Kia Has the Recipe
It’s sort of like that upset horse race when a no-name horse breaks on the final turn from the back of the pack and passes all the major contenders. That’s how I view Kia. It’s on pace to end 2012 with a 4 percent market share of the new-car market. In fact, the carmaker’s sales have increased every year the brand has been in the U.S. market. No doubt that its vehicle line offers great quality and value. The new product designs are world-class, but that’s not why I think the company is successful.
See, I believe the secret to Kia’s success lies in those furry hamsters that appear in the company’s commercials.
As I began my research for this article online, my trophy wife Debbie heard me laughing out loud in my office. Of course, I was watching the latest Kia hamster commercial on YouTube. It starts out with a scene from maybe Paris in the late 1700s. You know, powdered wigs and lace. Well the scene starts off with people walking into an opera house. The conductor is prominently center scene, leading the orchestra as the ballerinas dance. You’re thinking, “What the….” when a Kia Soul rises out of the floor in between the dancing ballerinas. Then the conductor rips off his mask to reveal that he’s one of the Kia hamsters. The Soul’s doors then swing open and more hamsters emerge.
There’s another hamster in the balcony with a high-tech DJ setup. The music goes wild and electronic. The hamsters start break dancing onstage, and the ballet dancers and the audience start moving like they’re at a rave. It’s hilarious, original and it captures the audience. Incredible marketing.
Back in the ’90s and early 2000s, some children told their classmates that their father was a pimp running a brothel. It was simply less embarrassing than saying their father sold Hyundais.
I know, low blow. But Hyundai dealers did struggle with bad product and low-end clientele from the very beginning. It wasn’t easy, nor was it glamorous.
Now, their ship has come in and Hyundai sales are off the charts. The product is great, public acceptance is better than ever, and my dealer clients are screaming for product. That’s right, I am working with some of the biggest Hyundai (and Kia) dealers in the world and they can’t get the cars they know they can sell.
OK, so Hyundai has great quality, styling and consumer appeal. And that’s all good. But you can’t sell that if you don’t have the product. But here’s where things get bad: See, ever since the first Hyundai hit the U.S. market, dealers, in general, have never made solid gross profit per unit. In fact, they still aren’t, despite the limited supply. Now that’s ugly. Is it a mindset that you can’t hold gross on Hyundai product? Or is it a factory culture that has pressed dealers to turn inventory quickly in order to get replacement allocation without a problem?
In the early years, Hyundai was the first manufacturer to invent stair-step incentives. These dealers have always been chasing incentives or allocation rewards. On top of everything else, residuals on Hyundai cars are at or above 50 percent on 36-month terms. Who would have ever guessed that? Leases on these cars are very attractive to payment-conscious consumers, but, once again, profit per unit sold is pitiful — but not for everybody.
Some Hyundai dealers are sitting on less than a 30-day supply on the ground when the industry norm is approaching or surpassing 60 days. And they still aren’t getting premium prices for their cars. That’s because they are incentivized to cut each other’s throats to get more inventory.
It’s taken a while, but I’m seeing more dealers getting their stores on Facebook, YouTube, Twitter and now Pinterest. I’m also hearing from more dealers who say they’re actually selling on these sites. With Facebook approaching a billion members, you have to leverage social media to reach the consumers. I mean, that’s where they are.
The problem most dealerships have with social media is they think they can treat it like they do traditional media. Social media requires an entirely different approach to yield tangible and measurable returns.
The newest and perhaps most powerful social site for sales is Pinterest. I was looking at some of the dealership boards on Pinterest recently. I began to realize how you can use the photo-sharing site to dramatically improve and expand your message. Of course, the secret doesn’t lie in how you create your boards; the secret lies in how to drive traffic to them. And we’re rapidly figuring that out.
There are many examples I’ve seen of dealers doing a great job with this new medium. The challenge now is to get more consumers to pop on to them. My friend George Nenni with Dominion Dealer Solutions is probably the best Pinterest expert I’ve met, so get him on the line to pick his brain.
Well, this was a difficult article to write because, for the most part, everything’s good. Oh, there are problems here and there and friction with some of the manufacturers, but, all in all, everybody is building good cars, sales are up, and manufacturers aren’t really doing anything to impact dealers. Give them time, though, because they’ll soon figure out a way to screw it up.