Ziegler Supersystems, Inc. January 2004 Dealer Magazine Article

In the Lion’s Den

Jim Ziegler discusses and explains his recent national television interview with CBS 60 Minutes

By the time this article is published in early February, I suspect the entire industry will be aware that I recently flew to New York City and appeared in a featured interview with Steve Kroft on the CBS News Magazine …“60 Minutes”…the most high-profile investigative news program in history. Remember, this article is being written December 12^th and the show is projected to run sometime in mid-December or early January.

When 60 Minutes producer, Bruce Ferguson, contacted me back in October about the possibility of me appearing on the show, I was extremely cautious and apprehensive. You’d have to be out of your mind to voluntarily be an interviewed guest on that show! Well, evidently, I was more than qualified because I agreed.

The first question that came to mind was how did they find me and, of course, what story were they working on. Ferguson explained that he had come across my name while researching this story on the Internet. It seems there were several quotes in one of my articles that I wrote for this magazine last July that caught these journalists attention. In the article titled The Barbershop Mirror I wrote the following paragraphs…

“They are bringing out the “Big Guns” and there is about to be a bloodbath. A Tennessee court just authorized class-action lawsuit against Covington Pike Toyota, one of the largest Toyota retailers in the country, and its parent company, United Auto Group (Roger Penske’s group).

…I have got to tell you, I think it’s gonna fall...and it’s gonna fall hard...soon.

The class-action against Covington Pike Toyota/United Auto Group could include more than 40,000 plaintiffs. AND, if the attorney wins this case, it is almost certain he’ll file a similar lawsuit against every car dealer in the state of Tennessee. Within a year it will be on your doorstep, no matter what state you do in...It’s coming.

Some of the largest public companies have totally abused the F&I Profitability until it glared in the public spotlight. Estimates have it that the largest players make more than 70% of their profits from F&I revenues.

One of the biggest scandals in the history of the industry was last year’s multi-million dollar settlement at Gunderson Chevrolet in California...an AutoNation dealership...all revolving around F&I abuses, fraud and theft by deception. Believe me, nobody at AutoNation told those managers to go and do criminal things to your customers. Regardless of my low opinion of some public companies, these are still good and decent people. (Clue-impaired as so many of them are...still good and decent people) More so, it was a result of a corporate culture that put incredible high-pressure on managers to produce high profits in F&I to offset low loss leader pricing on the front side of the sale. OR, at least that’s the way I see it.”

More so, it was a result of a corporate culture that put incredible high-pressure on managers to produce high profits in F&I to offset low loss leader pricing on the front side of the sale. OR, at least that’s the way I see it.

Well, 40,000 plaintiffs didn’t show up for the dance but, at last count there were more than 26,000 active class-action litigants participating in the class-action against United Auto Group/ Covington Pike Toyota…and now 60 Minutes is digging deep, conducting an investigative report exposing all of the industry secrets pertaining to F&I that we’ve kept stuffed in the closet for so many years.

Remember, it’s a well known fact that I have been lobbying our industry hard, trying to reform the way we sell finance. The biggest single issue in all of the cases we are seeing, coast to coast, is centered around the fact that lenders pay the dealers reserve commissions on interest rate markup.

Later, in that same article, I went on to say…

The solution is simple AND now is the time for the manufacturers, the banks and the entire finance community to reform the way we do business. GMAC Platinum Plan is a step in the right direction. I believe it’s time to completely abolish finance reserve profits in retail lending. This would take so much consumer pressure off of the dealerships and manufacturers and greatly improve Customer Relationships and Perceptions of the process.

The catch is they need to replace it with a flat rate reimbursement to the dealerships that is fair and consistent.

The catch is they need to replace it with a flat rate reimbursement to the dealerships that is fair and consistent. I envision it this way...if the total amount financed was, say in excess of $25,000 the dealer would receive $600.00 flat fee for handling it...every customer would receive the same rate for the tier-level they qualified. If the contract was less than $25,000 then maybe a $400.00 or $500.00 flat to the dealers. Any amount less than that, I don’t feel the dealers would play. What I am advocating is “One-Price” finance at every tier level. Every customer gets the best rate they qualify for every time.

