In this case, the dealerships were accused of “having advertisements online and in print publications that misrepresented the actual prices of automobiles”, “dealership employees asking consumers to sign incomplete documents with the understanding that they would be completed using the negotiated vehicle price, but later entering a higher price”, and “allegedly charging consumers fees for unwanted or undisclosed warranties and services”. According to the article, the auto group denied any wrongdoing but agreed to the settlement.

But I digress. The above story really isn’t the point of this post, nor is it my intention to try to warn you of the legal dangers of non-compliance with the laws of the land. I, and my peers, write enough about that. Sure, I’m now a compliance consultant, but my ramblings here are based on the things I learned during my 20 plus years in automotive retail – and the realization that I probably had it all wrong.

This post is about Transparency. It’s about the Big Picture. It’s about opening your mind and stopping to think about the absurdity of old school tactics. Not from a legal or ethical mindset, but from a common-sense business perspective.

I realize that “Transparency” is the latest, and perhaps most over-used, buzzword in the car business. But please bear with me for a few moments while I pose a few questions. Hopefully, it will stimulate some “outside the box” thinking.

First, what is the upside of hiding information from your customers?

Sure, you have to do whatever it takes to stay ahead of the competition. Sure, that’s what the legendary automotive sales trainers taught us. Sure, the chances of getting into a legal bind are pretty slim. Sure, everybody else is doing it. Sure, if you give customers too much information they’ll just use it to shop you. Sure, there are ways to “manage” your online reputation, even if you have some unhappy customers. I get all that.

But – Big Picture Time – is the “anything it takes to make a deal” mentality really a sensible way to do business in today’s world? Do you really think this will lead to customer satisfaction and retention? Do you really believe that customers will continue to put up with this type of behavior forever?

Here’s how I look at it: Every time you…

-Post a misleading ad, or

-Charge a customer more than the advertised price, or

-Lie to a customer about a vehicle being in stock, or

-Present a foursquare with inaccurate numbers in order to confuse a customer, or

-Present “packed” payments, or

-Fail to truthfully disclose a vehicle’s history, or

-You’re not completely honest and upfront with your customers

…there are some things you might want to consider:

1. You may be breaking the law – but it’s only illegal if you get caught, right?
2. What you’re doing may be an unethical business practice – but customers have no loyalty and you’re just trying to make a buck in a fiercely competitive marketplace, right?
3. You may be pissing off customers (or potential customers) – but “ya gotta have haters, right”?
4. You’re gambling with your future – this is an unsustainable way of doing business in the modern world and your continued success is greatly at risk.

Now you may be perfectly comfortable rolling the dice on number 1 and not care a lick about numbers 2 or 3, but what’s your answer for number 4?

I challenge you to think about it. Just think about it. Unfortunately, I didn’t when I worked in dealerships – I was a faithful practitioner of the old school ways.

Now, I realize that you may feel that this post is just more nonsense from an ex-car-guy-turned-consultant who doesn’t get it – and you may be right. Only time, and customer sentiment, will tell. But you may still want to ask yourself just how long are customers going to put up with business as usual?

Let’s face it; consumers have access to much more information, and choices, than they ever did. You can hate the internet and all its information. You can hate the idea of “transparency”. You can hate all the regulations that dealers have to contend with. You can hate the consumer advocates. You can hate the media and all of its anti-dealer sensationalism. But guess what? None of it is going away. The “But We’ve Always Done It This Way” mentality just doesn’t hold water anymore.

Now, I’m not a believer that the internet is going to somehow take over car buying. I totally agree that dealerships are, and will continue to be, the primary way that customers will purchase vehicles for a long time to come. But remember this; while customers may always choose to do business with dealerships, they don’t have to choose to do business with your dealership.

One final question: Are you a true professional who is ready, willing and able to succeed in the new world or are you hoping that things will never change?

In my book, transparency is not a dirty word, but complacency is.

Good luck and good selling.

While this error did not end up being fatal to the case, it made things much more difficult, cost the client a great deal more in attorney’s fees and could have cost the client the case in another court. It is of the utmost importance that all documentation requiring signatures be signed at the time of the purchase by all parties and that the customer be provided fully executed copies of all documents.

In another case, one of the sales documents contained a redundant or unnecessary signature block on the back of a form which was not signed. On the front of the form, just above the signature block, the form stated that by signing the consumer acknowledged that he or she had read all of the terms and conditions on the front and back of the form. The signature block on the back asked the consumer to acknowledge that he or she had read the back of the form. The primary issue in that case was that the arbitration agreement appeared on the back of the form. Fortunately, the dealership eventually prevailed based upon the signature on the front of the form, but not without paying thousands of dollars in attorney’s fees to resolve the issue. If your form features redundant or unnecessary signature blocks, it is generally far more cost-effective to have new forms produced than it will be to pay an attorney to argue that a signature on a subsequent signature blocks wasn’t necessary.

Another issue that often arises involves dealerships that occasionally add additional forms to the sales contract over time without making adjustments to their previously existing forms. However, many sales contracts contain what is known as a merger or integration clause. This clause will essentially state that the document containing the clause, along with a list of additional documents, makes up the entire sales contract and that the parties agree that no other documents that will be considered part of the sales contract. The problem is, as the law changes or as a dealership modifies its practices, additional documents are added to the sales contract without updating the merger or integration clauses. Under certain circumstances, a consumer can use the merger clause that was intended to protect the dealership as a weapon to argue that these new documents are unenforceable. As a result, anytime a dealership is considering adding additional forms to the sales contract, it is generally a good idea to have your attorney review the sales documents as a whole to make sure no updates are required to your pre-existing documents.

Also, there are a growing number of consumer actions based upon improper disclosures and notices in sales documents. Many federal and state statutes require that at the time of the sale, a seller make certain specific disclosure to a vehicle purchaser. A few of the more commonly known statutes include the Truth in Lending Act, Fair Credit Reporting Act and the Equal Credit Reporting Act. Several of these statutes are essentially strict liability statutes, this means there is almost no defense for a failure to properly make the required disclosure. It is very important that you consult with your attorney regularly to make sure that your sales documents comply with all state and federal disclosure and notice requirements.

