Looks are important, so much so that even the brutal economy hasn’t squashed the amount of money lenders spend on reconditioning — so far.

In fact, putting a financial emphasis on reconditioning in advance of remarketing is even more crucial in this economic environment, say many lenders, with special attention going toward cosmetic repairs.

Consider Manheim’s auctions. Lenders are spending more on reconditioning to get used cars as frontline-ready as possible, with most bucks going toward exterior repair, says Kelly Conger, group vice president of Frontline Services. Think paint and body, wheels and glass as top fix-up spots.

“This approach has increased this year as sellers are trying to make their vehicles stand out, compared to the rest, in the hopes of selling more of their vehicles in a shorter timeframe,” Conger says. Although Adesa is not seeing lenders spend any more or less on reconditioning, this fact alone is still meaningful.

“This signifies an importance,” says Don Davis, director of operations and strategic improvements at Adesa. “[They] could cut but choose not to. The economy hasn’t changed the mindset.”

When it comes to reconditioning, Davis says safety items, like cracked windshields and brakes, are always crucial to fix. Cosmetic repairs are a top reconditioning trend, too.

“Detailing is always a steady piece of presale reconditioning,” he says. GM, for one, is spending more on reconditioning for its closed auctions. GM dealers want to purchase vehicles at auctions that are retail salable, Dan Kennedy, national sales manager at GM Remarketing, says. If a dealer purchases a vehicle that needs bodywork, it ties up their capital, he says.

“We have to make the decision on what we repair and what we don’t,” Kennedy says. “One of the issues is to make a decision on where do you stop or start on vehicles.” GM has an inspection staff to determine this.

GM is not the only one putting a greater focus on reconditioning. Bank of America is doing the same.

Steven Piccinati, senior vice president of remarketing at Bank of America, specializes in the repossession market and is a believer in reconditioning. The average amount spent on reconditioning has spiked, he says.

“Our audience wants to sell at retail,” says Piccinati. “We try to get assets reasonably close to it. We do light cosmetic work.”

Although Bank of America has always believed in reconditioning, Piccinati says the bank is smarter about it now because of technology. He cites AutoIMS, a Web-based vehicle recovery and remarketing inventory management systems provider, as a particularly valuable resource.

Not all lenders are spending more money on reconditioning services, however. Take private loan servicing provider Peak5. Jody Hall, vice president of remarketing, primarily deals with subprime repossessions and is spending less on reconditioning. Hall pointed to the volatility in the market as one reason for that.

“Dealers aren’t looking to buy vehicles with high prices,” she says. Spending less on reconditioning is nothing new for Hall, noting this has been the case for the company for the last couple of years.

Peak5 typically spends somewhere from $350 to $425 on reconditioning a vehicle; five years ago, it spent $150 to $250. Hall says this is about the same amount of money, given inflation. She does not anticipate spending any more on reconditioning, unless dealers’ purchasing habits change.

“We readjust reconditioning to make them happy,” says Hall. “Right now, I don’t see it changing. This is such a volatile market place.”

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On a daily basis, the auction industry establishes resale values for thousands of vehicles. Consignors are at liberty to sell or refuse to sell at these established values. Dealers also have other options—they can return offered vehicles to their stores and mark them down for retail sale. But most consignors are just delaying the inevitable by “no-sale-ing” their units. Moreover, they are also denying themselves of needed liquidity to fund their front-end lending operations or even of needed capital for their businesses.

While many may be thinking now is the wrong time to be selling used-vehicles due to the record wholesale price decline in October, the current need to generate cash may be more important than obtaining maximum vehicle values. This is especially the case at a time when auto asset-backed securities markets have collapsed and other sources of capital are severely restricted.

Moreover, not all segments of the wholesale market are experiencing weak demand. For example, demand for many of the sub-prime repossessed units — which tend to be older, rougher and, as a result, less-expensive — is relatively high at auction right now. This may be attributed to two things: the preference of some dealers to conserve floorplan capital, and the relative success retailers in the buy-here-pay-here space are having. The latter are often perceived as “lenders of last resort” for the credit-challenged car-buying public. Also, older units are in shorter supply at auction. This is because franchised dealers are holding on to trade-ins that they would have previously wholesaled. This is done in an attempt to retail these units for the attractive grosses they generate.

