COMMENTARY: Recapping another year in BHPH
Wow, another year ended, and a new one has started. Grandma always said life is like a roll of toilet paper; closer to the end the faster it goes! These years are about down to eight months now it seems.
This past year, I have been to Denver, Kansas City, Mo., (several times), Las Vegas (twice), Chicago (monthly), Midland, Texas, Louisville, Ky., (twice), Philadelphia (twice), Atlantic City, N.J., (first time), Little Rock, Ark., Bozeman and Billings, Mont., Washington, D.C., Fort Lauderdale, Fla., Charlotte, N.C., Dallas (more times than I can count) and other various places in Texas.
Marriott says 142 nights last year. Buckeye Bret and Bill Elizondo have me beat, but they are the professionals, I’m just a wannabe.
I spend a lot of time with collectors and in shops. I train, audit operations and write procedures, coach collection teams via the web and occasionally work with dealerships that are changing software. Needless to say, I am on the road and with dealership personnel (or on the phone with them) more days than not. It has not been a great year for our business, or many others. We have not been in the worst of times though.
I was talking with the “white hat” folks from Utah this week and we talked about what dealers are doing in collections. Collections is the hot topic of this year, at least the second half. Charge offs have really been spiking and keeping people current has not been easy as the two years prior. COVID really has been making waves throughout the last three years. So much so that I would say we lived BC, before COVID and AC, after COVID.
Part of the discussion I was having this week was about dealers feeling they need to clamp down on customers over collections and I want to holler (I don’t scream) NO! These are still BHPH customers. The same folks I dealt with before the turn of the century. If you apply too much negative pressure, they will buckle on you. Our customers have always been 1 hair away from a breakdown. Their lives are paycheck to three days before the next paycheck, trying to have fun, get lottery tickets or go to the casino, raise children, deal with crazy bosses and mates. One hiccup, you know like needing to fix a flat or replace a battery and that car you sold them is dangerous. If you, Mr. Dealer, don’t fix it — you can keep it (or come and get it).
Insurance companies have gotten worse to deal with if they deal with you at all. They took a beating at the first parts of COVID because cars that we gave $5,000 for in 2019 were getting us $7,500 insurance checks in 2021. Now the insurance companies are paying half what we had in a car, if they pay anything.
Cars are more abundant but still expensive compared to 2019 and generally the bottom of the barrel stuff. Customers have been trained that they can get nicer, newer vehicles with all the “special” financing available, until recently. Now the choices for financing are shrinking. Even some of the big players in BHPH are gone. The BOOM of the first year or so of COVID was a siren call to the hedge fund folks and big institutional lenders. The balance sheets of some big groups was too sweet to pass up for money folks wanting margins and the cash was flying around like we were dealing with Congress and had a war we could start.
Now times are tougher. We have gone full circle, or the pendulum has swung back the other way. We are back to customers barely making it with the exceptions that 1/3 of them do not want to work because they still have subsides and the cost of living has gone through the roof.
So, we are now here. Challenges we have to deal with because of what the customers are dealing with. We sold very overpriced vehicles using longer terms and still much higher payments than we would have considered in 2019. The issue being: it was the same cars as before and it is the same customer. As dealers, the thinking in the first few weeks of COVID were: we are going to crash, banks will fail or call their notes, no financing will be available and cars will be everywhere and worth nothing. The opposite took place in the months following.
As a group, the dealers reacted to all the people wanting to buy and having cash to do so. Finding cars became the big challenge, then getting those cars to the lot was the next issue. There was much more work to do keeping 10-15 cars available than before. Collections were beautiful! 90% current with 97% recency, charge off percentages were single digits for a 12-month period (or close) and you could get whatever you wanted for a car or truck. For sales and the dealers that are driven by sales, it was angel music. Now that angel music has turned to a muddy slog trying to keep cars out and dollars coming in.
I have been in a bunch of dealerships (or dealt with them remotely) and things are not great but it’s not disastrous stuff either. Yes, charge offs are big and hitting like big waves in a hurricane but they are not going to go on forever. There is plenty of sales happening, tax season is rolling around the corner and what has not changed is people need cars. The options our customers had in 2020, 2021 are drying up and you know our customers always want a different car in 18 to 24 months so there will be opportunity.
I wouldn’t overreact to collections. The collectors need to be aware of what has been going on and trying harder than before to work with customers to pay. Can you do some modifications to help customers weather this storm? Finding ways to keep the customers paying is always a challenge but with $600 a month payments and $4 gas, that challenge has become more of a quest. Squeezing a rock harder does not get more blood from it, you just have a tired hand and the same rock.
Can you modify some accounts to help them go until tax time? Can you design a “loyalty or refresh” program that allows good customers to see a path to get into something different, lower their payments and not be hurt buy the inequity we put them in? You can. We did this before. You do need to sit down and think about how you will handle this situation we are in or the situation will handle you. You still need to repo when it is time to repo, the ice cubes are melting (analogy for cars once you sell them) and that does not change. If you pressure people like it is their fault how we all got here, the customer will fold and everyone loses in that situation.
Look at underwriting and make sure you are making good loan decisions. Look at your grosses and see where you can lower pricing. Consider a lower interest rate but only so you can shorten term on the newer deals. Leasing may be a good option for getting payments down but still making reasonable gross. If you have a strong shop situation, consider salvage vehicles that you can recondition (pay the right money for them) and try to get a program together for the customer that wants to keep their car but cannot afford the payments they have, can you lower them?
You probably put two years’ worth of inequity on your books and it will take two more years to work through all of them, if you don’t charge them all off quick. Be putting better loans on the books now and try to help some of your better customers and this hangover will pass like the ones from college.
Gene Daughtry has been in the dealership part of the automobile business since 1990. He has created four different BHPH dealerships from startup to mature portfolios, all with complete service facilities. Currently, Gene is the senior consultant for AMS Consulting, part of Auto Master Systems Dealer Management System. Gene does procedure writing, operations training, consulting and offers AMS Digital Marketing and AMS Analytics to BHPH and LHPH dealers. You can reach him at email@example.com or call (479) 970-4049.