||'Pay-here' Outlets Are High-Risk Diversity
When the economic downturn hit and new-car sales tanked, family-owned Bill Marsh Automotive Group in Traverse City, Mich., decided to diversify.
In 2009, the Marsh group opened a "buy-here, pay-here" outlet that specializes in selling old, high-mileage used cars and trucks to customers with poor credit. The business model calls for dealers to finance customers at interest rates that typically exceed 20 percent.
Bill Marsh Jr., a partner in the six-dealership, multifranchise group, says his family's J.D. Byrider "buy-here, pay-here store" sells only about 150 vehicles per year. But he says it is profitable.
"With all the uncertainties in the economy and the volatility in the new-car business, we were looking for a way to diversify," Marsh says of the store. "We wanted to get into a business that was still the car business but was significantly different from the economic factors in the retail car business."
But buy-here, pay-here stores, such as J.D. Byrider-franchised outlets, are high-risk, high-reward ventures.
Says Chris Leedom, a Sarasota, Fla., consultant and trainer for buy-here, pay-here operators, the industrywide average gross profit per unit is about $3,750 and the average net profit is approximately $700.
High default rate
But the industrywide average default rate for the stores is 22 percent, and chargeoffs range from 18 percent to 25 percent annually, says Leedom. Still, that hasn't stopped some dealers with giving "buy-here, pay here" a try.
For one thing, it also allows dealers to tap into a customer segment that grew as the economy weakened. And it gives them a way to retail old higher-mileage vehicles they used to sell at wholesale.
But it is a different kind of business. Success in the "buy-here, pay-here" realm depends on a dealer's skill managing and collecting payments rather than on the number of vehicles sold, experts say.
Russ Darrow, CEO of the 15-dealership Russ Darrow Group based in suburban Milwaukee, sells 35 to 40 used vehicles per month at each of his six J.D. Byrider stores. He says the secret to being successful is to adhere to strict underwriting standards and not to chase volume.
"It's the collection process; it has to be steady, intense and aggressive, just like any other business," says Darrow, who opened his first J.D. Byrider dealership in Milwaukee 13 years ago and his sixth in Aurora, Colo., last year.
Mike Linn, CEO of the National Independent Automobile Dealers Association, a trade organization for independent used-car dealers, says "a good 7 or 8 percent" of the association's 20,000 members are dealers with new-car franchises. That represents an increase of 2 to 3 percentage points in the last two years. About half of those franchise dealers operate "buy-here, pay here" stores.
Big cost a big turn-off
Consultant Leedom says he has seen some growth in the number of new-car dealers getting into buy-here, pay-here, "but not nearly the flood that you would think."
He says the high cost is a big turn-off because the dealer isn't paid in full when a sale is made.
"Say you want to sell 20 cars and you have to spend $5,000 to get each car on the lot ready, that's $100,000," says Leedom, who operates four buy-here, pay-here dealerships.
"Those 20 customers make down payments of $1,000," he says. "You can see you'd be out $80,000 in just month one. And you keep doing that the next month and the next month. You're getting payments, but that's how it eats up cash."
Mike Pearce, vice president of franchise development at J.D. Byrider Systems Inc., says his company is aggressively pursuing new-car dealers to become J.D. Byrider franchisees -- and is succeeding.
Twenty-two of the 50 individuals who operate J.D. Byrider's 115 franchise stores are new-car dealers. Over the last three years, the franchisor added five stores owned by new-car dealers with four more scheduled to open in 2012. Eight new-car dealers are in the process of closing deals on J.D. Byrider stores.
J.D. Byrider franchise holders are given training and are provided with a turnkey business model that includes loan underwriting and collections.
Marsh's family opened its J.D. Byrider store in 2009. His inventory is generally 6 to 8 years old with 80,000 to 100,000 miles on their odometers. He says most of his inventory are trade-ins from his dealerships or are purchased from private owners.
His customers typically pay an interest rate of 20.9 percent to finance their vehicles.
Marsh says he researched J.D. Byrider for at least a year before signing up.
"We were not only impressed with the caliber of the people in the company but the retailers that represented them," he says. "They were dealers of substance and character who had the interest of the customer at heart."
(Source: Automotive News, 12/12/11)
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