From a dealer’s viewpoint, you wouldn’t be knocking the “Homeruns” out of the ballpark BUT you would make it up by receiving profits on A-Rated customers you didn’t used to make any money on at all because they always got your prime buy rate. The flat-rate instead of finance markup would take all of the combat out of F&I and greatly reduce the time the transaction takes. Your managers would have to shift their focus to product sales instead laying the people away on the rate.

Unfortunately, and I have been a part of it years ago, we have made our living in F&I preying on stupid people with bad credit. Like I said, I participated, was among the very best of the best at it, I changed my thinking years ago. Now the time has come to reform the process or get our butts handed to us in the courts.

Okay, so 60 Minutes wants me to go on national television and talk about these issues. Bear in mind, this is going to be another extremely ugly story portraying car dealers in the ugliest way. Why would I even consider doing this…I could get hurt?

I have known Steve Kroft for nearly thirty years. I was a rock 'n roll radio announcer at WAPE when he was on television in Jacksonville, Florida way back in the mid-seventies. Steve is a tough, seasoned journalist. Any interview with him is going to be sweating it out in the hot seat. Right about now you’ve got to be asking yourself why I would put myself through this.

The answer is simple…I was hoping my interview might put some kind of balance into the final edit of the show. My message was simple; the abuses we’re talking about here are not common in the automobile industry. Most dealers and dealership employees are honest, hardworking, decent people. The car business has been policing itself and cleaning up our act for more than twenty years that I am aware of. We’ve been involved in a renaissance of ethics and attitudes for nearly a quarter century. Our NADA is leading in that effort.

Oh sure, when I first got in the car business twenty-eight years ago…it was the wild wild west…anything goes, so-to-speak. AND…I gotta admit…I participated in almost every abuse we’re describing here. I set records in F&I as a top-producing manager with some of the most high-profile dealerships in the country. BUT, most of us…almost all of us anyway…most of us moved on…we all got away from those practices decades ago.

Arriving at West End studios in New York, I was nervous. The people were really nice and I sensed that was genuine. We had lunch together and discussed the shoot…not the specifics mind you, they were careful not to put words in my mouth. I sat through makeup…I hate video! It usually makes me look old and bald and fat. Lots of really bright lights…it was very warm.

Obviously, as I told the folks at 60-Minutes, I have no first hand knowledge of anything that went at Covington Pike Toyota, only what I have read and what has been publicly released.

Also...as I told Kroft in the interview, most car dealerships and most car dealers are extremely customer-friendly. Do we make a profit, of course we do, this is the United States of America…we’re capitalists. We’re supposed to make a profit. Do we make extreme unconscionable profits? Most dealers I know are struggling to scrape 2% maybe 3% off of the bottom line after expenses…BUT, evidently not some of these Wall Street corporate piranhas.

I knew what I was there to accomplish and I was aware that there were going to be some tough questions coming at me that might conceivably take me into places I didn’t want to go.

At one point in the interview he nailed me down with a tough question about exactly how much money does a car dealership make on an average deal. I really wanted to avoid that question but it was out there and I was on camera. If it wasn’t me, it was going to be somebody sitting in that chair answering that question. Remember, I was there trying to defend the dealers when they (60 Minutes) had reams of documented customer abuses in hand.

Kroft was disbelieving when I told him most dealerships in middle-line domestic and import lines make total profits of somewhere between $1600…$1700…$1800 average per retailed unit, that’s gross profit before taking out any of the costs of doing business. That’s counting all money coming in from every direction…sales profit…finance profit…holdback…any factory dealer incentive money…that’s everything. If a dealership is making as much as $2500 per unit that’s a celebration…it’s almost nonexistent. You’d be hard pressed to find a handful of car dealers nationwide who are making total profits of more than 10% per unit. Remember, in most cities you can find furniture stores marking up their products 500% and 600%...jewelry store markups have been known to be even higher. AND here we have car dealers being persecuted for trying to hold somewhere around 8% average...just for the luxury of trying to scrape 2% or 3% off of the bottom line after expenses. What’s wrong with that picture?

