It was an industry emerging from the rubble of 2009. Still battered and bruised, lenders and dealers were clearly focused on the road ahead for the auto retail industry, with technology taking center stage over the six-day, three-show period in February.
Set in Orlando, Fla., the week began on Feb. 10 with the American Financial Services Association (AFSA)’s 2010 Vehicle Finance Conference and ended Feb. 16 with the conclusion of the National Automotive Dealers Association (NADA)’s annual convention.
Dealer Stephen Wade, speaking before a room full of finance sources at the Vehicle Finance Conference, reminded the audience of a still-tight lending market when he described a phone call he made to five of his F&I managers at his St. George, Utah-based automotive group.
“It was eye-opening,” said Wade, the 2010 NADA vice chairman. “People that should be purchased, can’t.”
Touting the company’s recent success in the asset-backed securities market, Ford Motor Credit President John Noone said the increasing appetite for auto securitizations among investors is a clear sign that auto finance is rebounding. “The markets are coming back,” he said.
Steve Lambert, president of Nissan Motor Acceptance Corp., said the market bottomed out around February or March 2009. He said lenders and dealers have been in transition ever since. “It’s been quite positive in the last nine months,” he noted.
Tom Wolfe, the executive heading up the combined dealer financial services groups of Wells Fargo and Wachovia, noted that the company’s 2009 book of business is the best performing in almost 30 years, another sign that lenders have a better feel for the market.
Then there was GMAC Financial Services, which caused a stir when it announced days before the NADA conference that it would make itself available to all Chrysler and General Motors dealers through DealerTrack’s credit platform this summer. Tim Russi, the company’s executive vice president, said GMAC is now ready to compete for the top spot once again, and wants to help dealers in the used-car arena.
“We feel like we’re back in stride in the business,” he said. “It’s a little different stride, but we’re back.”
Binding F&I and Service
There were signs of other emerging trends, some of which were not so positive for dealers. The two developments that had dealers talking were: lenders charging fees for submitting credit applications and the prospect of auto finance sources eliminating dealer participation.
“This is dangerous,” 2010 NADA Chairman Ed Tonkin told a roomful of lending executives at the AFSA conference. “I know all of us are looking for ways to be efficient, but I’d like to warn everyone here that financing has been a profit center for dealerships, so be careful what you do in this arena.”
AutoNation’s Kevin Westfall, a senior sales and F&I executive for the dealer group, offered his own recommendation. “We provide a convenience to consumers and the banks,” he said. “I think we deserve to charge at least 1 percent reserve.”
The potential loss of dealer participation is one of the reasons why dealers will be turning to F&I products to fill the profit gap. And with retail sales expected to see modest gains this year, dealers are expected to focus on F&I products that drive their service business. “We moved away from rate sellers to product sellers — service contracts and prepaid maintenance,” said Michael Maroone, president of AutoNation. “Our products are designed to get people back [into the dealership].”
Dealer Wade said these trends are driven by the critical role the service department played in 2009. It’s one reason companies like ADP Dealer Services, DealerTrack and Reynolds and Reynolds showcased more sales-oriented service tools, such as service menus and pricing systems.
“The dynamics of the service department have changed from repair and warranty to a maintenance shop,” Wade said.
JM&A Group President Forrest Heathcott also noticed the trend taking hold. He said sales of prepaid maintenance, service contracts and GAP dropped the least last year. He also hinted that the company may take advantage of a dealer base that’s ready to grow again and expand the company’s footprint in Western states this year.
“We can do it through organic growth or through our current dealer network, as many are looking to buy more stores,” he said, adding that the company wouldn’t be opposed to expanding through acquisition.
Looking for Customers On the Way Up
While funding is trickling back into the auto finance market, lenders are still treading carefully. The feeling is the industry won’t return to any sense of normalcy until the housing and job markets improve. Those factors are hampering dealers’ efforts to serve the ever-growing nonprime customer pool. AutoNation’s Westfall said the dealer group’s nonprime business is down 50 percent. Forrest McConnell, president of McConnell Honda in Montgomery, Ala., told a similar story. “There’s not much available for that customer,” he said.
Describing his auto finance unit as a transportation lender, Wells Fargo’s Wolfe made it clear what lending sources are looking for in the nonprime space.