Finally, many dealerships use form documents that can be outdated or include corporate names or identities no longer in existence. This may happen when a dealership is sold or otherwise changes ownership, when a product ceases to exist, or where a dealership changes dealer affiliations. These forms also need to be brought up to speed.

Many of the applicable statutes allow plaintiff’s attorneys to recover attorney’s fees. While the damages a consumer might recover could be minimal in some case, there is no shortage of attorneys willing to take these case in hopes of collecting thousands of dollars in attorney’s fees from your dealership. Therefore, when it comes to your dealership’s sales documents, the old saying that “an ounce or prevention is worth a pound of cure” could not be more true. Paying your attorney to review your sales document is far more cost effective than paying the same attorney to argue their meaning to a court.

It was spring, after all! Shoppers were heading up and down Michigan Avenue, the snow was gone, temperatures were rising and summer was right around the corner. The sense of enthusiasm and reinvigoration was palpable.

It’s also a perfect metaphor for what’s happening in the automotive credit market. Let’s face it — a couple years ago, credit was frozen like a Minnesota lake in February, and most lenders and retailers must have felt like they were walking uphill both ways in a 2-foot snowdrift.

However, when we look at the data from Q4 2011, there are clear signs that the automotive credit market continues its thaw, giving everyone in the industry a sense of renewed optimism. Consumers are doing a better job of repaying loans, lenders have much less money at risk, loans are easier to obtain, interest rates are dropping, and lenders are coming up with programs to stretch loans and make monthly payments more affordable.

All these factors are good news for everyone involved, including consumers, retailers and lenders. Here are some of the numbers behind these positive trends:

• First, automotive loan delinquencies continue to decline. The 30-day delinquency rate fell 6.57 % from Q4 2010 to Q4 2011 (2.98 % to 2.79 %). The 60-day delinquency rate fell 9.51 % from 0.79 % in Q4 2010 to 0.72 % in Q4 2011.
• The overall dollar volume of loans at risk dropped to $18.5 billion, a $1.8 billion drop from Q4 2010. Meanwhile, the total volume of open loans rose by $23.9 billion in Q4 2011 to $658 billion.

These signs provide particularly good news for lenders. With less money at risk, lenders are on much more solid ground. This gives them more room to approve loans for customers with lower credit scores. Ultimately, this is good for automotive retailers, as it opens the door to more potential customers.

How did the additional appetite for risk play out in terms of numbers in Q4 2011?

• Average credit scores for new vehicle loans dropped six points from 767 in Q4 2010 to 761 in Q4 2011.
• Average credit scores for used vehicle loans dropped nine points from 679 in Q4 2010 to 670 in Q4 2011.
• New vehicle loans to nonprime, subprime and deep subprime customers increased by 13.8 % from Q4 2010 to Q4 2011.

From a consumer standpoint, perhaps the most important sign during Q4 2011 was the drop in interest rates. Average interest rates for new vehicle loans fell to 4.52 % in Q4 2011, down from 4.84 % in Q4 2010. Average rates for used vehicle loans fell to 8.68 % in Q4 2011, down from 8.71 % in Q4 2010. The Q4 2011 rates were the lowest since Q1 2008.

In addition, lenders appeared to be looking for ways to get consumers into vehicles with lower monthly payments. The number of loans from 73 to 84 months long increased by 47.4 % from Q4 2010 to Q4 2011 and accounted for 14.1 % of all loans. Between the lower interest rates and longer terms, consumers are much more able to find monthly payments that fit their budgets.

The improved automotive lending market is good news for consumers in the market to buy a new or used vehicle. The confluence of low interest rates, longer loan terms and an increase in loans outside of prime provide a great opportunity for more people to find a vehicle that suits their needs.

While the industry has not recovered to the point where we are seeing red-hot sales numbers, the current thaw is welcome relief to everyone who has been battered by the cold of the past few years. And, like my co-workers in Chicago, the improved forecast is putting smiles on faces. Hopefully, the trend will continue and the industry will see sunny days ahead.

Many insurers use a loss ratio approach to determining premiums. That means they shoot for a certain loss to premium ratio. As of this writing we are seeing most insurers writing to a 40% – 50% loss ratio for medium to large dealership groups. Smaller dealers are being written at 25%-35% loss ratios. If premiums rise, the loss ratio they are looking for will fall. During the hard markets right after the 9/11 crisis, we saw loss ratio pricing fall to 25%-30% even for bigger dealers. To be clear, when I speak of loss ratios, I am referring to your total losses (plus reserves) divided by your total premium. Most insurers look at a three to four year average of losses.

To give you an idea of the real effect loss ratio underwriting has on premiums, look at this example. Let’s assume for the last four years your dealership has had an average of $75,000 in losses each year. At a 50% loss ratio, you could expect to pay $150,000. But at a 30% loss ratio, those same losses will generate a premium of $250,000. Regardless of how low your losses go, insurers will have a minimum premium they are willing to accept, based on the size and location of the dealership.

Just to complicate matters a bit more, insurers will often have different target loss ratios in different parts of the country. If you are located where that insurer wants market share, the loss ratios go up, premiums go down and they get market share. If you are in an area the insurer is not excited about, the opposite can happen.

Some insurers look at a loss as a loss, they don’t care how or where it came from. Others are smart enough to give your loss run a little analysis. Assuming your bidders do look closely at your experience, here is what they are looking for.

Severity vs. Frequency

In insurance-ese, “frequency” is a four-letter word. Insurers would much rather see one large loss than ten smaller ones. Why? Often insurers perceive a high loss frequency as a sign of lackadaisical management that could ultimately result in many larger claims. The dealership with five small fender benders or a higher than normal frequency across all lines of insurance, concerns the insurer much more than the dealership with one big claim two years ago, and rightfully so. There’s a good chance the dealer with one big claim just got unlucky, where the dealer with ten claims got lucky that five weren’t big ones.

