Ongoing adjustments, adoption of GPS impacting Car-Mart charge-offs & losses

Perhaps the most recent quarterly performance by America’s Car-Mart shows that GPS technology cannot singlehandedly improve charge-offs and credit losses for buy-here, pay-here operators.

During a quarter where retail sales and revenue improved, Car-Mart executives said they were “very disappointed” with net charge-offs as a percent of average finance receivables rising 7.8 percent in the first quarter of their 2016 fiscal year. That reading is up from 6.3 percent for the prior year quarter.

Also frustrating Car-Mart leadership was the Q1 provision for credit losses coming in at 27.7 percent of sales versus 24.6 percent for the same quarter a year earlier.

Elsewhere on the performance side, the company indicated collections as a percentage of average finance receivables remained relatively flat at 14.0 percent from 14.1 percent for the prior year quarter. Furthermore, Car-Mart highlighted that its accounts more than 30 days past due dropped to 3.8 percent from 5.8 percent as of April 30, a move that represented a decrease of $7.7 million.

Car-Mart president and chief executive officer William “Hank” Henderson tried to explain what happened as the company opened its fiscal year.

“We certainly anticipated some elevated loss levels as we started the quarter with a high 5.8 percent of our finance receivables being 30-plus days past due,” Henderson said. “Also, as we had mentioned, we were somewhat disappointed in our collections for the fourth quarter and knew that we were facing some challenges heading into this year.

“Operational inconsistencies among dealerships, including issues with the effective utilization of our GPS technology in our collection practices, as well as other distractions related to policy changes and our software implementation, contributed to the poor results,” he continued.

“Additionally, the competitive landscape remains intense, but we feel that our issues are more attributable to our own lack of consistent blocking and tackling,” Henderson went on to say.

Earlier this calendar year, Car-Mart indicated that it had about 80 percent of its inventory equipped with GPS technology with plans to have devices installed on all of its retail units within six months. That process along with several other operational and technology changes appear to be impacting the company’s performance.

“We have spent several years now building an infrastructure to support a larger customer base,” Car-Mart chief financial officer Jeff Williams said before rattling off eight specific areas, including:

— Information technology
— Compliance
— Associate support and training
— GPS technology
— Centralization of non-core lot level administrative functions
— Manager-in-training program
— Customer payment technology
— Credit reporting

“These investments were made to provide better service to our customers and our field associates and to allow for productivity improvements for existing dealerships as well as to support growth from new dealership openings,” Williams continued. “While we are disappointed with the current quarter's results, we are always looking long-term and do expect that we will see benefit from these investments in the future

“The competitive landscape remains challenging, but as Hank mentioned, we know that we can do so much better at helping our customers succeed,” Williams went on to say. “Our bottom line results are always dependent on our customers succeeding on their individual contracts with us.”

As of the close of Q1, Car-Mart reported its active accounts base stood at approximately 65,600, pushed in part by a retail unit sales increase of 6.6 percent to 12,244 units. Company dealerships turned an average of 28.9 units per month in the first quarter, up slightly from 28.4 units a year earlier and 28.1 units in the previous quarter.

The sales performance lifted company revenue 8.9 percent to $143 million, leaving Car-Mart with $4.6 million in net income or 52 cents per diluted share.

Car-Mart now has 143 dealerships in its network after bringing aboard a store in Rolla, Mo., on Aug. 14. The company’s footprint is on track to expand to 11 states as its growth pipeline eight new locations, including one in Iowa.

As the company irons out its processes — including improved underwriting and leveraging of GPS technology, Henderson is confident in what Car-Mart can accomplish going forward.

“We are disappointed with our results for the quarter, but we are not deterred. We have opened almost 50 stores in the past five years and the majority of which of have done very well, and you can’t have that level of growth without a few bumps in the road,” Henderson said.

"We have great shared vision of the company,” he continued. “We are building an extremely capable and dedicated team to get us here. We have a solid plan in place to correct our shortcomings and we will work it intensely.

“When we fall short and make a mistake, we gained valuable experience that makes us better provided the course that we learned from it,” Henderson went on to say. “This recent quarter has gotten our attention drawn to exactly where it needs to be and I fully expect we will better for it.”

Car-Mart adjusts dealership addition plans by opening Georgia store

When America's Car-Mart closed its fiscal year back at the end of April, the buy-here, pay-here dealership chain initially expected to expand its footprint in Missouri. Instead, Car-Mart broadened its presence elsewhere in the Southeast this week with its seventh dealership in Georgia.