“Our goal is to identify the credit and customers who are moving up or have stability in their marketplace,” he said. “So, if I was meeting with one of my credit analysts in Buffalo, N.Y., and the data for a customer shows high stability on the job and in the residence. The customer grew up there, has the right down payment, and is using the car to go back and forth to work, I would tell them to buy it.”
Tony Boutelle, president and CEO of CUDL, echoed Wolfe’s sentiment. He said credit unions are still recovering from losses linked to the collapse of several corporate credit unions last year, many of which became victims of the subprime mortgage meltdown. And although regulators are now keeping a close eye on the segment because of what happened, Boutelle said credit unions still view the dealer business as critical to their success.
“You’ll see more [credit unions] in the prime market space,” he said. “For existing members, they may go deeper, but we’re probably going to see a big appetite for nonprime this year.”
Experian Automotive’s Melinda Zabritski said activity in the fourth quarter 2009 has her believing lenders are opening up to the outside-of-prime segment. For the first time in two years, prime originations decreased, she said.
“It surprised me,” she said. “But I think it also ties into the fact that a lot of subprime lenders have funding again, so that’s logical that as they’re now going back into the market, we’ll see growth in nonprime and subprime — growth being market share.”
NADA Chief Economist Paul Taylor expects the subprime market to improve, but noted, “It’s not progressing as fast as we like, but it’s progress.”
Rich LaLonde, founder of Auto Credit Express, said the perception that auto finance is closed to high-risk consumers has less to do with lenders’ trepidation and more to do with the vehicles dealers stock.
“We have a used-car buyer who is always booking out cars. He seems to always buy a diamond in the rough,” he said. “Two months ago it was the Dodge Journey, which he was buying $4,000 back of book. Now that that car has kind of cooled off, he was buying a Lincoln model for $3,000 back of book to cover the discounts lenders are charging.
“So, you always have to be studying to find out where those cars are,” he said.
Lean Market, Internet Puts Concentration On Lot Management
The outcry for dealer financing seemed muted this year, although insiders attribute that to dealers having a better feel for how much inventory they need.
“Since those initial conversations took place, it seems that some of the noise out in the market about floorplanning not being available has died down,” said Wells Fargo’s Jerry Bowen, who recounted his bank’s work to restore dealer financing through the Small Business Administration. “We’re trying to find out exactly how you size and quantify what the demand is out there.”
Steve Anenen, president of ADP, thinks the situation could be a boon for technology providers. “Dealers, especially the ones who are well-capitalized, realize they don’t need to carry more floorplan,” he said. “What we see happening in the marketplace [are dealers] talking about technology.”
Driving dealers toward technology is the Internet, which has forced dealers to rethink the way they manage their lots. Exhibitors likened the shifts in inventory management to a similar sea change in parts ordering years ago.
“It’s finally gone where parts ordering went,” said Reynolds and Reynolds’ Scott Worthington. “There’s all this sophistication to parts ordering and now that theory and logic is starting to show up on the used-vehicle side. We refer to it as taking the ‘I think’ out of the equation.”
But what dealers discovered last year was that they could no longer compete on historical data alone. It became clear pricing vehicles was just as important as knowing which ones turned quickly and profitably. “The Internet has allowed buyers to shop in different ways,” said AutoNation’s Maroone. “I don’t think we can manage an industry on 30 days.”
Management Tools Become Sales Tools
FirstLook’s Brian Hudson has seen the evolution of inventory management firsthand. “Back in the early stages, we had to convince dealers of the actual process,” he said. “It was showing them that they needed a game plan for managing their inventory, then having tools to appraise cars. Then we came out with our Ping I tool. It was very basic, but it was a very effective tool because it allowed dealers to walk their lots virtually.
“So, the initial stage wasn’t necessarily about price comparison, it was walking a virtual front lot,” he added. “That’s when our company and our competitor (vAuto) came out with pricing tools, which really got the industry knowing about comparing your price to your competitors’ prices and where you fit in the market.”
The push by technology marketers didn’t go unnoticed. DealerTrack became the latest company to enter the pricing-software arena with its MarketDriver AAX enhancement.