Loss ratios

How much is too much? This is a tough question, because so many factors come into play such as severity, frequency, acts of God and the general state of the insurance market. There are some general rules, however. Insurers break even at about a 60% loss ratio (losses/premiums). This does not mean insurers are dying to write 60% loss ratio accounts. The chances of this account’s losses getting worse are greater than the chances they will get better, unless specific steps have been taken by the dealer to reduce losses. As a rule, insurers like accounts with lower than average loss ratios and love accounts with less than 25% loss ratios. Loss ratios are usually reviewed over a three or four year period to see if the loss ratios have been consistent and predictable.

Loss run management

Take a very good look at your loss runs, preferably three or four times a year. Not just this year’s loss runs, but go back to all runs the insurers will be requesting. In the older runs, look for changes, like the claim from two years ago whose reserve has jumped from $10,000 to $75,000 and ask why. In the current experience period, look for any trends that point toward loss control steps you need to take. If you see three workers’ compensation claims for “metal in eye” you know your shop folks are not wearing their goggles.

Check your loss runs for accuracy. With the current level of automation, we don’t see the number of mistakes we did in years past. However, we do see insurers occasionally classifying a garage keeper’s (damage to a customer’s car) claim as an auto inventory physical damage claim, inadvertently skewing your inventory claims higher than they really are. Subrogation (when your insurer sues someone else to pay the loss, when it’s not your fault) should be included to reduce the amount of your paid claim, but is occasionally left off.

What to do when you have “bad losses”

Communicate and advocate! – Find out where your losses have come from, take steps to correct them (possibly with your insurer’s help) then communicate your efforts and results. Don’t wait to be asked. To communicate and advocate is particularly important if you are bidding your coverage. Those bidders only have your loss runs to look at, and if you don’t communicate they will assume your bad losses will continue. You must also be an advocate when your losses result from unusual circumstances or have been mishandled by an insurer. Remember that insurance is not a constitutional right. Insurers do not have to provide insurance to the dealership that disregards their losses. On the other hand, even if your losses have been poor, insurers often embrace the dealership that takes the necessary steps to correct their loss problems.

Many insurers use a loss ratio approach to determining premiums. That means they shoot for a certain loss to premium ratio. As of this writing we are seeing most insurers writing to a 40% – 50% loss ratio for medium to large dealership groups. Smaller dealers are being written at 25%-35% loss ratios. If premiums rise, the loss ratio they are looking for will fall. During the hard markets right after the 9/11 crisis, we saw loss ratio pricing fall to 25%-30% even for bigger dealers. To be clear, when I speak of loss ratios, I am referring to your total losses (plus reserves) divided by your total premium. Most insurers look at a three to four year average of losses.

To give you an idea of the real effect loss ratio underwriting has on premiums, look at this example. Let’s assume for the last four years your dealership has had an average of $75,000 in losses each year. At a 50% loss ratio, you could expect to pay $150,000. But at a 30% loss ratio, those same losses will generate a premium of $250,000. Regardless of how low your losses go, insurers will have a minimum premium they are willing to accept, based on the size and location of the dealership.

Just to complicate matters a bit more, insurers will often have different target loss ratios in different parts of the country. If you are located where that insurer wants market share, the loss ratios go up, premiums go down and they get market share. If you are in an area the insurer is not excited about, the opposite can happen.

Some insurers look at a loss as a loss, they don’t care how or where it came from. Others are smart enough to give your loss run a little analysis. Assuming your bidders do look closely at your experience, here is what they are looking for.

Severity vs. Frequency

In insurance-ese, “frequency” is a four-letter word. Insurers would much rather see one large loss than ten smaller ones. Why? Often insurers perceive a high loss frequency as a sign of lackadaisical management that could ultimately result in many larger claims. The dealership with five small fender benders or a higher than normal frequency across all lines of insurance, concerns the insurer much more than the dealership with one big claim two years ago, and rightfully so. There’s a good chance the dealer with one big claim just got unlucky, where the dealer with ten claims got lucky that five weren’t big ones.

Loss ratios

How much is too much? This is a tough question, because so many factors come into play such as severity, frequency, acts of God and the general state of the insurance market. There are some general rules, however. Insurers break even at about a 60% loss ratio (losses/premiums). This does not mean insurers are dying to write 60% loss ratio accounts. The chances of this account’s losses getting worse are greater than the chances they will get better, unless specific steps have been taken by the dealer to reduce losses. As a rule, insurers like accounts with lower than average loss ratios and love accounts with less than 25% loss ratios. Loss ratios are usually reviewed over a three or four year period to see if the loss ratios have been consistent and predictable.

Loss run management

Take a very good look at your loss runs, preferably three or four times a year. Not just this year’s loss runs, but go back to all runs the insurers will be requesting. In the older runs, look for changes, like the claim from two years ago whose reserve has jumped from $10,000 to $75,000 and ask why. In the current experience period, look for any trends that point toward loss control steps you need to take. If you see three workers’ compensation claims for “metal in eye” you know your shop folks are not wearing their goggles.

Check your loss runs for accuracy. With the current level of automation, we don’t see the number of mistakes we did in years past. However, we do see insurers occasionally classifying a garage keeper’s (damage to a customer’s car) claim as an auto inventory physical damage claim, inadvertently skewing your inventory claims higher than they really are. Subrogation (when your insurer sues someone else to pay the loss, when it’s not your fault) should be included to reduce the amount of your paid claim, but is occasionally left off.

What to do when you have “bad losses”

Communicate and advocate! – Find out where your losses have come from, take steps to correct them (possibly with your insurer’s help) then communicate your efforts and results. Don’t wait to be asked. To communicate and advocate is particularly important if you are bidding your coverage. Those bidders only have your loss runs to look at, and if you don’t communicate they will assume your bad losses will continue. You must also be an advocate when your losses result from unusual circumstances or have been mishandled by an insurer. Remember that insurance is not a constitutional right. Insurers do not have to provide insurance to the dealership that disregards their losses. On the other hand, even if your losses have been poor, insurers often embrace the dealership that takes the necessary steps to correct their loss problems.