The newest location is in Albany, Ga., lifting Car-Mart’s store count to 142. This store that’s to be managed by Josh Wolf is the first new store opening of the company’s current fiscal year.

And as far as that previously projected addition in Missouri, company officials said, “We currently expect to open our Rolla, Mo., dealership within the next couple of weeks, and we have eight additional new location projects in process at this time.”

Car-Mart president and chief executive officer William “Hank” Henderson mentioned when the company reported its fourth-quarter and full fiscal year performance that the store in Missouri was scheduled to begin moving metal in June. Henderson also shared some details on how Car-Mart plans to venture into new markets.

“We are very excited about our expansion plans as we will be adding a new state this year — Iowa,” Henderson said. “We have already secured a location in Burlington, Iowa, and are currently looking at a few other prospects in the state.

“As always, we look forward to adding value to the markets we will serve,” he continued. “We are looking to pick up the pace of new lot openings in 2016, and the projects in process right now will certainly help.

“We are pleased with the top line growth and remain convinced that we are moving the company in the right direction,” Henderson went on to say.

The company is looking to leverage the additional stores to improve the performance it enjoyed during the 2015 fiscal year, metrics that included:

— Net income of $29.5 million or $3.25 per diluted share

— Revenue increase of 8.4 percent to $530 million

— Retail unit sales increase of 9.9 percent to 46,760 vehicles

— Net charge-offs as a percentage of average finance receivables of 27.8 percent, down from 28.2 percent for the prior year

Car-Mart closed its most recent fiscal year with a 10.7-percent lift in sales during Q4 as well as a $222 jump in the retail sales price for those vehicles to push revenue to $138 million and net income to $7.2 million.

“As we expected, we saw a nice improvement at the top line for the quarter and are pleased to see the increase in sales productivity,” Henderson said. “Our general managers are doing a very nice job of executing our sales plan and are working hard to attract customers looking for good, basic and affordable transportation to go with Car-Mart's excellent service.

“We believe that we offer our local markets a better value by staying focused on customer success,” he continued. “As always, we are committed to growing our company in a healthy manner with customer success being the priority.

“Competition remains tough, but we know that we can execute at a much higher level, specifically as related to our lot level collections efforts,” Henderson went on to say. “We remain committed to continuing to grow the business in the face of increased competitive pressures which have been prevalent for the last few years. We believe that there is a significant number of good, hard-working folks who deserve the opportunity to succeed with Car-Mart, and we will continue to expand to meet this need.”

No matter how many more stores in Missouri, Georgia, Iowa or elsewhere where Car-Mart might add, chief financial officer Jeff Williams reiterated the importance of one specific part of the company’s business.

“Because the competitive environment remains challenging, we must always be on the top of our game especially as related to collections,” Williams said.

“We are focused on the increase in our accounts over 30 days past due at the end of the quarter and the decrease in principal collected for the quarter. We are not happy with where we are in these two areas and are working hard to help our customers succeed,” he went on to say.

3 steps to solidify customer complaint response strategy

Especially in these times of intensive regulator oversite, Automotive Compliance Consultants president Terry Dortch insisted that how your buy-here, pay-here dealership responds to customer complaints often determines whether the store’s good name gets blemished or a lawsuit results.

Viewed proactively, Dortch explained complaints can help BHPH dealers identify process and personnel weaknesses to be corrected.

Dortch acknowledged that every dealer knows about customer complaints. But if operators are not hearing them personally, he mentioned that perhaps a visit to review websites like Consumer Affairs will be enlightening.

Automotive Compliance Consultants has found that most review sites like this one contain a number of positive reviews, but their share of negative ones about various dealerships, as well.

Dortch wondered how many complaint reviews might have never reached social media had dealers responded to customer concerns more appropriately, expediently and kindly.

The firm emphasized that proper response to customer complaints is part of an effective compliance management system (CMS). This system describes correct processes for complaint follow-up and other best practices for ensuring BHPH dealership compliance with prevailing laws regulating the business.

“A dealer can have put into place the right practices to ensure the business operates according to these various laws, but if no set policy and responding practices are put in place for handling customer complaints, the CMS is broken,” Dortch said.

Automotive Compliance Consultants specializes in dealership and auto finance compliance, providing in-dealership consultations and analysis, compliance audits and training, and offers solutions for all compliance needs.

