Chief Executive Officer of Kinetic Advantage, Marty McFarland, was interviewed for the April 2023 publication of SubPrime Auto Finance News.

The original source of this text is from page 72 of the publication seen here.

It’s been a topic discussed heavily, but wanted to get your thoughts, too. How have rising interest rates impacted dealerships and their floor plans?
It’s really impacted dealers in two ways. Probably the most notable way is the whole purpose of the Fed raising interest rates is to cool off the economy a little bit. With the already high level of costs of used cars, you tack on a rising interest rate so customers’ monthly payments are going up. We’ve certainly seen a slowdown in the dealers sell-through rate. They’re certainly not selling at the pace other historical performance norms would indicate. I think on the front end of the business, the consumer has been impacted with regard to their vehicle payments. So, it’s probably delayed some of those purchases that a consumer normally would have made in a less-rate environment.

I think the secondary impact since we’re talking about floor plans is every time the Fed raising their rates, floor planners, as most companies do, pass those rates on to their customers and in our cases, the dealers. We have to because our underlying cost of funds goes up as well in lockstep with the federal movement.

It kind of hits the dealers on both sides. It’s a little tougher to sell that car to the consumers, and it costs the dealers more to hold that car. It’s not good for the business, I can assure you that.

How judicious have dealers been with their floor plan funds and other financial resources?
I think the world of used-car dealers. Because if there’s ever a group that really and typically reacts very smartly to the environment, I think the used-car dealer is in that category. There’s been a number of sources in the industry that have counseled the dealers to reduce the inventory they hold. Forever in this industry, dealers have typically held plus-or-minus 60 days worth of inventory. Right now, they’re being counseled to hold closer to 30 days. We’re seeing our dealers react to that. The dealers are typically not holding the amount of inventory they used to hold in the past. I think they’re being very judicious. They’re being really smart in the auction lanes, buying that specific unit that they know they can put a customer in, not filling their lot with ones that might be window dressing, if you will. They’re buying specifically what they believe they can sell. That is really smart business for the dealers to do. They’re doing the right thing, I believe.

Especially among independents, what have you seen as far as operators either getting into this business or winding down their dealerships?
That’s a very fair question in this environment. The way I would respond to that is the dealers that to use the term winding down today that we see are typically those dealers that either have not been in business very long. Perhaps they were in business in 2021 and maybe early part of 2022 and you couldn’t help but sell a car and make money. That environment certainly has shifted. Some of those dealers were perhaps less experienced in owning and operating a dealership. They’re probably being challenged a little more than those dealers who have been in and gone through a couple of these cycles and know how to manage those. So we’re seeing some of that.

I think on the front end, I can tell you that one thing I love about the business we’re in and the partners who we do business with out there in the dealer world is they’re always making new dealers. We still see that entrepreneurial spirit where that guy perhaps he worked at the used-car part of a new-car dealership and wants to break out on his own and start his own dealership We’re still seeing that. The entrepreneurial spirit is still alive and well. We’re still signing up a lot of dealers who are perhaps still relatively new in business. Personally, I’m excited about this business as I’ve always been, even in difficult times like these. While some dealers are going away, we’re still getting new ones. That’s America, right? The land of opportunity. And these dealers take advantage of that, even during difficult times.

What’s on your radar to watch closely for the rest of the year and why?
In a general sense, a macroeconomic sense, we’ll be keeping an eye on interest rates. We know that every time they raise interest rates, it’s a little more challenging for our dealers to do business. That’s something we keep our eyes on, for certain.

I’m particularly interested in seeing where used-car prices are headed for the balance of the year. It appears there’s always an up and down. But if we can have some stabilization, that’s very good for the dealers. But it’s the unknown and the fluctuation of values that makes it challenging for dealers. If we can have relatively stable prices for used cars, I think that’s great.

One other thing I’m always keeping an eye on is how digital technology is impacting dealerships. It almost sounds trite to say that now. But it’s becoming so embedded in all aspects of the dealership operations, from the acquiring that car to getting it front-line and ready and remarketing the car it they aren’t able to sell it at the retail level. We really stay lose to what’s going on with everything digital related to that dealer because that’s something that moves fairly regularly. It’s very important for dealers to figure out a way to manage all of that and modify business practices.

See the original publication here or if you have questions for Marty and the Kinetic team, contact us today!

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