Often, sub-prime financing companies that have to satisfy certain covenants with sources of capital are basing sales strategies on liquidity considerations rather than retention considerations. As previously stated, this may be an appropriate and commendable strategy to provide “front-end” liquidity for retail lending. Dealers may also find it best to liquidate aged or unwanted used-vehicle inventory to generate cash in order to weather potential economic storms.

So at a time when the government, the financial community and the automotive industry are all seeking ways to inject liquidity into the market, the auction industry represents a ready source of cash from ample volumes of used-vehicles.

Wholesale market values may be depressed at present, but there are pockets of healthy demand for certain types of used-vehicles and auction companies can advise remarketer of those opportunities. In these unprecedented times, the need to create liquidity may ultimately supersede the desire for price maximization.

Tom Kontos is Executive Vice President of Customer Strategies and Analytics at ADESA, Inc.

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Shaheen Chevrolet has known for quite some time that the key to remaining profitable lies in its ability to slash overhead. The Lansing, Mich.-based dealership has been tightening its budget for the last few years, compliments of Michigan’s early-stage economic downturn, says Jason Cords,general manager.Some more recent savings methods include cutting back on marketing expenses roughly 35 percent from 2008, reducing staff by approximately 13 employees over a six- month period, and requesting that all vendors cut the dealer’s costs by about 15 percent.

As a way to save on training expenses, the dealership started hiring only staff with previous experience. “It costs so much money to get someone up to speed,” Cords says, estimating the total training fee to equal as much as $15,000. But once hired, most employees are there to stay.

“No one is leaving here unless they are completely getting out of the business or becoming a manager or going to another state,” Cords says.

As the economy tanks, the Big Three struggle, and financing dries up, Shaheen Chevrolet isn’t the only dealership looking for ways to save money and ultimately stay afloat.

St. Paul, Minn.-based White Bear Lincoln Mercury is scaling back on frills, making serious slices on advertisement and extracurricular activity budgets. “We used to do picnics every Saturday. We won’t do that this year,” says Travis Peterson, used car manager.

The dealership also renegotiated its pricing with vendors to slim down costs, reducing fees 15 percent to 20 percent, Peterson says.

Cutting out the fat has allowed the dealer to maintain all of its employees so far. Reduction isn’t the only answer to staying in business – many dealers are offering new incentives to try to lure in sales. Consider Jim Price Automotive. The Charlottesville,Va.-base dealership offers a job security incentive, modeled after Hyundai’s insurance program: If a cus- tomer loses his or her job, the dealership will make the payments for the customer, up to three months. The deal began Jan. 1, 2009, and will run for the rest of the year. “I hope I will be lucky, and there won’t be a ton of people,” Sandy Fewell, chief operating officer, says.

So far, the dealer, and its staff, is surviving the economic storm. “We have been very fortunate. We have a sales force that has hunkered down, knowing it would be tough period. They have survived it well,” Fewell says.

But it doesn’t make for easy work.

Reductions in staff, for one, create heavier workloads for those left behind, says Ron Reahard, founder of F&I training consultant firm Reahard & Associates. Most employees, including F&I managers, are trying to cope with the burden, realizing it is not the best time to try to find another job, he explains. “It’s not a time to take a chance,”

Reahard says. “It’s time to do a known quality. Most dealers are keeping their good people. The let-go people are struggling to find a job.”

Joe Lescota, chairman of the Automotive Marketing Department at Northwood University, shares Reahard’s sentiments. “The job is getting tougher. There is more disclosure. You can’t hide anymore,”

Lescota says, citing F&I managers as one acutely more challenging position, in part because of fiercer competition from credit unions and financial institutions. “Credit unions offer the same [products] but offer better customer service,” Lescota says. MakinglessmoneycouldleadtoF&Iman- agersleavingandcreatingaddedexpense for dealerships. Lescota estimates a dealer would lose 1.5 percent of a departed employee’s annual salary to fill the void. And if not properly trained, the cost could add up to be even more. “The most litigious department is F&I,” Lescota says. “You hope they [F&I managers] have been trained in law.” Lescota blames some dealers’ turnover troubles to the philosophies they maintain, rather than just the crumbling economic environment.

“We reward sales people and recognize them for highest sales. Do we give them plaques for customer service? No. We reward them for high gross profit. We train and educate them to squeeze every last dollar for short sales as opposed to long-term sales,” Lescota says, emphasizing a dealership’s battle cry should be customer service instead. What dealers are doing right in these chaotic times is maintaining their training programs, say some industry insiders. “Dealers who believed in training, still believe in training,” says Reahard. “This is a direction dealers want to go. Dealers don’t want to stop training.” Especially when the education occurs online.

