Environmental Analysis
Industry Trends
A number of basic trends are changing the dynamics of the automobile industry. They include:
- a 25 percent increase in car prices over the last five years
- a growing supply, demand and profit margin for loaded used cars
- the changing dynamics of vehicle ownership
- the explosive growth of leasing
- the need for a broader range of dealer profit centers
- the increased demand for subprime credit options
- the dilution of the traditional dealer franchise system.
Let's take a closer look at these trends. New car prices are rising faster than the overall rate of inflation. According to Leasing Now, this steady increase is forcing potential buyers to reconsider a decision to purchase a new car. For example, when faced with a choice between buying a new car and a major home purchase (a computer, entertainment system, major appliances, etc.), consumers often opt to maintain their existing vehicles in favor of the other purchase. However, studies indicate that this decision is a delay and not a cancellation of a vehicle purchase; the purchase will take place after other needs are met.
In the past, consumers commonly rejected used cars as a primary household vehicle, viewing them as a problem someone else managed to get rid of. Used cars were generally purchased for children or as second cars driven by non-working spouses. The latter has been changed by the increase in dual-income families. Working couples require appropriate vehicles for both partners.
Because of the increased quality and supply of feature-rich used cars, these vehicles are now viewed as a viable and acceptable option to a new car that costs twice as much or has fewer features. Also, because many new cars have factory warranties for periods of up to five years, many late-model used cars on the market are still covered by the original warranty when the second owner takes possession. Plus, many dealers offer warranties on used cars.
The growing popularity of leasing can be attributed in large part to the fact that it is a far more customer-friendly way to sell a car than traditional financing. Leasing eliminates dickering over price, thereby making the transaction more pleasurable and efficient for the customer.
From the dealers' perspective, leasing generates increased sales volume and has a higher customer return rate than straight purchasing. Dealer Council studies indicate that 25 percent of automobile buyers will return to the same dealer for their next vehicle; by contrast, 91 percent of individuals who lease will return to the same dealer for their next car. Because leases are typically of a shorter duration, often as little as half the time of a standard purchase finance agreement, vehicle turnover is significantly higher among leasing customers.
Loyalty Analysis-Industry Average
Lessee likelihood of leasing from the same lessor. All vehicles including light trucks. Source: Dealer Council
| Lease Time Frame | Percentage |
| 24 months | 91% |
| 36 months | 81% |
| 48 months | 56% |
| 60 months | 37% |
New and used automobile superstores have changed the public's perception of dealerships. Consumers expect and demand a wider range of products and easy shopping opportunities. Today, a dealer might carry new vehicles from as many as five or more competing manufacturers and offer a substantial selection of used cars. Brand loyalty on the dealer's part is far less important than putting together a package that appeals to the customer.
The actual sale of a vehicle - especially a new vehicle - represents a very small percent of profit to dealers. The more significant portion of profits is made in areas such as service, financing and insurance programs. Savvy dealers are exploring their options in these areas, and developing products such as service and maintenance agreements that can be sold separately from the vehicle itself.
The fastest growing segment of automobile sales involves buyers with bad or bruised credit. As banks move to decrease their loan risks, it has become increasingly more difficult for a large percentage of the population to qualify for traditional credit. It is estimated that over 70% of the market has bruised credit. For new car dealers able to finance non-prime credit, this situation translates into significantly increased sales and leasing. Originally pioneered by buy-here, pay-here lots, the concept is quickly becoming an important profit center for conventional dealerships. Finance Works is positioned to take advantage of the industry shift with a variety of programs that offer subprime credit in both lease and purchase situations.
Automotive Financing and Financial Services for New and Used Vehicles
Increasing new and used car prices, fluctuating interest rates and personal economic uncertainty on the part of consumers have sparked a number of changes in the way vehicles are financed. Consumers are looking to dealers to find ways to make the cars they want affordable. Consequently, major auto companies have been forced to re-examine their financing capabilities.
