The deadlines of a monthly publication sometimes prevent totally up-to-date information, but as of this writing, several items are having an impact on our business.
The first is the lengthy resolution of the presidential election. Other items of note include newspaper and other media stories noting the weakness of job growth and "Big 3" sales hitting the skids. Let's not forget domestic manufacturers cutting production of cars and trucks in the fourth quarter of 2000 and first quarter of 2001. Or GE Capital "pulling the plug" on its US auto loan and lease business and the Automotive Lease Guide sharply cutting residual values that take effect on leases that begin in January 2001.
All of the above noted news certainly has an impact on our business, but the real fact is, domestic inventory levels are at an all-time high and, from the recent comments I have heard from those dealers, show room traffic is off by a double-digit count. Conversely, at this same time imports, for the most part, saw an increase in business in November.
As a dealer body, we all realize how vulnerable we are when it comes to incentives. Unfortunately, as the incentives go, so goes our new vehicle retail sales business. I'm not sure that NCM's client base is reflective of the total industry, but our average domestic dealer's lease penetration is 19.6%, our average import dealer's penetration 17.1% and highline 31.4%. That's the penetration story, but for the most part, leasing represents a higher percentage of our gross profit than it does our volume. Therein lies a concern if this portion of our volume/gross is put in jeopardy.
According to an article that appeared in a December issue of another industry publication, "Leasers lost money on 84% of the full-term, off-lease vehicles returned to them in 1999, up from losses of 71% of full-term leases in 1998."
The information, gathered from a Consumers Bankers Association study, also noted that the average loss in 1999 was $1920.00 per vehicle. So what? If the manufacturer's finance arms reduce or rather, should fail to increase incentives to offset the reduction in the residual values, what impact will this have on the average dealer? Will it represent a 19.6%, 17.1% or 31.4% loss in volume and the proportionate gross? It is possible.
I would strongly suggest that you visit with your sales and F&I management and discuss options. One option you might consider, if you do not already have it in place, is training your sales force and sales management to obtain a cash-down payment commitment from the customers during the initial qualification process of the sale. Providing an incentive to sales personnel based on obtaining cash down, i.e. "Cash is King," might lessen the severity of payment shock from the customer.
The one result that none of us can live with from all of this is a high day's supply of inventory, lessened floor-plan credits, etc. Obviously I don't need to outline the results of that scenario. It is especially important now that you communicate with your sales management regarding the cost not only of excess inventory, but aged new vehicle inventory. Remind them that a $1,500 gross profit on a vehicle sale that has been in inventory for 90 plus days is not really $1,500. If we need to examine our gross profit levels in order to reduce inventory, then I think it's prudent to take that action.
I personally believe that you will have adequate opportunities in the near future to replace any inventory shortages that might exist.
Last, but not least, I would like to remind you of four actions that might help protect you if this slowdown is reality. Review and then take the appropriate actions in the following areas:
* Nonessential expenses
* Nonessential/excess inventories
* Nonessential personnel
I'm not suggesting that "the sky is falling," but I am suggesting that a good defense does make a good offense.