When you discover an issue with a vehicle caused by a non-warrantable concern it is vital that your dealership carefully document the process by which the discovery was made, what tests you performed to verify it and, whenever possible, take plenty of photographs and/or video of the issue. It can also be helpful to have an independent third party confirm the diagnosis. This is especially true in cases of fuel or oil contamination where laboratory tests will provide excellent support for your position if you are involved in warranty litigation. Once you have completed your investigation you should share this information with the warrantor as soon as possible as it may require additional testing or require further information.

In creating your repair documents it is key to be as detailed as possible regarding what the cause of the issue is, why it is not covered, how you confirmed this, and what the estimated cost of repairing the item will be. Next, you must carefully explain the situation to the customer. In discussing your findings with the customer the dealership representative must be careful not to say anything that could back to haunt the dealership or the warrantor in a litigation. Unnecessary or out-of-context remarks about a warrantor are often cited by an upset consumer as a basis of some type of wrongdoing by a warrantor who has denied repairs.

Of course, most dealers would like to find a way to get their customers’ repairs covered under warranty. It makes a customer happy and it assures that a dealer can get paid for its work. However, attempting repairs of excluded items could be a breach of your agreement with the warrantor, or even possibly a more serious civil or criminal offense.

A more common problem with attempting to improperly repair a non-warrantable concern is the risk of an additional undiscovered or latent problem. In other words, if a consumer has a relatively minor problem caused by lack of maintenance but, as an act of “good faith,” a dealer finds a way to get the repair covered, it makes it more difficult to explain to the same consumer if they return with a more serious concern that it is not covered based upon the same lack of maintenance. Unfortunately, I have seen this happen several times and the consumer assumes that the “lack of maintenance” argument is invalid because “they fixed it last time.” It can be extremely hard to overcome this discrepancy at a trial or arbitration.

A dealer should always do its best to satisfy a consumer and it should never ignore a problem that is caused by a non-warrantable issue. If a warrantor decides to make an exception to a warranty exclusion, that is the warrantor’s decision. If a lawsuit arises as a result of that decision, the warrantor would generally be the one responsible for its decision. This is true especially if your dealership has followed the steps laid out above and documented the process.

According to a recent article from The Detroit News, economists for both General Motors Co. and Ford Motor Company expect U.S. auto sales to increase in 2012 above the expected 12.5 million units that were forecast for 2011. A general figure that seems to be circulating in the industry is that we may see vehicles sales in the 13.5 to 14.0 million range, which would represent another 10% increase.

Why is everyone so bullish on auto sales, in spite of a sluggish economy? Five simple reasons:

1) Average age of vehicles:

The past 15 years have seen a steady increase in the average age of vehicles, according to a Polk research firm. In 2011 the average age of vehicles on the road was 11 years. This trend is due to two reasons: vehicles are more durable and customers are holding on to their cars longer. At some point, however, as older cars break down and the cost of repairs start to rise, the benefits of holding onto a car versus purchasing a new one will be tipped in favor of the latter. As that tipping point is reached for millions of older cars, consumers will start trading them in.

2) Scrappage rates:

Starting with ‘Cash for Clunkers’ in 2009, scrappage rates remained higher than usual for two years, with total numbers of cars scrapped exceeding the total numbers of new vehicles registered. According to Polk research, the trend of scrappage rates exceeding sales was expected to continue through 2010 and 2011.

And in another article from The Detroit News, a sales analyst from Ford Motor Co. predicted that scrappage rates of 6% on 250 million vehicles on the road in the U.S. (in 2011) would generate the need for 12.5 million to 13 million new vehicles.

Scrapping statistics are generally viewed as a bellwether for future gains in vehicle sales. The higher the scrappage rate, the more demand for new and used vehicles.

3) Inventory levels back to normal:

Last year was a bad year for Japanese automakers. The tsunami in March severely impacted inventory levels for much of the year. Supply chain interruptions caused by the tsunami also affected U.S. manufacturers’ production.

Then, just as things were getting back to normal, flooding in Thailand threatened to impact production again. As of press time some auto plants in Thailand had been shut down, and the expected impact to production was unknown. However, we predict any slowdown will be short-lived and the impact on inventory levels will be nowhere near as severe as was caused by the tsunami.

In Q4 of 2011, AutoNation was expected to receive shipments of 30,000 units from Japan, well above their average rate of 27,000, indicating that Japanese automakers are up to 110% of their pre-tsunami production levels. Presumably other auto dealers are also back to normal inventory levels as we head into 2012.

4) Easing lending requirements:

Since the 2008 crisis, banks and finance companies have taken losses in real estate and business loans. One bright spot, however, has been in automotive retail. Apparently people are more likely to walk away from their homes than let their cars be repossessed. Banks took minimal losses, if any, for car loans, so naturally their interest in this area has grown and they have begun to ease lending requirements.

According to an Experian Automotive Credit Trends Report released in 2011, banks starting easing up lending in the second half of 2011. New car loans for buyers with credit scores below prime jumped 22.4% in 2011 compared to 2010, while car buyers with the worst credit, deep subprime scores, saw the largest increase of 44.1% over the same period.

Since almost half of all consumers have credit scores below prime, that’s good news for both car shoppers and auto dealers.

5) New, innovative products:

In 2012 automakers are releasing new products that are in compliance with increased government regulations, as well as appeal to increased consumer demand for fuel-efficient, safer, and “green” vehicles.

