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Dealerships have long relied on the finance and insurance department for profit. If new-vehicle sales flatten or decrease, F&I departments could be part of the solution to securing healthy dealership profits — but not on their own, industry insiders say.
Parts and service are significant areas for retaining dealership profit, too, said Pete DeLongchamps, vice president of financial services and manufacturer relations at Group 1 Automotive Inc. of Houston. But he noted that “the best retailers are focusing on service-based initiatives through F&I,” with products such as vehicle service contracts or prepaid maintenance to maximize service retention.
Steven Szakaly, chief economist for the National Automobile Dealers Association, suggests dealers integrate “what’s sold in F&I [with] what happens on the service side.”
Dealership staffers should follow up with customers who buy F&I products, such as service contracts or prepaid maintenance, to encourage them to come back to the store for service, he said.
Selling F&I maintenance and service products is vital to long-term service and F&I revenue. “Now that vehicles are lasting longer, capturing that service work after year five is important,” Szakaly said.
He added that it is especially true for tire and brake service. Only 6 to 12 percent of tire and brake work is covered by dealerships, but raising that to 12 to 24 percent would make a big difference, he said. There is room for “growth in the low-hanging fruit,” he said.
DeLongchamps: “We are comfortable.”
Used cars and F&I
Rick Kurtz, senior vice president for distribution at F&I product provider Protective Asset Protection, said the need for F&I products “is greater than ever.”
“If new-vehicle sales plateau, we are dealing with the influx of used vehicles,” Kurtz said. “But with used vehicles comes an opportunity for the consumer to value something like a service contract or GAP.”
Fair pricing of those products and full disclosure of what they do and do not cover remain an important focus, Kurtz said. But he added that most dealers have a compliance officer on staff, overseeing those concerns.
Regulators have put pressure on both dealership-arranged financing and F&I product sales. To stay on the right side of regulators and ensure that F&I continues to be a profit center in the dealership, many dealerships and product providers enforce robust compliance programs.
Mike Casey, group vice president of sales at JM&A Group, said his company works with a legal team to ensure that product sales processes are consistent. The company balances that effort with an emphasis on understanding an evolving set of customer preferences. “If we do that, we address all those concerns” while both avoiding regulatory hurdles and enhancing customer satisfaction, he said.
“If new-vehicle sales plateau, we are dealing with the influx of used vehicles. But with used vehicles comes an opportunity for the consumer to value something like a service contract or GAP.”
Rick Kurtz
Protective Asset Protection
Profit highs
Signaling the strength of F&I product sales and dealership-arranged financing at auto retailers, the six public new-vehicle dealership groups broke records in F&I profit per unit retailed last year.
In 2015, for instance, at AutoNation Inc., of Fort Lauderdale, Fla., F&I profit per vehicle retailed hit $1,538 on a same-store basis, the highest among the retailers and up 8.8 percent from the year earlier. Group 1 Automotive reached $1,522, up 2.8 percent. The other four public new-vehicle dealership groups’ profit per vehicle ranged from $1,141 to $1,387 in 2015.
High transaction prices are one driver of growing F&I profit per unit, said Tom Libby, manager of industry analysis for IHS Automotive.
But “there are so many unknowns,” he added. “I can’t predict if it will go up further.”
DeLongchamps said he expects Group 1’s F&I profit per vehicle to hover around $1,500. The retailer has executed its plan to improve profit per unit and now “we are comfortable with where we are,” he said.
When sales have fallen in the past, Matt Pettoni, treasurer at Asbury Automotive Group, of Duluth, Ga., said the dealership group has relied on the “relative stability” of F&I profit per vehicle retailed and parts and service revenue “resiliency.”
Pordon: Service is sweet spot.
Tony Pordon, executive vice president of investor relations and corporate development at Penske Automotive Group Inc., of suburban Detroit, also pointed to service and parts as Penske’s sweet spot.
Service and parts may be the sweet spot for some dealerships, but dealers on the whole will adjust to regulatory pressures to ensure that financing remains a dealership profit center.
F&I is a “core part of the retail process and will be despite regulatory issues,” Libby said.
If new-vehicle sales plateau, the F&I department may become even more pertinent, he said. “Sometimes the F&I department can thrive [on falling or flat sales] because you have a situation where there’s more pressure to move units, and banks can address that by offering more attractive financing,” such as longer loan terms or lease incentives, Libby said.
Libby is confident that dealers will be able to handle regulatory pressures. “It will challenge them, but they will deal with it. If there is a restriction on dealer reserve, they will find other methods to earn revenue whether it’s more financing sources, other products, other parts of the deal to finance,” he said.
The industry will also likely keep vying to remove dealer reserve caps with bills such as HR 1737, currently before Congress, which would significantly limit the Consumer Financial Protection Bureau’s guidance over auto lending, Libby said. The House of Representatives passed HR 1737 with bipartisan support. Its companion bill awaits action by the Senate.
Most dealerships, JM&A’s Casey said, have a “greater reliance [on the F&I office] today than ever before.” Despite a potential new-vehicle sales plateau, it’s important to remember that 2015 was and 2016 will likely be the “height of the industry. We’ve just made a continuous climb,” Casey said. “Anyone would sign up tomorrow for a market of 17.5 [million].”
If new-vehicle sales stall, will FandI step up?
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