When establishing a complaint response system, the firm explained a dealership should consider:

• The types of complaints received, and how to categorize them. Those from a regulatory agency, and complaints regarding Equal Credit Opportunity Act claims should be placed in their own category.

• How complaints are to be received and by which individual or individuals within the dealership.

• How complaints will be documented, how information will be gathered about the complaint, information about the individual making the same, and each contact with the customer.

“Respond promptly and appropriately, whether in your estimation a complaint has merit or not, as certainly someone believes you violated their rights and certainly their emotions,” Dortch said.

“Ignore complaints or respond in a way that dismisses or demeans the customer and you’ll likely germinate a potential lawsuit,” he continued.

After receiving, logging and responding to complaints, Automotive Compliance Consultants recommended that BHPH operators use them to improve the business, as they likely point to:

• Weaknesses in sales and finance processes

• Employees that may be exposing the dealership to risk

• Needed improvements in customer handling

• Broken compliance practices

• Need for remedial employee compliance training

The Automotive Compliance Consultants staff has extensive experience in the retail automotive industry and focuses exclusively on dealership compliance issues.

For more information, contact Dortch at or visit

DealerSocket Buys AutoStar Solutions

DealerSocket announced this afternoon it has bought AutoStar Solutions, a popular dealer management system for buy-here, pay-here and used-car dealers.

This news comes after AutoStar Solutions first announced at the end of December that its AutoStar Fusion dealer management system had completed integration with DealerSocket’s customer relationship management software.

 “AutoStar Solutions delivers extreme value and expertise to the buy-here, pay-here and used-car retailers,” said Jonathan Ord, chief executive officer of DealerSocket. “The people at AutoStar are passionate about the used car retailing world. Together, our goal is to equip BHPH dealers with the most advanced and innovative next generation technology at the best possible value for their day-to-day operations.”

The DMS system tailors its solutions for BHPH and used dealers, specifically, and works to optimize processes for finance, wholesale and leasing.

AutoStar’s solutions include Web-Based DMS, PortalPay, CollectorPro, Insight Reporting, Leasing, AccountLink, NetLink, and more.

“We’re excited to announce this partnership with DealerSocket,” said AutoStar’s president and CEO Allen Dobbins. “DealerSocket’s deep commitment to providing their customers with next-generation technology aligns perfectly with our value standards, technology, and opportunities for automotive dealers.”

AutoStar’s chief revenue officer Antonio Rajan added: “This is an excellent opportunity for our company to evolve our product offering into an even more powerful platform and essential tool for Independent and BHPH dealers. The future is brighter more than ever with this partnership.”

And this isn’t the first big acquisition the DealerSocket has made this year. In late February, DealerSocket announced the acquisition of FEX DMS, a dealer management system (DMS) for BHPH and other independent dealers.


Dealers Praise NABD for Latest BHPH Best Practices Conference

Mike Marak is the president of M&M Auto Sales in Hiawatha, Iowa, boasting more than three decades of buy-here, pay-here experience.

Marak chose to spend three days in Dallas last week for the Best Practices Conference hosted by the National Alliance of Buy-Here, Pay-Here Dealers. Judging by what he shared with NABD afterward, it seems to have been time and money well spent.

“Everything was great,” Marak said. “I did not hear one bad speaker. I learned something in every session, and I have been in the business 31 years.”

NABD highlighted that BHPH operators from throughout United States attended the three-day event, which wrapped up on Jan. 20. The dual-track program focused on best operating practices and compliance for BHPH.

And Marak wasn’t the only dealer who thought spending time away from the store to come and gather information on compliance, collections and underwriting was a prudent move.

“NABD is the leading voice and authority in our industry. There is no close second,” said Al Gardiner, owner of St. Mary’s Motors in Lexington Park, Md. “This show and other NABD contributions are an absolute must for dealers whose livelihood depends on the BHPH industry.”

Jack Bridges, chief operating officer of Credit Now Auto Co. and Atlantic Acceptance Corp., offered a similar assessment.

“Having attended virtually every one of (NABD’s) national conferences over the years, I came expecting to gather a wealth of information and that is exactly what the show delivered and so much more that it’s simply amazing,” Bridges said.

“(NABD’s) conferences are, simply stated, a must for anyone that is serious about learning, improving and growing their BHPH business,” he continued. “In fact, I would say a lot of Credit Now Auto Company’s success over these many years is due in a large part to what we have learned at (NABD's) shows, then brought home and put into practice.”

