Q&A:
Rob Avery
Vice President, Prestige Financial Services
The Larry H. Miller Group
What is your background in this business, Rob?
Initially, I was hired by Larry's sub-prime department to increase their sales seven years ago. They really didn't have much of a sub-prime department. They were doing about 30 deals a month. Within eight months we took that up over 400.
Was this in one particular market or is this in all of their stores?
In Utah specifically. Then we started to branch out from there into some of our other markets such as New Mexico, Colorado and Arizona.
Does every one of the Larry H. Miller Group stores have a sub-prime finance department?
Almost all of the stores have one. There are a few makes such as Lexus and Cadillac that do not, of course. Each store has a director over the sub-prime.
Can you tell me how each one of these departments are set up in the individual stores?
There may be some variations, but most of them are set up with a director or manager and they have an assistant who helps them primarily with clerical work. They have two or three salespeople assigned to them.
How do they generate most of their leads?
Lots of different ways. Some from walk-in traffic and some from the sales floor, but mostly through direct advertising. We are very heavy into direct mail.
Direct mail in each market directing customers into that store?
Right. And we do a lot of off-site sales.
Tell me about your off-site sales.
We have many different types. Sometimes they specialize on the sub-prime customer. We do very large sales that will attract a large number of sub-prime customers.
Can you give me a little more detail on how that works?
In a sub-prime sale, we mail specifically to the customers of our choosing. We try to get people with a little bit higher incomes, $1,500 incomes or above. What we are looking for are people who have the ability to purchase insurance and have a down-payment. We mail out to them and we set up at sites away from the dealerships. We usually bring in around 150 to 200 cars. Typically more than one of our dealerships participates. We usually have three or four or five stores participating. The cars are geared towards the target customer's budgets. Most of them are under $15,000. It is very controlled. No one can go and look at a car or go on a test drive until they have received an approval. They have to come in and fill out a credit application first.
Since you do all of that in-house, you have control over all of that?
Prestige Financial will send out four or five people to an off-site sale where we are interviewing customers and approving the loans.
On the spot?
On the spot.
Of course you have let them know this in the advertising.
Right. It is very fast. Probably one of the easier types of sales that we do because we can take care of a lot of business right there. It is quick. The customers are usually in and out within an hour, unless they want to take longer and look at a lot more cars. Again, it is very controlled.
If somebody walks into a new car department and the new car salesman spends some time with them and finds out that they are a prospect for sub-prime, how is that turnover handled?
It usually goes pretty smoothly because the salesperson who is out there working with the customer is trained to recognize that they are a sub-prime customer. They will bring them over to the sub-prime department and make the turn. If the deal goes down we pay them $100 for the referral.
Rob, you said you do a lot of direct mail. When prospects get that direct mail, what is the call to action you are asking those prospects to make?
It depends on the type of mailing we are doing. Typically, we are asking them to come to some sort of an event. A lot of these customers have been to sales and they have spent hours and hours there. They can actually call us and get pre-approved for our sale. We invite then to bring their stipulations; we pay them five dollars if they just bring their stipulations with them. It has been geared up for them and they know it is geared up for people who have had credit problems.
You create some excitement and they see other people doing the same thing.
It works great that way. We are all geared up for them and we tell them it is going to be fast and we do have a good reputation in the community. I think that is important.
You want most of these folks to go through Prestige, but for those who don't, who are your major lenders?
All of the deals actually go through Prestige. Then Prestige makes the decision on if it stays in-house. The customer profile may not meet our underwriting guidelines. We have partnership relations with WFS and Auto One.
It sounds to me that the majority of your sub-prime units are moved though these sales.
Actually, most of them are sold at the dealership level. We are prepared at the dealership level to handle a customer when they walk in. When you are prepared and you have a system in place, you have got a mechanism to finance them quickly.
Someone comes into one of your dealerships and they are a sub-prime prospect. Take me through the process.
As soon as they are identified as a sub-prime customer then they meet with our sub-prime manager. Then they see one of the specialists in our sub-prime department and they take a complete credit application, call the credit bureau, etc. They interview the customer. They find out what kind of down-payment they can handle. They find out if they have the ability to get insurance. They collect any stipulations that are going to be required, such as driver's license and their pay stub. Then they determine that person's ability to purchase a car and what kind of payment they qualify for. Then they will turn the customer over to the salesperson, who will sell the car at the same time they submit the application.
What kind of time frame are we looking at for the whole interview process to take place?
That process usually takes about half an hour. We have pretty fast turnaround time. Depending on the day, sometimes in 15 minutes. The absolute longest time it usually ever takes is two hours. Meanwhile, the salesperson is out selling the car. Most of the time we are pretty good at speculating what we are going to approve them at, their payment and everything. By the time we get the answer back to them, let's say it takes them an hour, they are outside looking at a car during that time. The whole sales process, financing, delivery and everything, usually is finalized within two to two-and-a-half hours.
Rob, in you opinion, what are some of the keys to a successful franchise dealership sub-prime department?