How many times, in how many articles and how many speeches and seminars have I said “You don’t have to be a criminal to sell cars!”… “There is never a need to lie or cheat or sneak or deceive to make a profit.”

You don’t have to beat customers into submission…you can use salesmanship, persuasion and product presentation to build value.

I told Kroft… “Most car dealers are historically and emotionally invested in their communities. They care about how their neighbors are treated. Some of these dealerships have been in their communities for generations. These dealers put their names on kid’s Little League uniforms, they build wings on hospitals and endow whole buildings to universities, and they support the churches and the schools and the local charities and provide a lot of quality employment for the community.”

I pointed out that most of the big lawsuits we’re seeing in the national spotlight are leveled against the big corporate Wall Street Dealers…the public companies. We talked about how the landscape changed with the arrival of AutoNation and CarMax and United Auto Group and all of the other big public players over the last decade. If you’ve followed my articles, you know my theory is that the some of big corporate players in our business have created a corporate culture that inspires and encourages criminal conduct at the retail level. The pressure from the top down is to make high profits to impress Wall Street. At the same time, these publicly-traded dealerships are positioning themselves to be the low price leaders on the sale of the cars. I’ve said it before…(with the big public companies) the new car has become nothing more than a lost leader advertising gimmick to get the F&I Sales.

These Wall Street Dealerships, usually lacking a dealer principal with community ties, bring in these hired-gun, mercenary managers who have no emotional or historical investment in the community. Many times these people are the con artists the rest of the industry rejected years ago. The pressure to make high profits and show a strong financial statement in the public companies’ culture is enormous…and, usually, the only way for them to get to the numbers these corporations demand is by making outrageous finance profits. It doesn’t matter to some of these people what happens down the road because they don’t plan to be working here that long. The long term effect on the dealership in the community and word of mouth doesn’t matter to them. In other words…these suckers don’t plan to hang around long enough to fade their own heat. When it all comes crashing down they’ll be long gone.

Over the last ten years we’ve seen numerous prosecutions and lawsuits aimed at F&I abuses. This isn’t the first time Covington Pike Toyota has been sued or prosecuted for allegedly deceptive and abusive processes. Truth of the matter, I believe they’ll probably have settled out-of-court before you read this. BUT, that doesn’t make it right. Oh Yeah, when Steve Kroft asked me on-camera if I thought United Auto Group would win this case…I said YES because technically they are right according to the letter of the law. BUT, morally, ethically, honestly…are they justified? Hell no!

I was shown washouts…deal recap sheets…that were made public by this case showing $7000 rate reserve profit on a $32,000 Toyota Sequoia…plus there were additional outrageous markups on service contracts approaching 600% of dealer cost of the policy…a total deal profit of more than $12,000 when only $2900 or so came from the sale of the car. This was not an isolated deal. I was shown the profit printouts for the dealership where it appeared that the rate reserve profits were more often above $4500 on perhaps as many as three out of four deals…that’s just reserve profits per deal…plus other outrageous product markups. Excuse me folks, I teach legitimate high-profitability BUT what I saw here, in my opinion, was rape. It’s as if a pack of rabid wolves were systematically separating the weakest prey from the herd for the slaughter…there was blood on the floors in the finance offices at Covington Pike Toyota and now we’re all going to pay for it.

On camera I told 60 Minutes that I thought Roger Penske was a good and honorable man…but, at the same time in my private thoughts however I was screaming what kind of an insensitive, out-of-touch jerk would run this kind of operation?