NABD founder and president Ken Shilson indicated the educational sessions featured 11 dual-track workshops on Sunday afternoon and Monday.

Compliance topics included legal and regulatory updates, handling regulatory investigations, compliance systems and an IRS update. The best operating practices sessions focused on areas such as the Internet, integrated technology solutions, add-ons, maximizing recoveries, performance benchmarks, inventory and reconditioning and capital alternatives.

On Tuesday morning, the workshop sessions combined into a single track, featuring both best operating and best collections panels and a presentation on the new Buy-Here, Pay-Here Center.

The best practices sessions featured many of the nation’s most successful operators and industry experts. The compliance program included leading attorneys Tom Hudson, Terry O’Loughlin, Patty Covington, Eric Johnson, David Silverman, Myles Stevenson, Gerald Sachs and other chief compliance officers.

“All the sessions were interactive so attendees could ask questions and get answers to their questions on how to become compliant, and ways to improve their profitability and cash flow, and regain market share,” Shilson said.

“These sessions helped attendees take a proactive approach toward making 2015 a better year,” he continued. “In the highly competitive environment of today, training like this has never been more important. Attendees left with many new ways to increase market share and to avoid legal and regulatory mistakes that could cost them millions.”

Joyce Caudill, vice president of Richwood Acceptance in Walton, Ky., insisted that Shilson and NABD “have their fingers on the pulse of the BHPH industry.”

Caudill emphasized how discussions about the Consumer Financial Protection Bureau taking a great interest in the BHPH space are some of the main takeaways she had from the event.

“As our industry continues to come under close scrutiny and tighter regulation, real-time information on what the CFPB and other regulators are doing, planning on doing and honing in on, is more important than ever,” Caudill said. “The legal experts on the panel were top notch, not afraid to answer the hard questions and get us all on the right path to compliance.

“The technology experts have listened and are treated our business as the real player it is for even more credit challenged customers than ever,” she continued. “Putting all the information in a friendly, exciting format, at one place makes dealer education easier than ever. I tell everyone I know in the business that these conferences are a ‘must do,’ except our competition.”

And dealers weren’t the only attendees who gained valuable experiences out of NABD’s latest event offering. Mike Downey is the vice president of sales and marketing at Auto Master Systems.

“It is obvious that NABD has a great understanding of the needs of today’s dealers by dedicating a conference to the important topics surrounding operation and compliance,” Downey said. “The quality of content offered, and their selection of highly qualified speakers makes attending this conference an easy decision for BHPH operators who want to improve their business.

“We’re proud to be a part of it and look forward to the next one,” Downey went on to say.

And Tax Refund Services and TaxMax founder Bill Neylan added, “The NABD show is a must for all buy-here, pay-here dealers, as well as any vendor in the industry who are looking to better their business.”

NABD announced it will hold its 17th annual National Conference on May 19 through May 21 at the Wynn Hotel Resort and Casino in Las Vegas.

“The Wynn is the finest, five-star, Las Vegas hotel and casino. NABD offers unprecedented room discounts with no resort fees while supplies last,” Shilson said.

In addition, NABD plans to hold a BHPH Boot Camp on Aug. 22 and 23 in Monroe, N.C.

For more information on these upcoming events, visit or call (832) 767-4759.

NABD Welcomes Largest BHPH Boot Camp Crowd Ever

The largest contingent ever attended the most recent BHPH Boot Camp hosted by the National Alliance of Buy-Here, Pay-Here Dealers at the site of iCars, Ingram Walters’ dealership in Monroe, N.C.

A total of 27 attendees from 15 different dealerships from throughout the U.S. took the opportunity to examine all parts of the BHPH operation owned by Walters, who has been associated with NABD since its inception and has been running his own dealerships for more than 20 years near Charlotte.

Walters along with NABD founder Ken Shilson used the Boot Camp on Aug. 2 and 3 to outline every step that it takes to create a successful BHPH store, from establishing a related finance company, regulatory compliance, underwriting and collections to finding inventory that will turn quickly.

“This allowed attendees to attend classroom training and to receive in-the-field training at one of the nation’s best operations,” Shilson said.

The boot camp training covered all areas of BHPH operations including building a successful business model, acquiring and reconditioning vehicles, best underwriting and collection practices, financial management and monitoring, compliance, technology solutions, and maximizing recoveries.