Some innovations include:

• Many 2012 vehicles will have higher miles-per-gallon (MPG) compared to models from previous years. 40 MPG is the new standard in compact vehicles.
• Start-Stop Technology: Hybrid owners are familiar with start-stop technology, but now manufacturers are expanding its use because it’s an inexpensive way to improve a vehicle’s fuel economy by up to 10%.
• Electronic Stability Control (ESC): the government has mandated that all 2012 models under 10,000 lbs. have ESC, which has been proven to reduce fatalities in accidents.
• Inflatable seat belts: Ford Motor Company is introducing this innovation, which combines the features of traditional seat belts with those of airbags. The feature enhances safety, especially for rear seat passengers such as young children who are more vulnerable in crashes.
• Luxury: The 2012 Ford Focus will have new perks: rain-sensing wipers, a parallel parking system, a blind spot warning system, a backup camera, ambient lighting, push-button ignition, a stitched dashboard and a navigation system. In the past, consumers would have to pay for a pricey model to have all these luxuries included, now they are becoming de facto in less expensive models.
• “Green” Cars: Some consumers want more than fuel efficiency. Car manufacturers have responded by producing new cars using recycled and environmentally friendly filler in the seats, headliners and carpets. The Ford Fusion Hybrid, for example, has seats made from reclaimed plastic.

The combination of older cars and high scrappage rates indicates a pent-up demand for new vehicles, and thanks to lending requirements easing up, along with normal inventory levels, consumers will find it easier to purchase a new car in 2012 than in recent years. Additionally, auto manufacturers are offering plenty of choices with increased fuel efficiency, safety features and other attractive options for consumers.

For these reasons, I believe that 2012 will be better than 2011, and another 10% increase in sales would put us that much further down the road back to 15-16 million units.

The common excuse for dealership complacency is: “Well, this is the car business.” If you break this slogan down, what you get is: “Yes, we are a corporation with a P&L statement, balance sheet, HR department and sometimes shareholders to report to along with all the assorted corporate stuff. But when it comes to disciplined accountability, engaged employees, solid leadership and developing a Seal Team Six of our own, well, you know, this is the car business.”

Spoken like it’s a hall pass for not being in class. We all know, stupid is not illegal, but it sure is expensive! Average is everywhere because it is typically brainless. And, one of the biggest problematic issues facing many average or below average dealerships is ‘ignorance arrogance’ when it comes to management actively seeking ways to improve and grow the business and their employees.

Some just know it all (ha) and as a defensive mechanism, become arrogant when presented with new leading edge principles, which confuse their ‘rule set’ experience comfort zone. The damage arrogance creates in the work place is boundless. Arrogance creates a blind spot and overlooks things that can help you, your people and the dealership grow to greatness. Total all unit sales last month then divide that number by the number of sales people you have. The ‘average’ sales person in the car business sells roughly 10-12 units a month. So, where do you and your store stack up? Below, above or average? If it is the first or the latter, you need to refocus on some improved agenda items or simply remain average or below – C, D or F. You wouldn’t want your kids coming home with those grades, so why settle for the same for your business legacy? Time to shoot for the A and B grades.

To get you on the honor roll, a few new agenda items to check out in your store are as follows:

Be a visionary

Business gurus continue to speak about the importance of visionary leadership in any business. Why is it this industry largely doesn’t grasp the same concept that successful companies embrace regarding adopting a corporate vision for growth? Ready, shoot, aim seems to be the mantra. This will give you progressive deterioration if left unchecked along with high attrition, lost deals, lower profits, team disintegration and wandering people lost in the desert waiting for their next job. Put on a new pair of glasses and enhance your vision by taking your team to new heights of skill achievement. Do not confuse short term motivational ‘rah rah’ locker room sessions, product, certification or technical skills with team development enhancement.

Having vision is the cornerstone for true leaders because they cast out their sight way beyond the reaches of mediocre shortsighted managers who wait for opportunities and/or problems to present themselves before they act. These are the fixers and they usually bring people down with the store. Too little, too late. No, true leaders reach out to the future and envision ideas for business getting better, their team getting stronger and envisioning a dealership synergy that bonds the team together like Bondo. This is when everyone looks in the same direction instead of each other.

We must visualize our store and our people growing to the fullest potential. Then, constantly begin seeing the improvement areas to take them there every hour, everyday, every week, every month and every year. Your reward for this ‘corporate approach’ to running your business will be rewarding in so many immeasurable ways. The galaxy of opportunities will surprise you.

Plan for growth

The importance of planning is critical for true growth. You know, major league baseball players make millions of dollars but still get into the batting cage, work on pitch techniques and take grounders or fly balls to improve their skills almost every day in and off season. They don’t wait for the big game to mess things up due to lack of conditioning. Instead they recognize the planning importance to practice, practice and practice. If you notice big league ball player at the plate invariably you will see no two stances the same. Why? Because each individual is just that, an individual. What works well for one does not work at all for another. Similarly, your entire team: sales, service, parts, F&I, admin. Everyone is an individual and their skill sets are in most cases different from one another. Therefore we need to identify strengths and weaknesses in each then capitalize on the strengths by feeding and developing those strengths. Sure we have to conduct broad training as a group but the batting averages go exponentially up when someone can interview your employees, identify individual strengths and weaknesses and develop a ‘tailored’ training program (like BP in the batting cage) for each individual. Most, pro ballplayers if not all of them, have personal trainers to fine tune individual abilities even further. But many managers are too busy counting deals, complaining about gross profits and then beating up the team for failing to fulfill the aforementioned instead of utilizing their leadership talents to identify better ways to grow the business and the individuals they serve.

Think differently

“Great leaders and salespeople have an edge because they are able to let go of obsolete ideas.” –Donald Trump

Donald gets it and refuses to be pulled down by old school paradigms, which are often perpetuating the continuing madness of diminishing business and customer dissatisfaction in our industry. Everyone is saying the same things. Most web sites look the same. And, most dealers do nothing to create differential from their competitors or improve the skill sets of their sales and management team to promote solid leadership. Nothing limits achievement more than small thinking! When you start your car you should know the direction you are heading. Therefore, let your passion pull you forward and your planning give you direction for processes and development programs which endure the down times and prepare you to capitalize in the up times.

