Wednesday, May. 23, 2007, 08:00 PM UPDATED 11:59 AMBy Nick Zulovich
LAS VEGAS — At the National Alliance of Buy-Here, Pay-Here Dealers Conference in mid-May, Ken Shilson, founder of the group, presented new annual industry benchmarks.
NABD worked with Subprime Analytics and NCM Associates to collect and compile the data. The 2006 statistics include operating information on sales, collections, recoveries and inventory management, which was courtesy of NCM 20 Groups. As for Subprime Analytics, it compiled and contributed portfolio performance statistics.
According to Shilson, who is also established Subprime Analytics and is a partner with Shilson, Goldberg, Cheung & Associates, which also helped in the compilation of data, 2006 industry profitability was negatively impacted by three factors:
—Increased vehicle acquisition costs
—Increased bad debt charge-offs
—Higher operating expenses attributable to inflation
"Gross profit in 2006 declined for the second consecutive year," Shilson pointed out. "A more careful look at these results provides some important trends that need to be recognized."
1. Financing income for 2005 and 2006, even for the top performing operators, was not sufficient to offset bad debts.
2. The increase in bad debt expense has risen steadily since 2004, commensurate with higher vehicle acquisition costs and increased cash in deal.
"Although these trends are not favorable, I believe the better operators in the BHPH industry are very much aware of these economic changes and will take the necessary steps in the future to reduce and mitigate further losses," Shilson noted.
He went on to report that he surveyed several clients, who reported the following plans for this year:
1. Implement improved technologies that will enhance operating efficiencies and further reduce overhead. Their goal is to offset increased vehicle acquisition costs with less overhead, Shilson pointed out.
2. Reduce bad debts by improved underwriting through a better matching of the right customers with vehicles they can afford.
3. To further reduce bad debts by improving collection operations and by increasing recoveries.
4. Improve cash flow by gradually increasing down payments and customer payments to offset inflationary increases in costs, without lengthening the term of customer contracts.
"Although I agree with all the aforementioned strategies, some new challenges have recently surfaced, which also must be addressed," Shilson explained. "Gasoline prices at or over $3 per gallon and inflationary increases are zapping the liquidity of the BHPH customers.
"Initially, these customers react to these increases by altering their driving patterns, or by eliminating other discretionary expenses," he said. "Unfortunately, these changes only work for limited periods of time, and economists don't agree on whether gasoline prices will go higher or return to levels under $2.50 per gallon."
He went on to say that these issues will only be answered in the coming months.
"In the interim, prudent operators must do a better job of underwriting," Shilson highlighted. "They must gather more customer information at the point-of-sale and use it to match the right customers with affordable vehicles. Their goal should be to sell vehicles that customers can afford based upon a pre-sale analysis of their cash flow.
"The industry must learn from the recent subprime mortgage meltdown that if you sell customers more than they can afford, defaults will quickly follow," he stressed. "Operators must analyze their bad debt losses to determine what other adjustments must be made in their underwriting to reduce charge-offs and increase collections."
He concluded by noting, "In summary, success in the BHPH industry in the future is achievable only to those who understand and manage subprime portfolio risk prudently. The challenging economic landscape requires operators to work smarter, not harder."
According to NCM, the average number of units sold per dealer for the year was 1,350, compared with 895 in the previous year.
Continuing on, the median cash in deal per vehicle sold was $4,480, compared with $4,913. The median ACV per unit sold was $4,949, as opposed to $4,745 in the previous year. As for the average reconditioning cost, it was $610, compared with $585 in 2005.
NCM also reported that the average gross per vehicle sold came in at $4,189, versus $3,790 in the prior year. Meanwhile, the median cash down payment was $1,074, compared with $1,366. The average amount finance was $8,844, compared with $7,646 in 2005, while the average term of a loan was 131 weeks, compared with 111 weeks in the previous year.
According to the data presented, the total cost of vehicle sales in 2006 was 63.5 percent.
In a breakdown, the average cost of vehicles was 55.26 percent as a percentage of vehicle sales. Meanwhile, reconditioning costs was a median of 5.38 percent.
Moreover, total operating expense came out to be 18.33 percent in 2006, compared with 18.03 percent in the previous year. Advertising made up 1.45 percent, bank charges were 0.12 percent, contributions were 0.37 percent, depreciation was 0.77 percent, dues and subscriptions were 0.03 percent, insurance was 0.72 percent, while legal and accounting was 0.43 percent.
In a further breakdown, outside services made up 0.35 percent, office expense was 1.10 percent, rent was 1.46 percent, repairs and maintenance was 0.25 percent, salaries (of non-owners) were 8.85 percent, general taxes were 0.15 percent, other operating expense was 0.67 percent, taxes-payroll was 0.78 percent, utilities and telephone were 0.63 percent and travel and training were 0.20 percent.