All attendees received projection modeling software, a complete policies and procedures and human resources manual, and other resource materials including legal and compliance materials supplied by Hudson Cook, sample pay plans, a reconditioning plan and much more.

“For a very modest investment, attendees received invaluable training and resource materials which can help make them millions,” Shilson said. “The opportunity to see iCars, receive individual instruction and learn best practices provided a unique experience.

“It takes capital, technology and knowledge to prosper in BHPH today,” he continued. “The old ways of doing things don’t work like they used to because of increased competition and different industry economics. Operators must develop new ways to prosper, and incorporate capital and technology, along with sound operating practices, to remain competitive.

“This boot camp included participation from three leading technology providers: Auto Master Systems, PassTime and Spireon. In addition, Flock Specialty Finance helped attendees understand innovative new ways to capitalize their operations. The sessions ended with one-on-one meetings with attendees to develop a strategic action plan,” Shilson went on to say.

For operators who were unable to participate in the August session, the next boot camp is planned for Nov. 8 and 9 also at iCars.

NABD’s next major event will take place just after 2015 begins. Walters and Shilson will host a new gathering — the Best Operating Practices and Compliance Conference. It’s set to start just as tax season intensifies — Jan. 18 through 20 at the Hilton DFW Lakes Executive Conference Center in Dallas.

“We have moved our next event to January 2015 rather than holding it just prior to our National Conference (in May at Las Vegas) as we have in the past,” Shilson said. “This will minimize the length of time attendees must be away from their respective operations to gain this important training.”

NABD also announced it will hold its 17th annual National Conference at the Wynn Las Vegas on May 19 through 21.

Operators can gather more information and registration details by going to or calling NABD at (832) 767-4759.

Shilson: 11 Strategies for BHPH Success from a Financial Perspective

Success in buy-here, pay-here is frequently measured by how many vehicles a dealer sells each month or year. Although sales are important, this commentary will focus on other areas which are important to BHPH success.

“Keeping them sold” is important to long-term success and requires good underwriting and collections, efficient systems and processes, a cash efficient business model, financial flexibility, a compliance management system, and portfolio metrics. I will discuss each of these in this article.

A careful look at the most successful BHPH operators of today reveals that they:

1. Manage credit risk successfully.

2. Utilize a cash efficient business model which generates an appropriate return on their investment.

3. Match the right customers with vehicles their customers can afford.

4. Avoid trial and error mistakes which cost them millions of dollars.

5. Learn from their bad debt losses so they don’t repeat them.

6. Handle collections consistently and maximize recoveries.

7. Maintain financial flexibility with the goal of increasing their equity.

8. Control operating expenses through efficiencies created by implementing technology.

9. Resolve customer complaints promptly before they escalate into litigation and regulatory problems.

10. Have a compliance system to avoid legal and regulatory mistakes.

11. Use metrics to monitor portfolio performance and to adjust their underwriting.

In general, it takes more skill and expertise (as well as capital) to be successful in the BHPH industry today. 

Let’s now look more closely at the attributes I mentioned above.

1. In order to manage credit risk successfully, operators must be good underwriters and use experience, technology and training to identify those customers who will repay them.  This begins with a careful evaluation of customer attributes including their capacity, ability to pay, stability and credit history. This approach spells (and results in) cash!

2. Although many different business models are used in the industry, the most successful models maximize cash return. That is, future cash flows, adjusted for losses, generate an appropriate return on the capital invested.  Every operator should know the return they expect before making a significant investment. However, this requires them to estimate future revenues and losses using portfolio analysis. It takes financial expertise, data and performance history to calculate the risk adjusted yield on your portfolio.

3. Good underwriters utilize customer stipulations to put customers in vehicles they can afford (not necessarily the ones they select off the lot). This requires the separation of sales from underwriting.

4. In the capital intensive world of BHPH today, trial and error mistakes have never been more costly. Mistakes are best made by your competitors. Operators need to identify underwriting mistakes utilizing portfolio analysis and make the necessary adjustments periodically. Don’t expect a different result by doing the same things.

5. An analysis of your bad debt losses will help you avoid repeating them. It is much cheaper to correct underwriting mistakes than to keep making them. Determine what works and what doesn’t. The more you learn, the more you will earn.