Reahard’s online training program keeps gaining traction, for one. Although Reahard has only offered online classes for about a year, sales have grown “dramatically” within the last six months. Part of this education includes shooting out a new training module to a dealer once a week. “Training should not be a one-time event but an ongoing process,” Reahard says. The appeal lies with its lower price tag and its easy online commute, he maintains.

For his in-house classes, however, he has noticed a drop in participation. “We aren’t seeing as much as two and three managers from the same dealership,” he says. “They don’t have as many.” Hennessy Auto Group, which boasts 11 dealerships in the greater Atlanta area, uses Reahard’s training offerings and is not skimping back. A newly hired F&I manager is sent out to his program for a three-day course, and continues with his or her education online.

“I really believe the initial training needs to be in the classroom,” Joel McGlamry, vice president of finance operations, says. “Without total immersion upfront, I don’t know if they grasp online training.”

The auto group looks for F&I managers with previous experience, or promotes from within their dealerships, says McGlamry, noting F&I managers would be costly to replace. “Even just the emotional cost is significant,” he says. Luckily, Hennessy Auto Group is not currently facing turnover issues.

Not all dealers are that lucky. To help keep employee retention high, new technology is emerging.

Consider Dealerflow’s employee relationship management solution, which allows dealers and managers to direct, mentor and dialogue with employees via online content management and messaging tools. Founder and President Ed Brown said the tool’s main objective is to help dealers run their businesses more efficiently. As dealers become larger due to consolidation, the rank and file employees become further separated from the dealer, Brown says. The technology helps a dealer “tie the company from top to bottom.”

The technology also assists dealers in running their operations with fewer employees by providing greater efficiency, he says, as well as helps to retain employees.

“Employees are encouraged when they know what is going on,” Brown says.

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More than the average car dealer these days, Gordon Hanna has seen his share of radical ups and downs in recent years. Even before the recent gas price spike and the domestic auto industry crisis rocked the market in 2008, Hanna, the general manager for Cadillac-Hummer of Metairie, La., just outside New Orleans, was experiencing a more tumultuous roller-coaster ride of boom and bust sales than most dealerships, due to the effect of Hurricane Katrina in 2005.

“When Katrina hit, it took out six out of 10 cars [owned by residents] here,” he says of the hurricane’s destruction. “That meant that at least one of the cars [in a household], if not both, were gone.”

More than three years after the devastation of Hurricane Katrina plowed through Louisiana, the retail auto market is, like so many inhabitants there, still struggling to return to normal. But, unlike most New Orleans residents and business owners, the car dealers there are also wrangling with a potentially even more damaging storm that’s raging in their industry — the ongoing crisis and bailout of the domestic auto-makers.

Immediately after Katrina hit in late August 2005, many observers surmised that the area’s retail auto market would never recover. The disaster pummeled the local auto market with a bevy of blows all at once. The most obvious was, of course, that the storm itself damaged about 230 Big Three domestic dealerships and all but wiped out nearly 50 stores across the Gulf Coast region, many of those in the greater New Orleans area. Car dealers’ inventory was destroyed, and the emergency that followed meant that car sales were virtually zero that September.

Also, the exodus of people from the New Orleans vicinity—some leaving briefly, and others who stayed away for good—created a smaller auto market with a smaller talent pool of experienced sales people and technicians to work the dealerships. Many have still not returned to their workforce levels of early 2005. (As of late 2007, greater New Orleans had only 137,000 households, about 70 percent of the 198,000 in July 2005, according to the New Orleans Community Data Center.) But while the first couple of months after Katrina proved to be the biggest of all busts, it led to a subsequent year of boom for the dealers that survived.

Bob Israel, president of the Louisiana Automobile Dealers Association in Baton Rouge, says many New Orleans residents with cars destroyed in the hurricane began receiving insurance settlements toward the end of 2005 and into 2006. And these folks used the money to buy new cars. “For almost 16 months after Katrina, we had a big boom in sales,” Israel says, adding that this benefited franchise dealers more because “so many independent shops were just wiped out and didn’t have the money to gear up as fast as dealers.”