You know what really blew me away? Toyota Motor Credit funded these deals and approved these abuses. I said to Kroft that was unconscionable. Most reputable lenders like GMAC, Ford Credit, Chrysler Finance and Chase bank…most reputable lenders in our industry capped interest rate markups years ago limiting them to 2% to 3% markup over buy rate…max. That, to me, is a reasonable profit. BUT, not Toyota Credit…with most reputable lenders capping interest rate markups, here we have Toyota Motor Credit running wide open, balls to the wall, apparently an accomplice, apparently aiding and participating in the rape of their customers by approving and funding these obvious abuses. The question comes to my mind...“Was somebody on the take here?” I can’t picture any responsible lender with their company’s best interests at heart allowing these outrageous deals to be funded. For any lender to so grossly over fund so many outrageously high-risk deals like this looks very suspicious to me. Did something go on under the table somewhere? Just asking! Of course all of this is just my personal opinion based on common human decency.

Now, Covington Pike Toyota/United Auto Group has this team of high-powered attorneys vigorously defending this case…with gusto. They do not appear to be giving an inch and they’ll probably prevail…this time…again. They probably have the technical letter of the law on their side…perhaps. Morally their position sucks the big one however. Of course, once again, that’s just my personal opinion of these lawyers and their ethics based on the fact that I have personal moral values superior to a wharf rat.

BUT, its people like these and practices they defend that are going to hurt us all badly. If we don’t clean it up, I assure you the legislators and the litigators will. The time has come to reform the process. These lawsuits and prosecutions are not going to go away. Last month 200 attorneys met for the National Consumer Law Center Conference attending workshops on litigating finance issues and deceptive practices in the car business. They are coming at us in droves…attack attorneys looking for a case. Now, the National Association of Attorneys General has issued another statement saying that prosecuting automobile dealers and automobile industry institutions for violations and deceptive practices is among their top ten priorities again in the coming year.

I am sure everyone in the industry saw the DateLine NBC undercover investigative report in December about Sonic Automotive and their F&I practices.

Now Ralph Nader and Public Citizen are stepping up their attacks on Dealer practices...we are under a microscope...an industry under siege. We’ve allowed these things to go on for too long now and the reckoning has arrived.

 It’s time to seriously look at doing away completely with the concept of finance reserve profits and interest rate markups to the customers by the dealer. I am extremely committed to driving this change.

IF…and the operative word here is “IF”.

IF the lenders would start paying a flat rate payment to the dealers on every contract they do…it’s got to be a reasonable amount or it won’t work. I am talking $500 to $600 per contract…then the dealers and the consumers would be satisfied. It would go light years toward creating better feelings and customer satisfaction with the entire process. There would be no appearance of discrimination or impropriety. All consumers would receive the same interest rate for the tier level they qualified for.  The payment we would receive on good credit customers’ contracts would offset the profits we gave up on credit challenged paper. It would cut the F&I process in half, time-wise…and virtually stop the lawsuits. Rate profit is the probably the single biggest reason consumers distrust us in the process.

When I see consumers buying low-coverage or power-train service contracts with a dealer cost around $300 and they are paying nearly $2000…that’s rape. You could never tell me top management was unaware…it had to be part of the training and the culture at Covington Pike Toyota. I believe these abuses were probably part of the scripted and trained processes of the dealership. There is no other way I could envision it going down. Of course, I might be wrong.

The lender, in this case Toyota Motor Credit, appears to be an accessory. I hold them in equal contempt for allowing and helping Covington Pike Toyota to inflict these perceived abuses on Toyota customers.

If I owned your dealership, I would insist that my F&I Managers used an F&I Menu Sale with every customer...AND...that they present the Menu to every customer in a legal and ethical format with fully optional sale and full legal and ethical disclosure...including disclosure of the base rate, base payment and terms with no products included. If my F&I Manager refused to do the Menu exactly the way it is supposed to be done I would fire them immediately with a bad reference.

