During an interview, California dealer Mike Sullivan answered questions about the economy and how it is affecting business.
How has the customer dynamic changed?
Clearly, financing has become an issue for everyone. Toyota and Lexus have remained aggressive. But the days of signing your name and taking the car are gone. We sell 15,000 cars a year, but we're seeing a real decline in approval ratios. Banks are restructuring.
Now, to demand 25 percent down is common and debilitating. A $4,000 to $5,000 down payment is a big deal when they want to put $1,500 down. Those days are gone. The A-credit guys are still OK, but the B-tier guy is the one really getting hurt. The C and D tier know they need to meet all these qualifications; they know it's a bigger down. But the B guy is in shock; he's being asked all these questions where he was used to be being chased.
In our upscale area, everyone lived on the equity of their house. But now letters of credit have dissipated, equity has diminished, and the ease of buying a new car is gone. A B-tier guy was treated like an A, but for the first time now those people are having to budget and think and plan.
What percentage of people coming in to buy a car get denied financing?
It's a noticeable amount. Not enough to hurt us today, but it's a conversation we're having with our lenders. We have to find new vendors. Banks got whacked for bad loans, and it's not just houses. People were buying or leasing cars with no down payment. We're still leasing 70 percent at VW, but to drive off now, you have to show a little glue, not just a smile. Sign-and-drive will be more difficult to do.
For those folks who have already bought cars, are you seeing an increase in late payments?
Yes, for the first time ever. Lexus of Santa Monica never had a single one, and we're seeing some voluntary repos. Our delinquent ratio is still the best in the country, but now we actually have a ratio. It's not like they quit making payments. These guys don't wait for the thing to get hooked, but they do bring the car back. They're saying, "What can I do about this?"
During this economy, do you feel private or public ownership of dealers will do better?
The publics have a synergy for buying stationery for the world, but I would rather take my 25-year relationship with my used-car manager going to auction. I think the publics will not be as quick or have the ability to respond. Their size is going to be cumbersome in a nimble market like this. We started a policy where we can't keep a car more than 30 days. It took us a couple months, but we did it. We are now selectively appraising and stocking the lot appropriately. It's harder to do something like that as a public company at that mass.