The results of this activity are illustrated by companies such as Jones Credit, which wants to use their new subprime finance unit to create customer loyalty. Kelly Motors, and Riota recognize the financing demands and are evaluating the potential for subprime financing programs. Kelly Financing wants to boost its retail financing programs, and plans to shift gears from creating the programs to implementing them. By contrast, the finance groups owned by Brownlee, Manzli and Reynolds say they are not currently interested in offering subprime financing.
Sportz Cars North America Inc. took full control of its captive finance company in January, 1995. This ended a three-year partnership with Credit Corp. The move was made to cut the response time for credit checks, expand a used-car leasing program, and tailor its programs for high-end customers.
An issue automobile financiers must deal with is a large percentage of consumers who are currently able to pay, but who may have suffered a bruised credit rating for one reason or another. These customers are often excellent candidates for leasing.
Local dealers who have good relationships with several local banks who can offer more flexibility in financing terms with their buyers. On average, franchise dealers can arrange financing for 65 percent of their buyers. In comparison, independent used-car dealers can arrange financing for less than 25 percent of their buyers.
However, increased financing options mean increased sales. That's why Joe Caldwell, owner of the Caldwell Automotive Superstore in Chicago, Illinois, has been aggressive in building banking relationships. An October, 1995 issue of Corp. explained that Caldwell sells later-model, well-maintained used cars, and Mr. Caldwell works with at least eight local banks to arrange financing for 80 percent of his buyers. Though that figure is far above the national average, there is no practical reason why other new car dealers cannot operate at or close to the same levels. PSAD offers financing resources to assist dealers in reaching this goal.
In any discussion of automotive finance, it's important to note that within the automobile dealer industry, acquisitions and mergers occur under the umbrella of financial services. As the MarketAvenue Journal reported, one of the more interesting of these transactions occurred when Tomorrow's Auto Group, a closely-held auto dealership group, acquired an 80 percent stake in Spike Sales of Little Rock, Arkansas in August 1995. With annual sales of approximately $1.2 billion, Tomorrow's Group is one of several larger dealership organizations that are buying up smaller operations across the country as part of a consolidation of what has been a fragmented industry.
In another notable transaction described in the Market Avenue Journal was Bundren Co.'s acquisition of Auto Touch Group, Inc., an automobile financing company, in September 1995. Bundren Co.'s issued about 10 million shares to pay for the acquisition.
Dealers interested in growth through mergers and acquisitions can benefit from the guidance and proficiency of financial experts with automotive experience. This is precisely the type of expertise PSAD brings to the table.
Used-Car Sales
The used vehicle market is undergoing an extensive image transformation. The Auto Newswire circulated results of a 1995 poll of automotive consumers which indicated that the image and preferability of used vehicles is at its highest level ever. This presents a major opportunity for new car dealerships to capture a much larger share of the used car market than they enjoyed in the past. PSAD is targeting this market in its dealer development programs.
In 1995, used-vehicles sales at franchised and independent dealers totaled $311.4 billion. Vehicle Newspoint reports that the annual U.S. market for used cars now totals more than $50 million cars and trucks changing hands each year.
According to Corp., the average selling price of a used car had risen from $6,000 to $10,750 over the last 10 years. Even with that increase, the average cost of a used car is half the average cost of a new car. Statistics as of March 1995 from the American Leasing Association (ALA) show the average retail cost of a new car was $19,925.
Luke Skye of the ALA, which represents most new car dealers in the United States, says the average gross profit margin on a new car in March 1995 was 6.7 percent. But, Skye points out, "A dealer's expenses are close to 6.7 percent. So he's really just breaking even on every sale." In 1994, according to the ALA, new car departments of franchise dealers returned less than 1 percent net profit on sales.