The industry needs to adopt F&I Menu Sales Processes and train everyone on the procedures…managers…sales representatives…and F&I Managers...on exactly how to present the products…with inflexible pricing structured by the dealership. It’s okay to make a profit.

Like I said during the 60 Minutes interview… “These products have great value. I’ve seen service contracts and credit insurance and other F&I products do too many good things for too many people. I believe in the products we sell and the fact these products have value to the consumers BUT I also believe in fair and reasonable pricing. You can sell these products to the customers in a low pressure environment with options, choices and selections NOT by payment packing and deception.”

Well…well…well…shaking my head now. I really hope I did the right thing. I was with these people in the studio nearly two hours and they’re only going to use about seven minutes of my interview on camera during the show. Last week they flew another camera crew down to Orlando and taped me performing a speech in front of a live audience to add credibility to the piece.

When I left the West End Studios in New York I had a good feeling that it went well…BUT…after all, this is 60 Minutes and they do scare the hell out of most people. Quite possibly, after the editing, I might come off looking bad myself. All of the good things I said might end up on the proverbial cutting room floor after editing. I might end up getting hurt here. It’s a risk I took in an effort to get the right message into a bad story that makes all of us look bad.

Am I pissed off? You bet I am. It’s time that we run the criminals, the con artists, and the losers out of our business.

Do I like United Auto Group? Hell no! For years I’ve heard that Roger Penske was Mr. Integrity. BUT, you know this isn’t the first time this dealership has been in this spotlight for abuses or has been accused of deceptive and discriminatory practices. Don’t ever parade Roger Penske and company in front of me as some kind of role model or as some kind of respectable industry dignitary until he cleans up his trash! If these are decent people, they have a hell of a long way to go to prove it to me. All I know at this point is they have polluted our industry.

Roger Penske, your company has brought this plague to our doorsteps and you are responsible.

Are there some good and reputable public companies in the car business…yes there are, and I said that on camera too. I think there are some Wall Street Dealers who have high standards and ethics as part of their corporate culture.

I am particularly suspicious of several of these Wall Street corporate giants that own their own finance companies, approve their own deals and carry their own finance paper so-to-speak. They have the ability to approve deals for thousands over value and obligate the consumers to perpetual upside-down hell while, at the same time, portraying themselves to be the low price leader.

When I looked Steve Kroft in the eye, on camera, and bragged about the NADA Code of Ethics that dealers everywhere are endorsing and subscribing to, I was sincere.

Looking at some other issues with United Auto Group

The headline in the Detroit Free Press read…

United Auto Reports Strong Earnings in 3rd Quarter 

United Auto Group is reporting a net income of $25.3 million, or 61 cents a share, for the July-September period, up 15 percent from a year ago. Revenue at the company's 134 U.S. and 79 international franchises grew 18 percent to $2.4 billion, driven by a 10-percent increase in revenues at stores open at least a year.

Excuse me! Don’t you just love the way these Wall Street Dealer guys (gals) report their income in terms of “Revenues”. Aren’t revenues the amount the cars sell for? What does that have to do with anything? Okay so you sold $2.4billion worth of cars but that doesn’t mean you made money…doesn’t mean you didn’t either.

Looking at the actual United Auto Group financials with the help of a friend who is better at this than I am, there appears to be some inconsistencies. (Remember I am just a high school graduate from the west side of Jacksonville) Of course I could be looking at this all wrong; I am not great with figures. This is the way I decipher what I read BUT, like I said; there is a strong possibility I am misinterpreting what I am looking at. I would appreciate it if everyone in the industry would start pulling apart these public companies’ financials for me.

Okay, United Auto Group...it seems to me that they averaged store sales for the first nine months of 1000 new units and 500 used units. According to their own figures, it appears they’ve managed a per store profit of only $480,000. If you take away the F&I income, it looks like they would be at a negative $736,000…as in <-$736,000> per store if you didn’t count their F&I Profits.  If I am reading this right it confirms my theory that these companies might be using the car as a loss leader to sell finance. I suspect you could dissect several of the big public companies and find similar scenarios.

