How To Expand Your Sub-Prime Department In Today's New Economy
By Steve Hall
We have recently experienced a major decline in new car sales over the last 30 days and the manufacturers are demonstrating signs showing this decline will continue. Although 2000 will set a record for new car sales, reaching nearly 17.5M in sales, manufacturers have also set a record in 2001 new car models for incentives and rebates per vehicle. Not only are incentives and rebates at the highest level in history, manufacturers have cut production levels in 2001. The combination of higher incentives, lower production levels, rising fuel costs and rising interest rates tell us that new car sales will decline in the next several years.
As new car sales decline, which have accounted for nearly 28% of a dealer's total profits in 1999 (NADA 1999), dealers will look for new ways to recover these profits. One of the most obvious will be to expand the capabilities of their finance departments. Dealers can achieve immediate and significant increases in volume and gross profits by offering a wider range of financing. However, there will be some new challenges dealers will face as they start to target sub-prime customers. They will experience much more knowledgeable sub-prime customers who have better information about price, interest rates, extended warranties and other options. They will be more selective and place more demands on dealers because they have more choices. Sub-prime consumers are more educated than ever before. They are leveraging the power of the Internet to drive down profit margins, seek out more options and become more knowledgeable about their own financing capabilities. This will be a culture shock for most dealers. They are used to controlling the flow of information. Dealers have had this advantage for years and by controlling the flow of information about the sub-prime buying process, they release information on a need-to-know basis, allowing the dealership to control the entire buying process. This will change as sub- prime customers obtain their own financing online, purchase their own extended warranties and insurance products online and place more demands on the dealer on pricing and service.
If dealers are going to recover their profits from decreasing new car sales by expanding their F & I departments, they must do a better job of managing their own information. They will be competing with dealers as far away as 80-100 miles. They will compete with other banks, finance companies and mortgage companies that are going directly to the consumer. In order to achieve a sustainable competitive advantage in the marketplace, dealers will have to better forecast the needs and demands of their "new" sub-prime customer and be ready to take on an entire new sales process that involves releasing more information, offering more choices and creating a better buying experience. Dealers are going to have to create a faster flow of information and get it into the hands of the people who are closest to the customer, sales managers, finance managers, and salespeople. These people will need to have access to the most competitive rates and terms in their marketplace and be able to compare it to the online choices the customer has. They have to also be able to know what vehicles have the most competitive and attractive rates and terms. Dealers will need to understand and forecast what type of vehicles these sub-prime customers will want and demand. Dealers can no longer push inventory onto these customers. These customers have more options and will be more selective. This will change the entire distribution channel of vehicles in the sub-prime marketplace from the current "push model," where dealers buy what is cheap and available and then by controlling the flow of information will use aggressive sales tactics, and expensive marketing and promotional campaigns to "push" inventory into the sub-prime customer channel. The new model is being created where dealers have access to better information to more accurately forecast the needs of the sub-prime customer and allow these customers to "pull" inventory through the dealership channel.
These new challenges are already impacting dealerships today. My company is working with dealers to help them leverage technology to convert the passive data that is locked inside of their dealer management systems into "active information" that can be applied in the marketplace to better understand the needs and demands of this new sub-prime customer. By developing better ways to manage information, dealers will be able to lower inventory supplies, turn inventory faster, and maximize overall total gross profits.
Steve Hall is CEO of PriceDrive, a technology company that provides business intelligence to automobile dealers to help turn inventory faster and maximize overall profitability. Mr. Hall is also the founder of Custom Finance Services (CFS), one of the leading consulting groups on sub prime financing strategies. shall@dealeronline.com
