Independent Dealers Characterize Market Environment
CHICAGO and FORT MYERS, Fla. — How is the current economic climate impacting independent dealers?
To answer this question, SubPrime Auto Finance News recently talked to a few independent dealers who work in the subprime arena, asking about the challenges they are facing and what they are doing to overcome these obstacles.
Kicking it off is Tariq Khan, of Urban Motors in Chicago. Giving some history about his store, Khan indicated that it was established seven years ago as a small-town store serving the local college-based community.
"We currently have four locations in Illinois to serve our customers and will be opening a fifth location this year," he said.
The store currently moves more than a 100 vehicles each month just based on the Internet marketplace alone, Khan reported.
"We offer a variety of finance options, including buy-here, pay-here, traditional and subprime. Often we are elected for pilot programs with finance institutions due to the wide range of our customer base as well as the many options we provide in financing for our customers," he explained.
Now, coming to industry challenges, he pointed to two in particular his company faces — insufficient down payments and access to capital for more inventory.
When asked if it is getting harder to get contracts approved by lenders, Khan responded that his team does see this problem from time to time, but usually as long as customers have enough money for down payments, the store can get them into vehicles.
"Overall, we have a high percentage of prospects that get financed," he indicated. "No customer will walk if they have a sufficient down payment."
As for obtaining enough capital for inventory, that is another challenge. According to Khan, his company has consistently grown over the years and is always in need of more inventory to meet demand.
"The most popular inventory is the well-priced ones. Due to our pricing model and customer satisfaction, we have an over 86 percent repeat customer base," he highlighted.
"Our best advertising medium and prosperous lead generator is our Web site, www.urbanmotors.com," he added.
While some areas of the country are particularly suffering due to the downfall in the mortgage sector, Khan said his store is faring well.
"We have been lucky in this respect. A lot of dealers are closing their doors right now," he said. "I think in the auto industry in general it is out with the old and in with the new. The older generation dealers cannot survive this market.
"It is time for younger, more aggressive dealers to take over," he reported. "I think you will see a lot of franchises close doors in the next two to three years. The subprime mortgage fallout, although a negative for the economy, can be turned into a positive for most dealers. It only means there are more customers out there for BHPH deals."
Continuing on, Khan explained, "The older generation franchised dealers have nowhere to go but up in the used-car market. For years they have focused on the new-car side; now with the fallout in new cars, they have to focus on used cars.
"However, no matter how hard they try, they cannot compete with the Internet dealers; they just have too much overhead," he noted. "Again, I think a lot of the younger dealers will have the opportunities to buy new-car stores and turn them around in the near future, including us."
Khan said auto lenders, such as AmeriCredit, who work in the subprime industry should not be tightening their portfolios or cutting dealer relationships. Instead, he believes these lenders should be taking advantage of the current economy and the higher number of customers having credit issues.
"I seem to disagree with their approach (auto lenders)," he stated. "This is a time to open doors to recently credit-challenged customers. The customers you are seeing with bad credit from the mortgage fallout are good people and good customers.
"Somewhere, they made a mistake in hopes of the American Dream — big houses, big cars, etc. But that does not make them a write-off. They are looking for an opportunity to re-establish themselves, and cars are a big part of their daily lives. They don't put their vehicles at risk often.
Moreover, as certain ethnic populations grow in the U.S., along with their buying power, such as Hispanics, he indicated that this is an important area to leverage.
"We have employees that speak Hindi, Spanish, French, Urdu and obviously English," Khan explained. "If we run into a customer that cannot speak with us or is overseas, we usually can contract a translator pretty quickly to accommodate them. We like to think we can speak everyone's native tongue, through a translator."
In Fort Myers, Fla., West Coast Auto Sales shows some similarities to Chicago; however there are also several differences, particularly as the Florida economy is receiving a hard knock from the mortgage downfall in that state.
William Brock, of West Coast Auto Sales, set the stage by first providing some history about his company.
"I opened West Coast Auto Sales in Oct. 2003. We typically have about seven people on staff at any given time to cover our sales, detail and mechanical areas," he said.
"Our business focuses on vehicles that are between one to four years old — late models with low mileage. We do most of our deals through regular bank financing, but occasionally do some subprime financing. We don't do any BHPH work," he noted.
Discussing subprime financing, Brock indicated that this has been more difficult to obtain for customers.
"Subprime financing has become a lot tougher in the last six months because the banks are tightening their reigns a bit," he explained. "People with less than a 550 Beacon credit score typically will not qualify for financing unless they have a very large down payment.
"Additionally, our local market is down. Real estate and development are two of the bigger industries in the Fort Myers area. With the real estate slowdown, the local economy has come to a halt and it is affecting dealerships," Brock continued.
In fact, he estimates that stores in his area have witnesses a 30- to 50-percent drop in business, when compared to 2004, 2005 and 2006. Showroom traffic has displayed a similar downturn. Brock said his store is seeing people who want to purchase a vehicle, but can't due to credit issues or lack of down payment.
Those who are showing interest are indicating they can't cover the down payment until they receive their tax return, he noted.
"I would estimate that about half of our potential customers in this situation are postponing their purchase until they receive the refund and have access to cash," he stated.
"So it has created a challenging situation for us, as well," he pointed out. "Some of the smaller independent dealerships are going to the wayside because they don't have the money to cover their negative equity."
In addition to the decline in business, another tough challenge local dealers in Fort Myers are facing is that sales in the $10,000 to $30,000 range are softer.
"Because of the slowing local economy, many people are now looking for cars under $5,000. That means there is now more competition among dealers to find these types of cars, which drives up the price," Brock highlighted. "A car that would normally cost $2,000, now costs $3,000 to $3,500, which ultimately diminishes a dealer's profit margin."
Like Khan, he, too, said his store has found success online.
"I think the Internet has really helped a lot in recent years with the emergence of sites like AutoTrader.com and Cars.com," Brock said. "But, it can be a double-edged sword. On one hand, it helps dealers gain new business outside their immediate area. The downside is that other dealers are doing the same thing, which can pull people out of your market.
"It can also defeat profit margins because you're competing with a number of dealers from a broader geographic area," he added. "In order to get potential buyers to pay attention to your cars, you sometimes have to push the price down and sacrifice some profit."
So how is he thriving in this economic environment? Well, Brock offered some advice to other dealers.
"Independent dealers need to watch their costs and tighten their belts as much as they can. Reducing overhead is critical because I think the market may stay this way for a while. Being an election year, it will likely be unstable because everyone is anticipating what will come next in terms of presidential leadership," he reported.
"First, we must wait and see who wins the election and then wait until that person is sworn in to see what kind of impact they will have. For independents, watching fixed expenses during the next 12 to 18 months will be a key part of business survival," Brock stressed.
He went on to say that it's a good idea for independents to leverage lender platforms to establish and maintain lender relationships.
"Independent dealers' No. 1 challenge is gaining access to primary lenders," he pointed out. "It is probably an independent's biggest weakness when compared to franchised dealers.
"Franchises offer primary financing for their customers, whereas independents don't always have access to those lenders," Brock continued. "AppOne has helped my dealership gain access to primary lenders, which has allowed our business to serve more customers and deliver more cars."
A Look Ahead
One key theme that appears to be apparent with both dealers is that the Internet is becoming an increasingly important avenue to reach potential customers.
While it has its downsides, as well as its upsides, in this ever-competitive marketplace, advertising via the Internet is a vital way to stay ahead of the game — no matter what the uncertain future may bring.