It takes time and effort to heal a sick or wounded dealership work environment. In laying the groundwork one must first recognize that a commitment to making improved changes is most important. Without this nothing happens and everything defaults to ‘business as usual’ very quickly and you lose credibility. I do not agree with the notion that in order to create an improved effective change in the way you do business takes a long time. In fact it can occur very quickly given a few cornerstones like empowering your people, sharing the plan with the team and providing them with economic news results as they occur. It enlists everyone in ownership of the initiative. When they are made a part of the initiative vs. being told what to do it sparks their ‘belonging senses,’ which in turn provides them with engagement in the position they hold. Disengaged employees cost you money, momentum and negative vibes which radiate throughout the store. So, give them the good stuff and watch them soar.

Empowerment should be a part of your overall business strategy. Secrecy breeds fear and worry. It sends a signal to your people that you do not trust them or think they are incompetent in absorbing the information. Next is investing in your people by investing in their skill set development, which ultimately makes you more money (duh). Spending money on your people over an extended time frame says to them “you are important to me and a valued asset to this organization.” The moment you clearly recognize that you really do achieve a competitive advantage through your people when they become ‘engaged employees’ everything else falls in place very nicely. Loyal customers are incubated through loyal work forces who are exhibiting the new relationship building techniques which energize them towards professional customer-centric selling skills.

Timing

A dealership can, unlike the Titanic, turn things around for the better much faster than most actually believe. How many times have you seen a sports team way behind in the game only to shock everyone by coming back strong when the chips were down to win the game? The patience element comes into play because you have to first give your team constant encouragement and pasture running room to build their skills and then continue allowing them to build them. Like a race horse, if you corral them their unused organs atrophy and never run again because you crushed their spirit. I have found that almost every sales consultant I have ever spoken with would eagerly accept the opportunity to grow and be challenged through affective new sales training strategies. Sadly, most never receive it as they wait for the next job opportunity.

No dealer or GM starts out intending to build a lousy store culture, or even just an average one. Would you get excited about going to an average restaurant with average food and service? How about hiring an average heart surgeon for your critical required operation? Maybe, but most people I know look for the best. Most dealers would like their team’s productivity to be born out of passion for the job and team synergy. Yet in this maddening marketplace, many dealers drastically fail to see the value they (and the team) can receive from well-conditioned, prepared and trained people. About the timing, I guess the question you must ask yourself is when do you want to see and experience a positive difference? If later or next year is ok then that is your mission time horizon course of action. If you want to make it happen right now then now is it. Now is always better than hemming and hawing around “until next quarter” because the stores that choose to implement now will blow right past you. Start a new agenda at the beginning of next month. Start your commitment plan for doing so now! The job never started takes the longest to finish. The biggest reason for failure to succeed is never starting. Just don’t get fooled into thinking like so many in waiting for the preverbal vacation spot – Someday Isle. Yea, someday I’ll start something new around here, someday I’ll look in to some new methods, someday I’ll train my people in new measures for success, etc, etc, etc. For most, someday isle never comes. Be the entrepreneur you are intended to be and do it now. Your people are looking to and at you for the fresh air to begin to blow. Breathe new life into the dealership and your people. Plant the seeds now for growing a harvest of opportunities down the road a bit.

Action

In order for the action step to succeed, the aforementioned steps need to be handled first. No more ready-shoot-aim. No, you are now taking all the planned steps to reap an abundant harvest of increase so get out the Leopold scope and draw a bead. Of course, to win the battle you have to have good, well-equipped soldiers. Winning is virtually impossible if your soldiers are weaponless, cold and starving. Three things have to occur for any great action achievement: purpose, persistence and patience. One tiny spark can ignite a raging forest fire and you can ignite enthusiasm for individual and sales team growth the same way. If you take actionable steps to make improved changes to your store you will reap benefits from doing so. If this is not a priority it will be like having a flat tire; then one day in the future you have to take care of it at a most inconvenient panic stricken moment.

Here are some beginning action steps I would initiate running any dealership:

1. Provide a long-term company outlook to every employee: Make your dealership the dealership where people enjoy coming to work because they see security and growth potential and a they are a participant in the planning.

2. Abide by the golden rule: Builds team unity, integrity, character, growth and an awesome overall morale.

3. Create an atmosphere where the business is like family: Comfortable environment allows for natural talents to become better. Let them know it is OK to screw up but provide them with the knowledge of how to do it right the next time.

4. Finally, challenge yourself to be the best employer in your market place: this will not only dramatically reduce attrition (huge savings) and increase business but attracts the best future employees because everyone will want to work for you.

Ask yourself this question: “What have you done for the first time recently?”

Faith that you can do something without action is useless. Worry immobilizes; concern moves you to action. The past should not be in front of you so take your eye off the rear view mirror and throw it in drive and speed to new successes. If you would like a refreshing approach to starting a new direction shoot me an e-mail at cbarker@dealer-communications.com requesting “action” and I will send you a couple of ideas.

“After six years and eight months, the soft market cycle has finally broken,” Richard Kerr, CEO of MarketScout, said in a statement on December 6, 2011.

What insurance execs are saying about rising rates in 2012

The news of rising insurance rates is exciting to insurance executives anxious to add to their bottom lines. Since 2004, dealers have seen stable to improving property, casualty and workers’ compensation rates, thanks to plenty of worldwide market capacity and competition amongst insurers. Taking these insurance executives at face value, they are absolutely giddy about firming rates. Chubb (who offers the Seafire dealer insurance program) CEO John Finnegan said during the Oct. 20 earnings call that his company is “pleased with the continued firming in the market.”

Travelers Chief Executive Jay Fishman, at a Goldman Sachs financial-services conference, said his company had increased prices for business-insurance clients by 5.2% in October and 5.8% in November, the largest rate increases in several years. “Our principal tactic right now is to drive rate,” Mr. Fishman said. “There is a sense of optimism building around this, and a notion that we can continue to drive this strategy successfully.” Additional information provided by Fishman revealed an 8.2% increase in November for mid-market business which would include many dealers.