Hanna at Cadillac-Hummer of Metairie, La., says that business at his dealership increased 40 percent to 50 percent in the eight to 10 months following December 2005. Despite the severe sales slump in the late summer and early fall of 2005, the loss of more than 100 cars, and the major population dip, Saturn of New Orleans in Harvey, La., reported a 23 percent year-over-year increase in revenues in 2005, mostly due to late-year sales. Some residents even used their home insurance settlements to buy a car, Hanna says. “People gottheir home money and had additional revenue to commit to cars,” he adds. But the uptick in sales after Katrina did not altogether map to previous sales patterns. According to Urban Science, a Detroit-based researcher, the population decreases and the damages effected car dealerships in the metropolitan area more deeply than in outlying areas.

Before Katrina, dealers on the outskirts of New Orleans commanded 63 percent of retail new-car sales (compared to 37 percent for in-city dealers); post- Katrina, the outlying dealers were selling nine vehicles to every one sold in town, says Mitchell Phillips, global practice director for Urban Science. Understandably, post-hurricane car buyers showed a greater preference for trucks – to haul debris, building supplies, and help navigate muddy streets. According to Phillips, the demand for pick-up trucks doubled in the last months of 2005 and through 2006, compared to previous years.

WHAT GOES UP, MUS T COME DOWN

Inevitably, the auto boom that dominated for most of 2006 gave way to a downturn, which began in late 2006 or early 2007. According to Israel, that yearlong slump saw sales decrease 15 percent to 20 percent percent compared to historical averages. Aside from the diminished population in the area, dealers also had to accept that as a side effect of the post-Katrina boom, they had essentially “pre-sold” a number of consumers who might not have been ready to replace their vehicles until later on. “The [boom] took people out of the market for two or three years afterward,” Hanna says. Israel of LADA agrees: “The normal cycle of replacement got out of whack.”

Typically, it takes about five years for a region to return to normal after a major natural disaster, according to Phillips. In fact he and others note that the New Orleans market in early 2008 was already beginning to rebound — but that was before the next shoe fell. The New Orleans market, like the nation, was slammed by the one-two punch of record-high fuel prices in mid 2008 and the financial crisis of the domestic auto makers. Car sales throughout the state fell 13 percent by November 2008; but Israel adds that that was better than the nationwide market, where sales fell an average of 30 percent.

Indeed, Israel believes the state auto market was well on its way to recovery until “Washington [D.C.] starts talking about bankruptcy and beating up the domestic [auto makers]. With all this negative publicity, sales dropped 40 percent [in Louisiana] in November.” He believes the ongoing auto industry crisis will effect sales similarly in December. “At this point,” Israel says, “Katrina is not even relevant.”

At this point, it debatable whether there is still the Katrina factor. Industry insiders forecast that the most likely result in New Orleans, as in the rest of the country, will be greater consolidation and more streamlining as the market becomes more competitive. The National Auto Dealers Association announced that it expects 900 dealerships out of 19,700 nationwide would close last year.

General Motors has already cut 6,500 of its dealerships; another 1,800 dealershipswill face the same fate over the next several years.

“The Detroit Three are in decline,” Phillips says. “Consolidation is happening, but it’s not any different than the nationwide trend.”

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Wholesale auction prices have been marked by one constant over the last year: volatility. Dealers are finding it more difficult to clear their inventory, so they are more hesitant to buy vehicles at auction that are too expensive or may not resell.

Adesa Analytical Services data reported a decline in average wholesale prices of 9.6% last November compared to the month before, and down 11.3% from November 2007. Dealers and lenders have been forced to change their approach to auctions and consider different remarketing strategies to better cope with current market conditions.

Weekly auction prices have been so inconsistent that it has become difficult to determine how to accurately price vehicles. “We’re in a rather unique market right now, one that we’ve never seen before,” says Mark Matthews, director rental and used-vehicle activities, General Motors Corp. “We’re experiencing some of the highest no-sale rates at auctions.”

Matthews says the market has yet to really stabilize. He says pricing in the final months of 2008 was tumultuous — or “bad,” as he put it. The turmoil has changed buying patterns with auction attendees purchasing only the vehicles they need.

“In the past, you’d walk into an auction with a list, fill everything on the list and add any other vehicles that looked nice,” he says. “Now, they’re walking in, filling their lists and leaving.” Tom Kontos, executive vice president and chief economist at Adesa, says the soft retail sales have taken a large toll on the auction market, but lower-priced cars and trucks are still selling relatively well. “Pricing has come in across the board,” Kontos says. “If you’re selling across the market, you need to price it cheap.” Full-size trucks and SUVs already took hits last May and June, although with gas coming down, sales have slightly improved, he says.