In contrast, the average gross profit on used car sales by those same dealers now stands at 12 percent. Moreover, since overhead expenses relating to the used car operations are lower than those for new cars, more money from that department falls to the dealer's bottom line. In 1994, it was 2.2 percent of sales.
The value-added elements a new car dealer brings to a used car transaction are important. There is usually a significant amount of goodwill and name recognition attached to the franchise. Buyers feel more secure because the dealer usually provides a warranty and has a repair shop. New car dealers are also leading the industry in establishing a variety of profit centers which mean the availability of additional products, such as insurance, to the consumer.
However, used-car superstores are on the rise. Examples include CarGo, Caldwell Automotive Superstore, Dada Auto and Auto World, Inc. Industry experts say the reason these superstores have come into being and are thriving is because customers were unhappy with the typical car-buying experience.
Bechtold City has gone into the used-car business through its subsidiary, Carton. In 1994, Carton's Raleigh store sold 4,050 cars at an average price of $13,664 to gross $455.3 million, according to Lisa Merle & Co. That's 30 times the sales of an average used-car dealer. Carton turned over its inventory 8.4 times, more than twice the industry average.
Caldwell Automotive Superstore specializes in selling late-model, well-maintained cars that appeal to many would-be new-car buyers because they cost thousands of dollars less than the same car bought new. The Caldwell stores are successful because they contain several profit centers. They offer financing, insurance, service contracts, rust-proofing and routine service. These areas generated 54 percent of the company's gross profit.
A new chain that will be called Auto World, Inc. will stock 350-650 late-model used cars and trucks at each dealership. Prices will be fixed, and no bargaining will be permitted. Vehicle purchases will include detailed warranties.
In January 1996, Dada Auto Group opened an 800-unit used car dealership in New York. The company's chairman, Bruce Jennere, says there is more profit to be made by selling previously owned vehicles rather than new ones. Jennere said his organization is absolutely interested in becoming a significant player in the used car business. In addition, industry rumors have retailers such as Baker and Brommel thinking of getting into the used car business.
Automotive Leasing
Automotive leasing is on the increase because it provides benefits to both consumers and dealers. For the consumer, leasing means lower monthly payment. It lets consumers drive a higher-priced, better-featured car than they could afford to buy. The under 30 market is more interested in short-term contracts than long-term purchases. Older consumers remember being caught upside-down in car loans during the 1980s, owing more than the car was worth and being forced to sell by circumstances such as a job lay-off; it's an experience they are not eager to repeat. The increase in self-employed individuals and small business owners means a higher number of consumers who may benefit from the tax advantages of leasing.
For dealers, leasing improves customer loyalty. Studies show that customer loyalty among lease customers is roughly double that of regular financing customers. The nature of the transaction means the customer automatically comes back to the dealership to return the car, and the dealership is then more likely to get that customer into another one of their cars. Lease cycles are shorter and therefore turn more frequently as compared to buying/financing cycles.
For salespeople, closing ratios are higher for leasing than buying. Closing ratios are 42.1 percent for leasing, compared with 27.6 percent for vehicle purchases. Cars Today reported that almost 64 percent of salespeople now present leasing as an alternative to buying a vehicle - up from 9 percent in 1991.
From a demographic perspective, it's important to recognize that women purchase 52 percent of all vehicles and influence 85 percent of all purchases. According to the Auto Newswire, women typically dislike the traditional vehicle purchase negotiation process, which is all but eliminated with leasings. They also tend to dislike dealing with car repairs, which is another issue resolved by leasing. Also, women (more than men) tend to appreciate the perceived safety and convenience factors of driving a new car every few years.
Industry statistics show that leasing trends are on the rise. A Cars Today article stated that leasing accounted for 13 percent of overall car sales volume in 1993, up from 4 percent in 1990. More specifically, another Cars Today article reported that leasing accounted for 30 percent of Sportz's volume and 40 percent of MHZ's volume. In trucks, leasing account for 7 percent of overall volume in 1993, up from 2 percent in 1990.