6. Collections is an art, not a science.  It is important to work with customers, but when they don’t pay, the vehicle must be recovered quickly to mitigate losses.  Bad debt losses are increasing (due to more cash in deal) so greater recoveries are needed to offset them.  Payment device technology helps improve revenues.

7. Financial flexibility is measured by the equity in your business, not by the size of your portfolio. Too much leverage can be a fatal pitfall and ego gets in the way of cash flow!

8. Cost control is essential to both profitability and cash flow. Technology requires an investment in future benefits.  Technology expenditures are needed to remain competitive.  A fully integrated DMS system is at “the hub of the wheel.”

9. In the competitive environment of today operators must build a bond with their customers so they aren’t lured away by competitors. Operators who effectively use online marketing which is integrated with social media are most successful.

10. A comprehensive compliance system is needed to avoid legal and regulatory mistakes which can cause failure.  A chief compliance officer is needed to direct the compliance effort. If you think compliance is expensive, just try the cost of non-compliance.

11. Portfolio metrics which measure default rate, static pool and loss/liquidation rates are needed to raise capital, project cash flow and manage credit risk.  These are as important as financial statements and tax returns!  Familiarize yourself with these performance measurements and build them into your own business.

At the NABD Boot Camps in Charlotte, N.C., we discuss (in more detail), each of the items above, and provide practical tips and best practices to implement them. Attendees tour the facilities and see one of the nation’s best operations in action.

If the old ways aren’t working like they used to, or if you are new to the BHPH industry, I recommend that you focus on the items above, not just selling.  It’s how much you keep that counts.  Good luck!

Ken Shilson is president of the National Alliance of Buy-Here, Pay-Here Dealers (NABD), which will host a Boot Camp in Charlotte, N.C., on Aug. 2 and 3 and a BHPH Conference at the DFW Hilton Lakes Executive Center in Dallas on Jan. 18 through 20. To register or for more information, visit or call (832) 767-4759. Shilson is also president of Subprime Analytics ( which performs electronic portfolio analysis and due diligence services for financial institutions that provide capital to the subprime automotive industry.

NC Operation Requests Permission Before Releasing Payoff Amounts

It’s not yet a compliance mandate issued by a state or federal regulator, but EZWay Auto Sales doesn’t immediately release the payoff amount left on a contract when a customer chooses to trade and make a purchase at another store.

Instead of what’s typically been done, the buy-here, pay-here operation with four locations in western North Carolina implemented a process about a year ago where the customer has to give permission either with a text message or an email before EZWay Auto Sales releases a payoff amount to another dealership or finance company.

Tisa Jones Wood is the account manager for Unifour Financial Services, which serves as the related finance company for EZWay Auto Sales. During a break on Monday at the Compliance Academy orchestrated by the National Alliance of Buy-Here, Pay-Here Dealers, Jones Wood explained the methodology behind this extra hurdle for another store to make a sale.

“When we came back from our first convention hearing about the (Consumer Financial Protection Bureau), we were trying to be very careful in what we release to people who are not party to the contract,” Jones Wood said.

“We decided that if it was not an in-house dealership, then for all outside dealerships, outside banks, outside finance companies, we would make sure we had permission on file that it was OK to release that information,” she continued.

Jones Wood emphasized that store management made the decision not because of any trouble the operators encountered with either state or federal regulators.

“There was nothing like that at all. It’s the case where we were doing the right things so we don’t have any issues. We would rather be out in front of everything before it happens,” said Jones Wood, who also handles the collections for the operation that has lots in the North Carolina foothill cities of Hickory, Morganton, Lincolnton and Lenoir.

And what about F&I managers at franchised stores or other independent dealerships who are ready to close a deal but need the payoff amount to process paperwork?

“Other dealerships don’t like it,” Jones Wood said. “Everyone once in a while you’ll get that person who says, ‘I’ve never heard of this before. You’re the only dealership that’s made us do this.’

“All we ask is for customers to send us a text message or an email so we have something we can print out on paper that we had permission,” she went on to say.

Benchmarks Reveal A Challenging 2013

The numbers point to just how rough the retail sales seas got for some buy-here, pay-here dealers in 2013.

According to the BHPH Industry Benchmarks prepared by the National Alliance of Buy-Here, Pay-Here dealers in association with SGC Certified Public Accountants and NCM Associates, sales volume softened by nearly 7 percent last year, coming on the heels of a 5-percent annual dip a year earlier. Experts point to the significant rise in special financing by a wide array of lenders that took away customers who normally would have had no choice but to seek a vehicle purchase from a BHPH operator.

