At dealerships, conferences and industry events across North America, the subject of financing trends is at the forefront of many minds. Longer term finance contracts on new vehicles have grown exponentially in recent years, while financing on the used car side continues to increase. What does this hold for the future of auto retailing and more importantly how can dealers rise to the challenge? To find the answers to some of these questions, Canadian auto dealer sat down with Dealertrack’s new Senior Director of Dealer Solutions Mark O’Brien. Here’s what he had to say.
HE: Based on the data you’ve been seeing, what are some of the most recent trends you’re discovering when it comes to vehicle financing both on the new and used side?
MO: From a used perspective, it’s worth noting the impact of CPO on used car financing trends since our data indicates a steady increase in the average used vehicle sale price. Analysis shows that in Canada, used vehicle sale prices are up 13 per cent since 2011. Add to this trend the fact that more used vehicle financing transactions are coming in with trades and you can conclude that those dealers with robust, professional and credible appraisal tools and a repeatable process will excel at conversion. Dealertrack data also indicates that used car financing in Canada continues to rise (up 14 per cent annually over the last two years). Furthermore, 40 per cent of those transactions are near prime or less involving consumers with an Equifax CRP score of less than 680.
HE: Do you see any meaningful financing trends when it comes to new vehicles?
MO: From a new car perspective, we continue to see the push for longer-term financing which is a concern related to the trend’s sustainability in the medium to long term. It’s certainly our view that shortening the trade cycle with a resulting abbreviated repayment period would contribute significantly to the overall health of the new car landscape in Canada, but the challenge of managing that change against the landscape of rising monthly payments to the consumer is formidable. Dealer involvement on educating customers on the downstream consequences of such a decision will help as will the recently noted rise in interest rates from several leading Canadian lenders associated with longer term loan transactions.
HE: At Auto Remarketing Canada this year, Michael Collins talked about the need for dealers to focus more on their back end gross when it comes to used vehicles. Are you seeing more dealers doing this and for those that perhaps aren’t, can you explain why it is so important?
MO: Yes, the big gains, at least in the last couple of years, are coming from the back end. When that’s coupled with a small decline in front end gross over the same period, it renders obvious questions about its importance to the overall financial health of the business. Our data suggests these back end increases are close to 34 per cent on a year-over-year basis from 2012 to 2013 which alone is adding 11 per cent to the profit per vehicle retailed. Our customer-facing team members would all support the notion that an increased focus on training and technology tools have contributed significantly to these gains. Equally contributing is the fact that business office personnel are taking a more active role earlier in the overall sales process and customer experience, indicating there has been a sizable shift in “perception” at most dealerships with respect to F&I. It’s been well documented that consumers are equipped with more information than ever before prior to walking through the doors of the dealership but that self-education has generally focused on the vehicle of interest, leaving perhaps the greatest potential for profit improvement in the hands of the business office.
HE: Big Data allows dealers to know more about their customers than ever before. Are dealers really taking advantage of the information available to them when it comes to providing the right financing strategy and putting their customers into the right vehicles?
MO: Dealertrack has long advocated for the employment of data analytics to improve efficiency, performance and increase sales. Cars have already been transformed into personalized data hubs and we predict Big Data will itself be transformational on several fronts with respect to vehicle retailing in Canada. The greatest impact dealers will likely experience with respect to Big Data will be on pricing and valuations. One click will deliver how long a car has been in the market, its original price, plus a valuation of the vehicle in a specific area or region — not just for that particular car but indeed from other similar models and brands. All data has to exist in a world where privacy is not compromised. We believe dealers today have generally surrounded themselves with enough data to finance appropriately and match consumer needs to vehicles but we also anticipate that with Big Data about to become a Mega Trend, this will undergo significant changes in the next year. For the time being, success will follow those who can interpret Big Data and translate them into meaningful decision making tools.
HE: Do you think we will see a return to 24-48-month leases as a significant chunk of the auto retailing business?
MO: If the goal is to mitigate the impacts of longer-term financing by re-energizing leasing then 60-month lease rates and not 24-month terms are likely to make that possible and realistic. Having said that, several OEMs are already down the path and actively advertising 24-36-39 and 48-month leases. Furthermore, many of our OEM partners are bullish that leasing will continue to come back and take a greater share of overall sales. Others might argue they never left and 36-48-month leases occupy a large percentage of their sales. It’s our firm position that we will see a return to 36-48-month leasing with 24-month term leases being the exception rather than the rule.
HE: Do you think we’ll see a return to 36 or 48-month terms as the mainstay of vehicle financing?
MO: At this stage we don’t believe this is realistic and we do not foresee this happening given consumers’ debt load, the cost of vehicles and customers payment expectations — at least over the short to medium term. We do think that the loan terms will settle around 60-72 months. Even today’s well-built cars are left with a low residual value after six or seven years of use. While there doesn’t appear to be any great influence from regulatory bodies to intervene in long-term financing, if there is evidence of this negative-equity trend continuing or worsening that may not be far away which could likely be the catalyst for an accelerated correction.
HE: With shrinking margins on vehicle sales and greater pressure on F&I departments, what do you think are some of the most effective strategies dealers can use to both generate profits and ensure long-term repeat business from customers via the business office?
MO: Such a scenario almost implies that the sales department would operate at a loss were it not for the contribution from the back office. We believe this is close to reality yet we also believe many dealers today are not capitalizing on back office potential. The real irony in all of this is that focusing on the right asset protection programs will enhance customer loyalty which of course represents the ideal outcome. It is firmly our vision that in the future the back office experience will move much closer to the front and that consumers will “self-select” using tablet-based menus instead of managers using traditional step-selling techniques. In fact this is a trend we’re already seeing take place. It’s also critical that the dealer principal, general manager and the entire management team must be involved and committed to the role of the business office and spell out its importance to the health of the business. Much like any functional area in any organization, the business office needs its own strategy and focus with clearly defined financial performance KPIs. Finally, I would suggest that investments in the right training and technology tools should not be overlooked since this endeavour is exactly that — an investment. It increases margins and increases loyalty so why not take it very seriously?
HE: We’ve seen a very long period of low inflation, yet there is still talk of interest rate hikes down the road. What is your view on this and the possible impact it is likely to have on auto financing?
MO: We think that interest rates will slowly rise in the medium term. A sharp increase in interest rates would have a dramatic impact on the ability of Canadians to manage their debt. If rates rise suddenly and sharply upward, some consumers are moved out of the automotive purchase funnel. Fortunately, we see interest rate increases as gradual, so the big shock may be dissipated somewhat reducing the chance of negative impact to car sales.
Bio: Mark O’Brien recently joined Dealertrack Technologies as Senior Director of Dealer Solutions. In his new role, O’Brien is responsible for all sales, service and marketing activities across all Dealertrack solutions related to dealers in Canada. O’Brien has more than 20 years of sales leadership, as well as substantial sales and service experience across the automotive sector.