There is a very fuzzy figure on the balance sheet under the heading “intangibles” of $1billion. This billion-dollar mystery number is defined in the footnotes as a value above fair market price. In other words…are they referring to goodwill?  Are the investors aware they own stock in a company that only has value because management “believes” that future market conditions will command a sellout price above the real value?

There is no way to accurately state that inventory on the ground is grossly underwater…not without the inventory records. BUT, I have heard information on some of their locations that makes me wonder if they are not under more water than the Titanic on many, if not most, of their lots? If their inventory figures are actually inflated and overstated, I suspect we’ll see a huge one-time charge coming against profits eventually…probably near term. I think this bubble might burst. Actually I am going to predict we’ll be seeing several of the very largest Wall Street Darlings taking huge…as in monstrous…hits because they’ve been hiding losses in over-valued inventory shown on the books as an asset. I suspect that one of the largest public companies has stored incredibly huge losses in their inventory they have sitting on the ground...and when this balloon finally pops they will take some really hard hits...to the max.

Taking a further look at the UAG public financials, in the area of “Cash or Equivalent per Location" it appears to me they only have somewhere around $80,000 per store.  By this math, it appears to me that Accounts Payable indeed exceeds Accounts Receivable by $30 Million, or $230,000 per store.  If they aren't "flooring" their trade ins before they pay them off, I wonder if they’re routinely "floating" on the banks or manufacturers finance companies to the tune of, say, in the ballpark of a million per store. If that be the case, each store needs a $l.1 million cash injection just to pay off trades and pay their bills considering only $80,000 per store operating cash.

Appealing to My Friends in the Automobile Accounting Profession

Gimmee a break! Is this what you call Voodoo accounting or what? I could be wrong. Tell you what. I would appreciate it if my friends in the automotive accounting profession would do me a favor. Each of you go on the Internet and get on all of the public companies websites and pull down their public financial statements and analyze them inside and out for me. See if you can find obvious deceptions and manipulations of the figures that only people in the industry might recognize. Can CarMax, AutoNation, Sonic, and Asbury and all of these other big players stand up to financial scrutiny of their publicly released financials being analyzed? How much do they make on the back in relationship to the front? Get me the results and I have ways to get them to the media and the analysts.

60 Minutes in My Dreams

You know, this is a different kind of article, much different than my usual Ziegler stuff. I promise you the March issue will be packed with the same outrageous, humorous, obnoxious, in your face, double-entendre, and full-paragraph-long run-on sentences that you’ve come to expect from me.

Well, one really good thing that came out of my 60 Minutes interview is that I established a good relationship with the people there...renewed an old friendship with Steve Kroft... AND they were really interested in my opinions and observations about J.D. Power and Associates. 

Who knows? I wouldn’t rule out the possibility of a return engagement on the show discussing the perceived lack of validity and credibility of some of the automotive industry’s alleged research community in relationship to conflict of ethics and a 20 year track record of future forecasting self-serving forecasts of trends and events that never came true when the future finally actually arrived.

Swirling a snifter of vintage Remy Louis XIII cognac…sitting back in the chair…my neck has a cramp. This article was stressful to write. Truthfully, I haven’t slept well since I did the interview because I was trying to do something noble and good and I am not sure it will be presented in the right way until after I have seen the show. Because of the deadline for the February issue coming out in time for the NADA Convention...I am having to write this article a little earlier than had this have happened at any other time of the year. So, you see I am forced to write about this before I have actually seen the show.  I want to hear from you. As a matter of fact, it is very important to me that you write or email on the content of this article and your impressions of the direction I am taking with this crusade. I really need to hear from you because I am really hanging out there on this one.

Of course I am speaking at the NADA convention again as well as the AutoTeam America event...please be there. JIM
 

This Man Means Business!