“I think the big thing is they took a number of our customers. They reduced the sales volume for a lot of operators by taking that business and putting them into vehicles so we had to give up market share,” NABD founder Ken Shilson said.

“Based on Experian’s numbers, we lost over 20 percent of the market share during 2013, and the special finance industry in the short term grew by a corresponding amount,” he continued. “I won’t blame it all on the special finance industry because some of that market share was lost to credit unions, some of which are being very aggressive right now. And also some was lost to new-car franchise dealers who on their used-car operations are being very aggressive themselves.

“The combination took those customers out of play,” Shilson added.

Why did all of a sudden these special finance companies start booking contracts with deep subprime customers? During the worst of the recent recession, reportedly consumers with credit scores approaching 700 had difficulty in securing financing. Now in the past 12 to 18 months, Shilson recollected conversations with BHPH operators who heard about consumers who had credit scores in the low-500 range being able to secure a late-model or even a new car.

“All of the special finance activity was driven by a search for higher yield investments. They were borrowing the money at 2 percent and loaning it out to subprime customers at over 19 percent. The spread there was the attractive part for investors to pour money in, and they securitized a lot of these loans,” Shilson said.

How Successful Operators Managed

Brent Carmichael is the BHPH specialist for NCM and helps to construct the benchmarks. Throughout the year, he moderates 20 Groups that collect stores of similar size for semiannual gatherings of brainstorming and more. Carmichael shared with BHPH Report what successful operators did to stay in business.

“Subprime was back and very aggressive,” Carmichael said. “We’ve also had dealers manage their growth for a cash flow and capital standpoint. We have some dealers who are intentionally selling three less cars a month because they’re focused more on the quality of the portfolio, not necessarily the quantity. Some dealers just wanted to maintain their portfolios, bringing in enough cash to do what they wanted to do. Some aren’t out to be DriveTime or Car-Mart, just wanting the business to pay them back a little bit.”

Carmichael pointed to the benchmarks, numbers to support why some operators chose that path. He mentioned profitability on a per-vehicle sold basis softened to nearly $2,100, representing about a $100 decline per unit.

“A $100 per car doesn’t sound like much, but when you’re talking 600 units per year, now we’re talking about a $60,000 loss in profitability year-over-year,” Carmichael said.

While operators tried to tighten their budgets in many areas, Shilson mentioned how BHPH stores looked to overcome a dwindling customer base by advertising more. The benchmarks showed the average operating expense for advertising ticked up to 3.8 percent in 2013, up from 2.8 percent a year earlier.

“They definitely tried to advertise more as they started to lose market share,” Shilson said. “The only thing that seemed to work successfully was online marketing. Online marketing seemed to be giving them the most bang for their buck. If they just did more radio or television, we didn’t see as much traction there.

“The online marketing in terms of a website and in term of other online marketing is more focused on reconnecting with particular customers or prospective customers,” he continued. “I think that’s where they had the great success. The competitive environment, like we’re seeing with special finance, is every man for himself out there. If you just advertise on TV, so is everyone else. But if you do a more focused thing with your website and your online marketing, maybe you’ll have a better chance of attracting that particular customer.”

Cautionary Signs

Beyond the raw sales numbers, both Shilson and Carmichael spotted trends that caught their attention and reflected just how challenging the BHPH business can be.

“The continuing increase in cash in deal is really one the most telling things,” Shilson said. “For the time since we’ve been doing the benchmarks, the cash in deal averaged more than $5,000.”

To be exact, the average cash in deal at BHPH stores last year climbed to $5,294. A year earlier, the figure stood at $4,672. Back in 2009, it was just below $4,000 at $3,990.

“That’s very significant. Our down payments and our repayments are not moving commiserate with the cost in the industry, so that’s a real challenge for us. We’re spending more, but we’re not taking in more,” Shilson said.

And just one area where BHPH operators are spending more money is on reconditioning. For the fifth year in a row, reconditioning spend increased by at least $100. The 2013 amount broke the $1,000 threshold, settling at $1,026, up from $962 back in 2011.

“That’s one area that concerns me because of what inventory is. I don’t think dealers are doing more to the cars. It’s just costing more to fix the cars,” Carmichael said. “That’s one thing many dealers haven’t thought about. BHPH dealers often look at cars that are about 6 or 7 years old. They’re decent enough with some reconditioning that they can sell, and they are affordable to the customer from a down payment and sale price standpoint.