The recent increase in subprime car sales is worth noting. David Sutton, general manager of auction sales and operations at Volkswagen Credit, says regardless of market conditions, dealers are always willing to buy a car, as long as the price is low enough.

“We’re seeing dealers [that] are more careful about selling and holding on to cars that are $12,000 and higher,” Sutton says. “Vehicle sales that are more subprime — within the $4,000 to $10,000 range — are very strong, around 90%.”

The success of older vehicles selling better than newer ones is still relative. Adesa’s Kontos says it is hard for any group to score an advantage in the market right now, “but older, rougher units are finding buyers more readily than cars coming straight off leases from captives.” Dealers deciding to hold out on selling newer cars until market conditions improve are also becoming more common. Those dealers are taking a risk, however. If the cars sit for too long, they lose value, compounding an already acute problem for the industry.

“Inventory of unsold cars at auction has gone up 52% from last year either because the cars did not sell or they’re being held in anticipation that market conditions will improve,” Kontos says. “You need to remember that cars are a depreciating asset even in good times. It would be in a dealer’s better interest to adjust pricing expectations, rather than waiting and hoping values rebound.”

Cars are being held at auction longer now than ever before, VW’s Sutton says. Typically, if a vehicle is not sold, it will be resold again within 30 days he says. “Now it may be held up to 90 days, because of current market conditions.”

The losses dealers are taking in the wholesale market are prompting them to be more proactive about remarketing. Brian Reed, remarketing specialist with Automoti.com, a virtual used-card showroom, says companies are participating in remarketing strategies that go beyond auctions. Rental car companies and fleet companies, for example, are participating in proactive, or “upstream,” remarketing.

“Some leasing and fleet companies will try to resell the vehicles to their employees first,” Reed says. “Dealers are able to resell the vehicle based on the residual value, which is in between the wholesale and retail price.”

Employees who purchase the cars qualify for financing and dealers are saving money in all aspects by avoiding wholesale prices. “Even if fleet companies resell vehicles to employees at an auction price, dealers are still saving the time and money it would take to transport the vehicles to auction,” Reed says.

Jim Calvert, CEO of Fourth Fleet Financial, says some of the losses dealers are taking right now can be attributed to their own mismanagement and loose organization.

“Many dealers panic and want to sell the vehicle as quickly as possible and go directly to auction,” Calvert says. “Dealers think wholesale; drivers think retail. Dealers who automatically want to sell wholesale are giving away money they don’t have to.” Cyber lots, already a popular remarketing tool, are being used more aggressively today to counter the current remarketing dynamic. Calvert says about 35% to 40% of his customers have looked into selling their vehicles online. “People have gotten more comfortable with online bidding,” GM’s Mathews says. “The population in the online lane is steadier than physical presence right now.”

Not so, says Adesa’s Kontos. Especially online, the number of attendees that are logging in to an auction has remained fairly constant, Kontos says, “but the number of those who are plac- ing bids is far less.”

To that extent, sellers at the auctions face more pressure to make the decision to hold or to sell, especially because bidding action has decreased, Sutton says.

General Motors holds a closed sale to General Motors dealers first before they submit vehicles to general auctions. “Vehicles that are in better condition we put in the closed auction for our dealers,” GM’s Mathews says. “Those that aren’t, such as repossessed vehicles, go straight to open sale.”

What’s it like for dealers right now? There is more pressure on dealers to generate front-end profit now to support their businesses, Mathews says.

“It has become difficult to try and find the market, Mathews says. “There is pressure to price the vehicles properly and try to gauge where the market will move. We look at auction results from previous weeks, online prices and historical price curves as guides.”

Matthews offered one idea that dealers can use to get ahead. “Some dealers are even remarketing vehicles that aren’t off lease yet to get the vehicles out there for viewing,” he says. “They offer these vehicles at a slightly more expensive ‘buy-now price.’” Despite it all, there is a ray of hope. GM and Chrysler LLC have gotten their bailouts, so their prospects are slightly brighter. For a range of reasons auction conditions are likely to improve at some point in 2009, Kontos expects. “Between now and then lenders and dealers should be cautious and anticipate tough conditions,” he says.

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