“You can’t swing a dead cat without hitting one of these companies,” noted Experian Automotive’s Edie Hirtenstein, senior product manager for the company’s AutoCount vehicle history product.
Price, however, isn’t what marketers want dealers to use to lure customers. They want dealers to use solutions like AutoCount to sell value instead.
”If I have the lowest-priced car, and if my tools are pushing the dealer to be the lowest-priced car, then I’m doing the dealer a disservice because all we’re doing is losing gross profits,” said FirstLook’s Hudson.
vAuto has its own phrase to describe the inventory solution evolution: “lifecycle management system.” The company characterizes its new RealDeal software as a price validation and delivery system. FirstLook calls its offering a Consumer Optimized Selling system. Both products pull market data from users of their systems — FirstLook polling approximately 40,000 dealerships nationwide — to provide dealers with insight on what features consumers are looking for and how much they’ll pay.
“vAuto is a strategy first, software second,” said Dale Pollak, founder and president of the company.
What We Know
Dealers do have a better understanding of the Internet’s impact. Westfall said AutoNation has instituted new processes to handle the millions of leads it receives through the Internet, and now employs full-time staffers to blog and manage the company’s Twitter and Facebook accounts. The only downside to the Internet, he said,
is lower profit per vehicle retailed.
Dealer McConnell also noted the Internet’s impact. “It has changed the game,” he said. “People know what they want.”
A study conducted by Autobytel found that 69.5 percent of dealers surveyed planned to increase their Internet spend this year. The company hopes that its iControl lead-generating software — which allows dealers to custom-configure their mix of online leads by make, model, Web source and distance from the dealership — will help dealers gain some control over the burgeoning marketing medium.
Cars.com also has a better read on how consumers shop online. After reviewing 230,000 new- and used-vehicle listings between June 2008 and June 2009, the company now knows that listings with 11 or more photos received 175 percent more page views and 127 percent more contacts. Listings with a manufacturer’s certified logo garnered 18 percent more page views and 34 percent more contacts.
The next step, said Michael Page, an advertising executive for Cars.com, is video. “I think 2010 will be the year of video,” he said, adding that video delivered 13 percent more contacts for the nearly 3 percent of dealers who employed video for their listings.
With a market clearly regaining its footing, dealers and lenders can only hope that unemployment, the housing market, finance reform and the prospect of rising interest rates won’t slow it down.
“I’m optimistic about our industry,” said Wade. “… Some days more than others.”
SIDEBAR: Industry Going Mobile
With more than 85 percent of Americans now owning a cell phone or other mobile device, exhibitors at this year’s conference showcased applications aimed at turning these handheld devices into business and marketing solutions. Here’s a short list:
• ADP Dealer Services Inc. launched a suite of applications to help dealers take advantage of today’s mobile technologies. The company’s Drive DMS for Mobile connects mobile phones to its DMS, allowing dealers to manage their dealerships remotely. The suite also includes a mobile application that extends the functionality of its ADP Network Phone. Also available are two additional solutions that allow dealers to manage their vehicle listings on mobile Websites and use text messaging to send service notifications and promote dealership specials.
• DealerTrack has teamed with Laser Appraiser on a solution that will turn mobile phones into mobile appraisers. Using Laser Appraiser’s wireless automotive valuation system, used-car managers can evaluate a trade-in or a vehicle at auction by simply scanning the vehicle’s VIN barcode. The solution provides mobile access to Manheim, Black Book, Galves, Kelley Blue Book, NADA and AutoTrader, then links the information collected from these sources back to DealerTrack’s AAX inventory management software.
• Manheim launched a mobile-optimized version of its Manheim Market Report. The new offering allows dealers to access vehicle pricing data and research on the lot, at auction or on the road via a mobile Web browser.
• MobiDrives, a new company headed up by former JM Family Enterprises Executive Jim McDavid, launched a new solution that allows dealers to create a dealership-branded, downloadable smart phone application. Dealers can then use the application to send special offers, service notifications and other reminders to a customer’s mobile device.
• Reynolds and Reynolds’ Mobile for WebMakerX 2.0 turns mobile phones into a marketing channel, allowing dealers to communicate new promotions to a customer’s mobile phone.