“There were little to no cars made in 2007 and 2008. That 7-year-old car just isn’t out there. It’s either a 2009 or it’s a 2006. Obviously, 2009 is more expensive, maybe with an (actual cash value) of $7,000 to $8,000. A 2006 is a cheaper car, but they’re also higher mileage and have a little bit more worn off, so to speak. They need a little bit more love to get them ready to make them sellable and safe for a customer,” he continued.

Shilson also shared a theory about why reconditioning costs jumped so much last year.

“What I think is happening in the reconditioning cost area as you recycle more repossessions, your cost to make them ready and to recondition them increases. I think that’s part of what’s happening,” he said.

How Dealers Can Leverage Benchmark Data

Both Carmichael and Shilson explained that operators should use the benchmark data as a reference point, not necessarily as the objectives for how their particular store should be.

“I never want a dealer to set up his business according to a benchmark. Our benchmarks are compiled from hundreds of dealers,” Carmichael said. “You’ve got guys out there who are single-point owner operators who are very involved in the business and run very lean. So there are some areas of the benchmarks that the average dealer selling 50 cars a month and 600 cars a year cannot get to some of the benchmarks.

“I think they’re a great goal to take a look at to see if I can get close as you can to some measure. Some have to be taken with a grain of salt. Some are very attainable for the average dealer. Some aren’t,” he continued.

Shilson emphasized that working each day is crucial, no matter when the benchmarks indicated.

“The big thing to say is a very challenging year in 2013, but are you going to make 2014 better? It’s not going to happen by itself. You can’t sit back and hope that it’s going to get better. You have to get out there and see what’s going to make it better,” Shilson said.


The financial benchmarks for 2013 reflect a higher level of competition within the deep subprime marketplace. The more significant factors that impacted profitability were:

1 Unit sales for most operators were fat or declined (some by up to 25 percent) from 2012, due primarily to increased market competition from special finance sources that extended credit to BHPH customers. Individual operators were affected by varying levels of special finance competition in their local markets. Some operators expanded their facilities (added lots) to increase market share. Market data indicated that the BHPH deep subprime financing market share declined by more than 20 percent in 2013, while the market share for subprime finance companies grew by a corresponding percentage.

2 Subprime finance lenders (including franchise operators) were particularly aggressive in financing deep subprime customers (with credit scores below 550) who purchased new and late-model vehicles (less than three years old) with low down payments, high repayments and terms of more than 60 months. Finance companies originated these “silly loans” in an attempt to “buy” market share quickly.

3 Capital poured into the subprime auto markets making special finance lenders overly aggressive in their underwriting policies and practices in search of high yields.

4 History indicates that higher default rates occur on deals with “too much vehicle and too little customer”. Recent Experian Automotive Data shows that quarterly repossession rates for the second half of 2013 increased dramatically over the corresponding period in 2012 for special finance lenders. Charge-offs for special finance lenders in the fourth quarter were the highest since 2006 and averaged $8,772.

5 BHPH operators again found inventory acquisition to be challenging. Lower new-car sales from 2008-2012 provided a limited supply of BHPH vehicles (usually more than 4 years old), which kept auction prices high. Operators reduced inventory levels commensurate with a limited supply and reduced customer demand.

6 Technology played an important role in 2013 BHPH operating efficiency. Most customers now have smartphones. This cellular link has become an important way for BHPH operators to “connect and collect” with their customers and prospects. In addition, the integration of Internet-based marketing tools, payment device technology, electronic pay portals and other technology into BHPH operations continued. Operators who proactively utilized online marketing fared better than those who did not.

7 New regulatory challenges surfaced in 2013 when the FTC, Consumer Financial Protection Bureau, and various state attorney generals’ offces monitored compliance and investigated alleged deceptive practices. The IRS increased tax audits of used-car operations, focusing on compliance issues. Even the Department of Justice joined in by policing discriminatory lending practices using their “disparate impact theory”. We should expect more compliance scrutiny in 2014 and beyond.

8 Operators with greater financial flexibility (more equity and/or available lines of credit) fared best. Increased competition, the limited liquidity of their customers and a higher cost environment were the major reasons why.

9 Given this overall environment, operators who managed risk successfully and opted to pass on making “silly loans” to maintain market share will beneft by avoiding defaults when these customers don’t perform.