Of course, insurance agents will join this chorus because as premiums rise, so do their commission checks, without selling a single piece of new business.

Why are rates going up now?

Any time the insurance market moves in lock step, there is a combination of events in play. In this case it seems to be the result of continued low investment returns and interest rates exacerbated by higher than normal catastrophic property losses.  A.M. Best, the insurance rating company, reports the pretax losses from catastrophes through the first nine months of 2011 at $38.6 billion in the U.S. alone. Add to this, losses in Europe and Asia (historic earthquake in Japan and floods in Thailand) and you begin to see the magnitude of the problem.

Why is the market only firming instead of a full fledge hardening like dealers saw between 2000 and 2004? Again, events conspire. First, there is still plenty of insurance market capacity which dampens premium increases. Second, the economy makes it hard for many businesses to stomach premium increases. Third, while the profit picture for insurance companies may not be as rosy as they’d like, it has been reported that still on average, they are making around 6%. Hard markets are much more likely to occur once returns go below 0% and the pressure to raise rates becomes insurmountable. Another bad year of property losses coupled with low investment yields, and we could be there.

How does this affect the auto dealer?

The most challenging time for dealers is at the beginning of a deteriorating market. It is easy to assume that the renewal process will be as it has been the last six years. Get a couple of quotes and everything will work out, right? Then bam, remember 2002 when those big premium increases hit and you were left with nowhere to turn. Now is the time to be aggressive and bid your coverage to all the available players. Competition works.

Here’s what we are seeing at Austin Consulting Group. As you know, we do not sell insurance. We analyze quotes from all segments of the dealership insurance market for dealers across the country.

• In the second half of 2011, we too began to see a rate firming for our clients with average increases of 2% – 5% after aggressively bidding all coverages.

• Dealers with higher than average losses are seeing disproportionally higher premium increases.

• In stable markets, nearly 25% of our clients change carriers to achieve the best insurance deal. Since June, we have seen an average of 40% switch carriers for a significant portion of their coverage package.

• Some insurers are again hesitant to write policies in coastal and flood-prone locales, especially in the northeast.

• Carriers that have traditionally written entire dealer packages are now going to outside carriers for EPLI and vehicle inventory.

• More dealers are finding the need to separate their coverage package and buy from multiple insurers to achieve the best pricing and coverage. Effective insurance buying becomes more complicated.

• Carriers are increasing deductibles and limiting some coverages to mitigate premium increases. This may not be best for the dealer.

• Dealers’ Physical Damage insurers are either significantly raising or eliminating aggregate deductibles all together. Look for some carriers to offer percentage (10%-30%) of total loss deductibles for weather related claims.

Austin Consulting’s prediction for 2012

For 2012, we expect something of a schizophrenic insurance market. Some insurers will still be looking for new business and as a result, offering better pricing to new prospects than current clients. Other carriers will try to hold on to profitable business with competitive rates while “running off” unprofitable business by excessive increases. In those cases where dealers have been priced under market, we expect to see premiums rise to market rates. Insurers who have not been competitive over the past few years may once again find themselves competitive, as premiums rise.

In all cases, insurers will be looking for premium increases where they can. The prudent dealer is left with little choice but to aggressively bid their insurance coverage to as broad a selection of insurers as possible. This is the only way to be absolutely certain you have the best possible pricing in any market. Start around 90 days out. Even if a 10% increase seems palatable, every dollar you could have saved is lost bottom-line profit. Competition keeps price increases in check. You never know which carrier will step up to the plate. But if you wait to see your renewal, it’s too late.

Obviously, when people think of Las Vegas, they think about gambling. Unfortunately, I’m starting to think that subprime financing is developing a similar connotation. There are some people who see the word subprime next to an increase in loans and recoil, thinking about the pain from the financial market meltdown just a few years ago. Much of the real-estate crash revolved around subprime loans, and it seems subprime auto loans are guilty by association. In reality, when lenders drop into the subprime category, it can be very beneficial to dealers, as it opens potential sales to many more customers.

In Q3 2011, share of loans to sub-prime customers overall was up by 3.18% since Q3 2010, from 36.71% to 39.89%. However, this doesn’t necessarily mean the industry should be alarmed. As long as it is managed correctly, a little bit of risk can be good.

When automotive lenders have healthy loan portfolios, with low delinquency rates and lower dollar volumes at risk, they are free to adjust loan criteria for down payment, term and loan-to-value ratio and to make more loans to riskier customers. As long as lenders carefully monitor loan performance relative to delinquencies and dollar volume at risk, subprime auto loans can work well.

A couple of years ago, when automotive lenders started to see higher delinquency rates and had high dollar volumes at risk, it limited their options in terms of how much they could push the envelope with their loan strategies. They wisely began focusing their loans mainly on customers with strong credit.

In Q3 2009, nearly a year after lending markets froze average credit scores for new vehicle loans peaked at 775, up from 749 in Q3 2007. In part, this was because subprime lenders did not have access to adequate capital. It also was a reaction by other lenders to a significant rise in automotive delinquencies. In Q3 2011, the 30-day delinquency rate was 3.27%. However, by Q3 2011, this rate had dropped by 14.9% to 2.78%. Total dollar volume of at-risk loans dropped by more than $9.4 billion from Q3 2009 to Q3 2011.

With fewer loans and dollars at risk, lenders felt comfortable opening more loans to subprime customers. The average customer credit score for new car loans dropped from the Q3 2009 high of 775 down to 763 in Q3 2011. In addition, the average dollar amount for a new vehicle has grown. In Q3 2010, the average new vehicle loan was for $25,273. This increased to $25,873 by Q3 2011.

The appetite for larger loans was prevalent in the nonprime, subprime and deep-subprime categories as well. In the past year, dollar values for new vehicle loans to nonprime customers were up 4.1%, from $25,793 to $26,850; for subprime customers, they increased 6.4%, from $23,981 to $25,527 and for deep-subprime customers they went up 9.12%, from $21,866 to $23,862. So in addition to more loans to riskier customers, lenders are freeing more dollars for each loan.

