Challenges and Opportunities

Business is booming, agents are growing their businesses and dealers have never been more dedicated to F&I training, product sales and reinsurance. But change is afoot in the auto finance industry, where leasing, bundled products and high-mileage used cars are growing in prominence. To keep up with these developing trends, new products are being introduced in the F&I office and dealer presentations are changing as well.

To find out how agents are turning the new developments to their advantage, Agent Entrepreneur was at the panel discussion at the Agent Summit 2014 Conference in Las Vegas earlier this year. There, a panel of industry experts looked at what is new in the F&I office and the escalating rewards accompanying the changing marketplace.

Products for Lease Customers

There was a time when few dealers gave lease customers equal time and effort in the F&I office. Today, agents and providers are working together to offer products that benefit customers through the life of the lease as well as at turn-in. According to Jeff Teuscher, vice president of sales for American Auto Guardian Inc. (AAGI) in Arlington Heights, Ill., leasing is running at 28% penetration on a national basis with an average lease term of 36 months. “The average payment is $420 and an excess-wear-and-tear policy adds about $20 a month. We know that there are more than $500 million dollars’ worth of excess wear-and-tear charges assessed on an annual basis, so there is definitely a need.”

Jeff Jagoe, senior vice president of sales and marketing for Austin, Texas-based Innovative Aftermarket Services (IAS), says that with the leasing market at 30-40% — and even as high as 50% in some markets — many agents have been asking for products specifically for lease customers. Jagoe says they want to give lease customers products with immediate benefits — not just benefits at the end of the lease. “What we’ve come up with is dent, windshield repair, cosmetic wheel repair and also rips, tears and burns. These have become very, very beneficial in our industry lately. They are easy products that you can provide to a customer right from the get-go when they have a three-year lease and they can utilize the benefits immediately. That’s emotional. So when they get that dent, or that ding in the windshield, they can have it repaired right away.”

With the vast majority of products sold by dealers offering benefits during the lease, John Braganini, principal of Great Lakes Companies in Kalamazoo, Mich., says, “Many lessors have their own programs for excess wear and tear but the benefits don’t come into play until the end of the lease term. That creates an excellent opportunity for F&I producers.” To fill that gap, as Jagoe mentioned, Braganini says they can offer the customer products with benefits that can be of value immediately, as well as throughout the term of the lease.

Jagoe noted that the programs designed for lease customers are not only beneficial, but are inexpensive to the dealer, agent and consumer. “We’re talking about a $5 or $6 bump in their payment and it’s something the customer can take advantage of throughout the lease.”

“Michigan is a high-penetration area for leases,” added Braganini, speaking of his home state. “They have incentive programs for the factory employees and the dealerships there have always done a good job of selling leases. …We started selling lease-protection products years ago. Paint and fabric, windshield, dent and key - all the short-term products.”

Some challenges remain, however, for dealers who wish to capitalize on leases, according to Teuscher. If the dealer only expects a reserve of $500 per lease deal, he says many F&I managers will assume that the $1,200 benchmark is out of reach. The key, he pointed out, is to endeavor to sell products that cover both ends of the deal and resist the urge toward gigantic mark-ups.

At National Automotive Experts (NAE) in Strongsville, Ohio, company president Kelly Price says they look at things a bit differently. “We focus a little bit more on making sure the customer maintains their vehicle at the facility, because if they’re not maintaining with them, only 14% of those people are going to come back and buy from them again.” Setting up a prepaid maintenance program, either as an incentive to purchase or lease from the dealer, or by offering it for sale in the F&I office, allows the agent to customize for each individual dealership. “Whatever their needs are, whether they want the customer back once a year or three times a year, we can set that up for them. But, most importantly, it’s keeping that customer coming back to the selling dealer. They need to keep that customer back in the store, so that they don’t have to work as hard to get that next sale.”

Bundled Products

With bundled products growing dramatically for the past few years, Teuscher says AAGI came out with a vehicle shield product that they thought would “fit all needs” but quickly found out that it didn’t. Instead, variations of it were being requested across the board. “One of the primary appeals of bundled products is that you can customize the products for the F&I manager and their customers to realize a mass appeal of the overall product.”

