HOUSTON — Ken Shilson, founder of the National Alliance of Buy-Here, Pay-Here Dealers, recently completed the latest industry benchmarks and shared some of the results with SubPrime Auto Finance News. According to Shilson, 2009 was a very challenging year.

"A credit crunch, rising inventory costs, Cash for Clunkers and various other economic factors combined to create some unprecedented challenges for both new- and used-car dealers," he highlighted.

"While franchise sales and profits declined, the benchmarks again show (at least among the better operators) that BHPH profits did not experience the same fate," he pointed out.

Shilson discovered that many operators experienced lower sales last year, which was particular true for operators who did not expand or add sales lots. However, despite these lower sales volumes, profitability remained stable and even increased in some cases, he explained.

"Operators again struggled to cover bad debt losses with finance income (where interest income equals or exceeds bad debt expense). This was, in part, the result of reduced interest income as the average age of receivable portfolios increased due to lower originations," Shilson said. "Interest revenue declined as the average portfolio age increased. Further, bad debt defaults increased in 2009 as more consumers surrendered their vehicles voluntarily due to reductions in overtime, layoffs and other pay reductions."

Even though default rates grew, apparently, bad debt expense, as a percentage of sales, actually declined.

"This resulted from tighter underwriting, which reduced early payment defaults and from increased recoveries attributable to the use of payment devices and improved vehicle remarketing strategies," Shilson pointed out.

Moreover, he found that the credit crunch caused a dramatic decrease in capital availability.

"An overall lack of capital restricted sales growth and forced operators to reduce overhead and to downsize. Operators who could not locate capital exited the industry. The introduction of new technology amongst better operators increased operating efficiency and decreased operating expenses," Shilson said.

Also, acquiring and reconditioning the "right" inventory as a reasonable cost continued to be a "major challenge" in 2009, Shilson stressed.

Basically, the lack of available floor plan financing led operators to reduce inventory carrying levels and reduce vehicle acquisition costs.

"Unfortunately, lower trade-ins and increasing vehicle acquisition competition resulted in higher mileage on the vehicles acquired. Therefore, more reconditioning cost was required to make these higher mileage vehicles ready for sale," Shilson explained.

Looking ahead, Shilson indicated, "The lack of new capital in 2009 forced prudent operators to reduce leverage and increase financial flexibility. This trend will hopefully continue in the future, even as the capital markets re-open. Successful operators must become more cash efficient and make more from less."

He also noted that further industry consolidation is likely going forward.

"Acquiring good inventory at favorable costs remains a continuing challenge as new-car sales decline and franchise dealers retain trade-ins or enter buy-here, pay-here themselves. Programs like Cash for Clunkers raised the cost and reduced supplies of SUVs and trucks. Further, floor plan financing remains in short supply. Reconditioning costs increased as operators were forced to acquire higher mileage vehicles. Those who controlled reconditioning costs enjoyed substantially greater gross profit margins."

Shilson went on to say, "Although 2009 was a challenging year for BHPH and for the automotive industry in general, several positive things emerged. Tighter underwriting, reduced leverage, increased recoveries and smarter vehicle sourcing should benefit BHPH operators in 2010 and beyond.

"More changes are likely needed to adapt to the new economic conditions. Operators who understand these challenges will prosper, while others will resist them. Education and networking have never been more important. For those who recognize and capitalize on the new BHPH opportunities, the best is still ahead," he concluded.

The NABD annually release industry benchmarks. The data is compiled with the assistance of Shilson, Goldberg, Cheung & Associates LLP. The benchmarks are a composite of the "best performing" operators and are not an average of the entire database of more than 500 BHPH operators nationwide.

Since 2006, the data has included operating information on sales, collections, recoveries and inventory management. The data points were developed and supplied by NCM Twenty Groups and based upon a composite of all their BHPH twenty group members.

Finally, the actual benchmarks are compiled electronically by Subprime Analytics, a company Shilson owns. This company has analyzed more than $6.7 billion, or more than 780,000 individual accounts, of BHPH installment contracts to identify loss rates patterns and operating performance for the last three years.

Shilson will release the full benchmarks, along with explaining the results in detail, at the 12th Annual National Buy-Here, Pay-Here Conference in Las Vegas, which will be held May 11-13.

For more information or to register for the annual event, visit www.bhphinfo.com.