However, this doesn’t need to set off warning bells in the industry. As the lending industry has shown in the past, it will expand and contract its share of subprime loans based on the overall performance of consumers in repaying their loans. Ultimately, this puts the odds in lenders’ favor and keeps automotive retailers — at least for now — with a larger pool of potential customers.

So if you see some of your friends in the automotive lending industry playing a few hands of blackjack during the convention this year, don’t be alarmed. They are just having fun.

The response was heartening. Most of you believe you have the appropriate processes in place, some of you submitted relevant questions, a few of you requested we help you further.

The article did not address the high level view of what a compliance program looks like, one that we endorse and install.

This compliance program is structured along the lines of the one the Federales require in some of the laws regulating our industry, namely the Safeguards Rule and the Red Flags Rule.

Overview of the rules

Both of these rules, designed to help stem the tide of identity theft, require car dealers to have a documented compliance program that consists of five critical elements:

1. Name a compliance officer
2. Conduct a risk assessment
3. Develop policies and procedures
4. Train employees on the policies and procedures
5. Audit regularly

You can implement this compliance program for any department in your dealership that has to abide by regulations in any area.

One at a time

Let’s look at each of the required components and how you can translate it into action.

Name a compliance officer

Very simply, someone is in charge of your compliance efforts. This person must have some juice in your organization, so that the rest of your employees will take this effort seriously. This person, however, does not need to handle every aspect of compliance, rather should be encouraged to delegate most of the compliance tasks and follow-up.

Conduct a risk assessment

After selecting a regulation to become compliant with, say the FACT Act for example, you need to figure out how well your processes stack up against your requirements. This means first you need to know what you are required to do, then conduct an assessment to see if you are doing it correctly.

Develop policies and procedures

Now that you know what you need to do, and have corrected the reality of what you were doing, you must reduce your new processes to writing in the form of a policy and procedure manual.

Train your employees

No good book goes unread! Be proud of your new policy and procedure manual. Make it required reading for all affected employees, giving them a reasonable amount of time to review the material. Shortly afterward, conduct a training session to review the material again. You will also want to incorporate the policy and procedure manual in your new hire orientation material. Finally, obtain an acknowledgement statement from the employee affirming that the employee read, understands and agrees to abide by the policy manual.

Audit regularly

“Trust, but verify,” Mr. Reagan said about the Russians and their nuclear disarmament intentions. You must take the same approach. Trust that your employees will conduct business and transactions in accordance with your policies. However, you must also periodically check to make sure they are. Consider a three-pronged approach:

• Develop a checklist for the billing clerk to use on every transaction to ensure the required pieces of paper are there.
• Require a ten percent review of deals on a monthly basis by your office manager, controller, general sales manager and/or F&I director.
• Engage a third-party to periodically conduct independent reviews of your transactions to see how they will stand up to regulatory oversight or judicial scrutiny.

It is not necessarily easy to implement this compliance program in your dealership, but it does develop a process mentality. And with sales seeming to pick up, the busier you get, the better your processes have to be.

Continued good luck and good selling.

For example, one dealer gave the keys to a repo agent, who had what appeared to be a legitimate order from one of the captives to repossess a car that was in the dealer’s service department. Unfortunately, the customer was not delinquent; someone had run an elaborate scam to steal his car.

Everyone in the industry is familiar with POR (Proof of Residence). We vet the stipulations in deals to verify that the dealer is providing what the lender is looking for to buy a deal. I see a lot of different types of POR. For the first time, I recently saw a photocopy of the customer’s People Magazine cover with her subscription label containing her address as POR.

Yet another strange one. While conducting a lot review to make sure used vehicles had correct used car buyer’s guides and new vehicles prominently displayed Monroney labels, I saw an addendum window sticker that added about $2,000 to the MSRP for “Trade Equity Assistance.” Thankfully for our dealer, the car was a dealer trade and the addendum was from the dealer he bought the car from, but it was obviously a deceptive practice intended to raise the price of the vehicle and disclose a non-existent down payment to the lender.

With no guidelines on what could be on addendums and what probably shouldn’t be on addendums, here is my humble attempt to outline some pitfalls and provide some standards.

Federal requirement

There is not a federal law governing the use of addendum window stickers. Addendums are generally used on new vehicles to add to the cost displayed on the Monroney Label.

Dealers attacked

Some dealers have faced attacks from the state attorney general or the Division of Motor Vehicles or the plaintiff’s bar over the use of addendums. The attacks are not generally about the dealer’s right to set vehicle pricing, but rather about perceived deceptive methods of adjusting vehicle pricing.

Potentially deceptive addendums

Some of the potentially deceptive practices when using addendums include:

• The added items listed on the addendums do not appear to support the amount of the additional mark-up. For example, charging $5,000 for pinstripes would seem to be a bit much.
• The items listed on the addendum are non-existent. Kind of like phantom pinstripes.
• The mark-up is for a list of items that are not individually priced. Having a list of tint, pinstripes, door edge guards, wheel well enhancements and a rear spoiler for a group price does not play well.
• Including soft adds that have a benefit or a warranty to the consumer, such as etch or environmental protection products.
• Inconsistent pricing between the addendum price and the starting price on the sales documentation, specifically if the starting price is higher than the addendum price.
• Having Market Value Adjustments on every car in inventory, even those which have been in inventory over a year. 

Dealer’s best practice

A dealer who is intent on using addendum window stickers as part of its selling strategy should consider these best practices to help avoid charges of deceptive selling:

• Every product listed on the addendum be fairly priced, separately priced and physically installed on the vehicle prior to offering the vehicle for sale.
• Only include hard adds.
• Only consider market value adjustments if the vehicles are truly in short supply.
• The addendum price is the starting point in the sales negotiation.

Continued good luck and good selling.