You absolutely have to have the right manager. Somebody who is great with people, very conscientious with the paperwork and well-organized. You need to have a very good system in place for handling the customer. You need to be prepared to accommodate the customer who calls on any advertisement. You need to be properly staffed. You absolutely have to understand the lender programs. You need to maintain a good log system to log the customers in. You have to have systems for following-up with these customers. In the event that they don't make an appointment, or if something happens and you are calling them back and rescheduling, you have to be well-organized. You have got to be prepared when they get a turn from the sales floor, to take care of that customer immediately, otherwise the salespeople from the floor will get discouraged and quit turning customers over.
Obviously the key is that good manager and you have over 30 of them out there. What are some pointers as to looking for and finding good managers for the sub-prime finance department?
We typically have found them in our sales force. We rarely have to go outside of our group to find somebody. Typically they are not the top salesperson, but they are consistently number three or four in the sales department. Usually they are three or four because they are not rushing after the next sale. They are making sure that they are taking care of business. Usually that person has been selling cars for at least a couple of years.
How many sub-prime units per month are you moving through your group?
I don't know how specific Larry was with you, I don't know if he wants that information disclosed.
He said 500.
Well, actually it would be a little bit higher. Prestige Financial is purchasing 500 by themselves.
And another 100 or so through other lenders?
About that.
What are your average front end and back end grosses?
The average front end is about $1,800. It's about $600 back end.
Looks like you are making a nice profit but nobody is being gouged or taken advantage of.
We don't believe in gouging the customer. We could actually make more money on these customers, but we want to sell them more cars in the future and we do have a lot of repeat customers.
What advice do you have for dealers who want to improve their sub-prime department?
First of all, you select two or three lenders and make sure that you have a good working relationship with them. They don't really need more than two or three.
But you have already told me that beside PFS you have three or four lenders.
Well, that's me (laughter). I have over 30 stores. Seriously, each store needs to make sure that they have an excellent relationship with a couple lenders and it's hard to do that with five or six. A GM or an owner of a store is going to want to make sure that their store has an excellent relationship with two, maybe three lenders. Make sure that you can provide them with enough deals to get and keep the lender's attention. I have been doing this for many years; dealers will actually get more deals bought with fewer lenders because those lenders will end up taking very good care or them. What happens by working with just a few is that now, your used car manager, who is very critical to this process, will know which cars to buy. Your desk people will understand those two or three programs. The salespeople will understand them. Everybody at the dealership who is involved will understand the criteria or what is required by those particular lenders. When you have six, seven or more lenders, it becomes far too complicated and nobody will know much about any of them.
Do you use any of the automated inventory/lender matching systems that are out there?
We have not.
If you only have two or three lenders, you don't need it.
You really don't need it. You will know your inventory. When you really get down to it, I have not seen very many dealers who really stick with those software programs for very long. They may use them for a while and then they stop using them or they change. It is just wasted money on those programs, in my opinion.
My philosophy is to keep it as simple as possible. When I came to Larry Miller Group, there were a lot of lenders out there, but we primarily stuck with just two lenders. In Utah, we went from 30 units to over 400 units in eight months. They weren't necessarily the best programs, but they were the companies that provided us with the best service...consistency in the buying.
Sometimes that is worth even more.
It is far more valuable to us. We wanted the service. We got paid quickly. We didn't have a receivables problem.
Larry had made me aware of the fact that you do provide your services to other dealers.
We do. We were getting a lot of calls from non-Larry Miller dealerships wanting to do business with us. We decided to go with a few. We chose only dealers who have sub-prime departments already in place. We are actually doing business with 11 other dealers/groups. I think we have a very good relationship with every one of them.
Is this something you are looking at expanding at some point?
Right now we are very busy. I don't think that we are looking to expand at this point. I believe it is something that we may do in the future. We do provide a high level of service to any dealership that we are doing business with and as a result, we look for high numbers from every one. We would never let them purchase only three or four deals. We like to get upwards of at least twenty deals a month from each dealership. We do expect high ratios. We probably have the highest look-to-book ratios of anybody in the country. It's more cost effective. That allows us to provide a higher level of service.
Rob, what do you see down the road for sub-prime?
I think that it is an industry that is going to continue to grow. The economy has been great. Bankruptcies are still on the rise. It is kind of a strange phenomenon, considering how the economy is doing. I am anticipating that when we do have a downturn in the economy there will be an exponential increase in bankruptcies and the primary lenders, who have been buying deeper as a result of the good economy, will probably tighten up. That will leave more paper for the sub-prime companies.
In your position with Prestige, how do you view the proposed legislation to make bankruptcies more difficult?
To be honest with you I really haven't worried about it. I think that it is a good thing, as a citizen of the United States. It probably would have some negative impact on Prestige Financial. Regardless of whether people are filing bankruptcy or not, they are still going to continue to have credit problems and they are still going to need to have a lender such as Prestige and the other sub-prime lenders out there.