Dolman Communications reported that during the 1994 model year, 28.7 percent of new personal-use vehicles were leased rather than purchased. The American Leasing Association (ALA) expected about 33 percent of new personal-use vehicles to be leased in the 1995 model year.
Jones has been industry's market leader in short-term, 24-month retail leases. In 1993,31 percent of Jones' retail transactions were personal-use leases. Leasing account for 12 percent of Jones' total truck volume and 16 percent of total car volume. Kelly Financing plans to boost its leasing programs by training dealers and employees, and restructuring its organization. In the fall of 1995, Reynolds received the capital and commitment from top management to develop a specific leasing strategy to compete in the leasing market.
Erich Smith, a long-time Boulder area Livingston dealer, expects leasing to get an even bigger chunk of the car market in the next couple of years, especially in the higher-priced autos, which normally lose value quickly.
Used-Car Leasing
Used-car leasing is a relatively new trend, resulting primarily from the increase in popularity and acceptability of the used car market. Used car leasing is becoming more popular in the consumer market because many vehicles coming out of fleets have high residual values, and consumers are turning to leases in some cases to finance them. In particular, luxury car companies are moving toward leasing the same vehicle to several customers before ultimately recycling it.
Consumers who may have been turned away from a new or used car purchase in the past due to poor credit histories may find themselves able to qualify for a used car lease. Another benefit is that leasing a used car rather than a new one allows for lower cost insurance coverage for the driver.
Reasons Why Consumers Choose Leasing
- Less expensive than purchasing
- Lower monthly payment than with a comparable finance contract
- No down payment or a lower one
- Tax advantages
- Easier to get credit approval
As of January 1996, barely 4 percent of used-car buyers were aware that they could lease a used vehicle. However, thanks to awareness programs such as those developed by PSAD, that percentage is growing. Leasing Now projects that over one million used car leases will be signed during 2001.
Dealer Training and Consulting
Along with the ease of qualifying for a lease, stepped-up training has made salespeople eager to promote leasing to customers. Major automobile dealers have demonstrated a clear willingness to spend significant sums on training.
An article in Cars Today says dealers can overcome their average worries about running a successful dealership if they made a commitment to training. Ads can create traffic, but a positive image and sales are built on the showroom floor.
Reynolds Corp. planned to have a national training program in place by January 1996 to help dealers learn the fundamentals of leasing. Dealer and employee training programs are new responsibilities for Kelly Motors Acceptance Corp.'s new market staff. As described in Cars Today, the programs are designed to impact Kelly Financing's retail financing and leasing programs.
Sales & Marketing Management reported that Verleon spent $850,000 on a sales training program which employs comparison shopping. Sales figures for the first two months of 1995 (after the training) were double those of last year for the same period. The sales reps experienced an invaluable gain of confidence and trust in their product.
An April 1995 issue of the Advertising Journal said DeLeon Automotive Group, an auto dealer chain, planned a three-year, $400,000 project to retrain nearly 500 employees. Mr. DeLeon believes his dealerships are only as good as the people working in them. He hired consultants to improve the responsiveness of his personnel. He also hired Main Frame, an national database management company which targets car dealerships, to improve the follow-up process with potential car buyers.
These are just a few of the multitude of examples available that illustrate the growing commitment to training in the automotive industry. With its wide range of training programs, flexible presentation capabilities, and industry knowledge, PSAD is in an excellent position to gain significant market share in this evolving industry.
Automotive and Dealer Insurance
By its nature, the automobile industry is a major consumer of insurance products. For example, dealers carry liability and property and casualty coverage, along with a standard or mandatory insurance package for their employees.
Beyond insurance to meet their own needs, dealers have discovered the issue of insurance as a profit center. Savvy dealers are aggressively marketing insurance products, particularly those that are related to the financing agreement, such as credit life and credit disability. These products are available through PSAD's insurance division, Insurance Works.
