By Nick Zulovich, Senior Editor
HOUSTON — Subprime Analytics founder Ken Shilson again generated buy-here, pay-here industry benchmarks; metrics he said are even more robust this year thanks to the merger of the National Independent Automobile Dealers Association (NIADA) and the National Alliance of Buy-Here, Pay-Here Dealers (NABD).
While the full report will be released during NIADA’s 72nd annual Convention and Expo beginning on June 18 in Orlando, Fla., Shilson shared some insights with BHPH Report regarding what he discovered after analyzing the data that came from NIADA, NABD, Subprime Analytics, NCM Associates and the accounting firm of Shilson, Goldberg, Cheung & Associates.
“Without their contributions, we couldn’t have a comprehensive look at what’s going on in the industry,” Shilson said.
What quickly percolated to the surface, according to Shilson, is how much money has found its way into the deep subprime auto finance space.
“It’s been very competitive in the subprime auto finance business in the last 36 months. A lot of that competition has been fueled by auto securitization money coming off of Wall Street,” Shilson said. “That has made it difficult for the independent dealer to compete because that’s such big money at low interest rates. The business model that’s being used in the securitization market is quite different than what the independents are doing.
“Specifically, the auto bond securitization model is a much newer vehicle at a higher cost, a much higher amount financed and a much longer term than what the independents were willing to do,” he continued. “For those independents that tried to move up the food chain, it wasn’t quite what was in the securitization model, but a higher cost vehicle than they had historically been selling, and they stretched terms but not nearly as much. None of those results turned out to be favorable. That didn’t turn out to be a good decision for anyone who did it.”
“In the deep subprime securitizations, those deals aren’t working out well. Those losses are pretty high. It’s just too much vehicle for too little customer,” Shilson went on to say. “For the independent dealer, no matter how high up the used food chain they went, they can’t sell better than new or certified pre-owned.”
Shilson acknowledged that some operators thought they had no option but to try to sell vehicles as nearly new as their inventory funding could supply. He gave an introduction into the specific metrics he will share later.
“They increased the sales price and the amount financed, thinking, ‘I’ll generate more revenue with less sales.’ But it doesn’t work that way unless you collect it,” Shilson said. “A higher amount financed just is not the recipe for success.”
Another phrase Shilson likes to reference during any presentation is how “cash is king, especially in buy-here, pay-here.” Shilson indicated that the latest benchmarks reinforced that line of thinking even more.
“From an operator perspective, he’s having to focus on becoming more cash efficient. Why? Because his money is costing him more with interest rates increasing and some inflation. His cost of operation with compliance and all of the other things is squeezing his profit margin just like the competition is. He’s got all of those pressures working against him,” Shilson said.
“From the customer standpoint, the quality of the customer has been diluted from all of the competition over the last 36 months. These consumers have many more choices than they ever had because there are so many people in the business. (Operators are) seeing a lower quality customer, and that customer is facing higher costs from both interest and living costs,” he continued.
So when operators see the benchmarks, should they just throw in the BHPH towel and go out of business? Shilson doesn’t believe that should happen, offering this suggestion instead.
“It’s truly a time in this industry to gather as much as you can from training and networking, 20 groups, trade publications, and assimilate that all into your business. Then you have to rewrite your playbook. That’s the theme of the June show,” Shilson said. “The old ways are not going to work given the changes in the industry. Operators who want to be successful are going to have to make the adjustments necessary to succeed in the current environment.
“What that really means is they’re going to have to be a lot more proactive. They’re going to have use social media better. They’ll have to use advanced tax refunds to get the customer before their competition. They’ll have to operate more efficiently. They’re going to have to implement technology to get more from less,” he went on to say. “Capital is going to be very tight. You’re not going to be able to just borrow whatever your shortfall is.”