Wash Out - Part 1
We are still with The Colonel, our conversation is Wash Out....
Q- Is the wash out still relevant today with all the changes, and technology that have influenced the retail automotive business?
A- Good question, the easy answer is no, its not relevant, the technology camouflages many of the steps. The real answer is yes its still very relevant, dealers still take vehicles in trade. Until dealers take vehicles in trade as partial payment, nothing has changed as it?
Q- Its the same as it was 50 years ago, when a trade is taken as partial payment. What is different today?
A- Leased vehicles have made a dramatic difference during the past few years. In Canada for some manufacturers over 50% of models are leased.
Q- How have leased vehicles made a difference.
A- Initially leasing was done by dealers with their own in house leasing some 40 years ago, just like wash out, the basic parameters/cornerstones of leasing are not new. On a small scale lease returns were not a problem, it was easy to deal with a lease return. The dealer's leasing company sold the vehicle to the dealer's used car department, and yes the wash out chain reaction would start. In the early days manufacturers, and captive finance companies did not participate in leasing.
Q- Leasing created an additional channel....the vehicle that is not traded in....the lease return?
A- You guys are catching on quickly...yes the lease return which again was not a problem for many years. The residual value was set at the start of the lease, in a perfect world the vehicle returns, and is worth at least the residual value or more.
Q- If its not a problem, where is the challenge?
A- The first challenge was the increasing popularity of leasing, especially for higher priced vehicles, which generated an increasing number of lease returns. The second challenge was the fine tuning of the leasing variables to gain a competitive advantage in the market. The third challenge is washing out the lease.
Q- Colonel slow down a moment, the first challenge we understand. The second challenge intrigues us, the fine tuning of variables?
A- The retail automotive business has always been very competitive, manufacturers quickly discovered that leasing is a powerful lever to gain an advantage. In an age of spreadsheets, powerpoints what do you think evolved? The tweaking, and fine tuning of the lease variables, to gain a market advantage.
Q- What gets tweaked, fine tuned, adjusted.
A- Every component of a lease can be altered, in an attempt to gain a competitive advantage, and when all the components have been tweaked, the one that rears its head the most is residual value. There are mind altering discussions on residual values, there are companies that earn good money analysing residual values, auctions earn good money justifying residual value losses.
Q- Colonel, please explain you are ahead of us....
A- Its very simple, the actual residual value that makes pragmatic business sense does not work in the market. The residual value that works in the market, does not make pragmatic business sense.
Q- They are walk away leases, the customer does not care about the value?
A- Everybody knows that, but you need a residual value to structure a lease, and arrive at a magic monthly payment that will move the metal. Especially when the rate alone is no longer an effective lever.
Q- Are you saying that residual values are aggressive?
A- You can call it aggressive residuals to move the metal, gain a competitive advantage, attract opportunistic customers, and in a saturated market to steal customers.
Q- We covered the second challenge which is to tweak the lease variables, correct?
A- Yes we did, keep in mind that residuals come to term at the end of the lease usually in 36 months. Its like a delayed result, in an industry that does not like delayed results.
We will continue....
Strada Auto Store
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