Bundled products also offer “extensive coverage with very competitive pricing,” according to Teuscher. He likened them to a State Farm policy and suggested presenting bundled products to the customer using that analogy. “You can buy home and auto insurance and receive a discount. Or, you can get home, auto and life and receive the maximum discount.”

“Bundled products offer a built-in advantage for agents when the first thing the F&I manager says to the agent is, ‘Hey, I’ve got too many products already,’” says Rick Meinke, national sales manager for Woodridge, Ill.-based Entire Car Protection (ECP). “What’s nice about a bundled product is now they’ve got three, maybe four products to sell.” Meinke says ECP has bundled up to eight products, which makes it easier to offer to customers.

(ECP was misquoted in this article published on Monday June 2nd 2014. ECP, Inc. does not offer Vehicle Service Contracts or GAP.)

For agents who fear losing separate commissions on bundled products, Price says her company offers an alternative. She advises them to bundle the presentation instead. “And then if the customer says, ‘I’m not interested in dent, but I like the windshield,’ that’s great, we can customize it for them. They don’t know how many contracts would be printed out on the back end, [either with or without one of the products in the bundle.]”

Despite their apparent popularity, bundled products still represent only a fraction of total products sold. Jagoe says for this to change, dealers have to petition banks and finance companies to get on board. “We need to fight with these lenders and let them know, ‘Hey, you have a bundled program - you’re financing yours, you’re not financing ours. That’s wrong.’… We really gotta get the dealers to start harping on the lenders and say, ‘Listen, you need to start financing this program.’”

Products for Used-Car Buyers

Braganini says selling F&I products to used-car customers can bring added challenges. “One of the issues you have is that service agreements are expensive and it’s difficult to get them financed. You sell a limited-coverage contract with reduced benefits to get the cost down and you don’t mark them up as much. But the percentage of high-mileage used cars in relationship to sales in general just keeps going up. The vehicles are just made better, and young people can’t afford to buy new cars today.” However, he adds, dealers who ignore the growing used-car market do so at their own peril.

“I’m not big into used cars, never have been,” commented Randy Crisorio, president and CEO of United Development Systems (UDS) in Clearwater, Fla., “But there are some tremendous opportunities out there for dealers that are used-car dealers only that sell 60, 80, 100 cars a month who do a good job, have been there a long time, and have F&I staff.”

Traditionally, those opportunities have come in the form of a service contract, but Price believes dealers should widen their focus to protection products as well as prepaid maintenance. Price believes that, if customers can view the results of a protection product that significantly improves a vehicle’s appearance, they will be more likely to add it to their used-vehicle purchase. In a sense, by letting customers see the results, the product could sell itself. Price does not think enough is being done to help dealers market those paint protection products. “If you have a good paint product that really makes that car look like it’s been reconditioned, and it shines, then put that pre-owned unit on the showroom floor. … Let them see what it does.”

When a customer shows up in a franchised dealer lot, they are not expecting to find 100,000 mile-plus vehicles, says Glander. Agents should remind their dealers of this. “The dealer has to give the customer confidence to buy that vehicle. Putting a service contract on the vehicle turns shoppers into buyers. We like that idea a lot and it helps agents, obviously, to make a nice commission.”

Glander adds that, in addition to improved CSI numbers, dealers can leverage used-car product sales to increase back-end profits. “Service contracts remain the highest-margin item in the F&I shop. But, more importantly, on the back end, a lot of dealers have very profitable, very sound reinsurance pools. Putting 120,000- to 150,000-mile vehicles that have very different repair patterns may or may not make sense to add to that reinsurance pool. I think it’s important to help the dealers understand there’s still an underwriting profit opportunity there, depending on the vendor they use and likewise for agents.”

The Value of Training

“Ongoing training is important,” stated Meinke. Agents must be willing to adjust their training, in order to change dealers’ mentality toward used-car buyers. Self-imposed limitations, such as failing to present products for high-mileage vehicles, can be a real barrier to production. “Beat these limitations and try to get the F&I managers to understand that, by not offering these products on used cars, they are creating a limitation for themselves.”

Teuscher agrees, saying agents and dealers both must shake off the mindset that F&I products and high-mileage vehicles don’t mix — and that high-mileage vehicles are not saleable customers. “The whole process of eliminating zeroes is the key,” he says. “Sell a windshield protection, sell a six-year powertrain coverage, sell an etch product. Why aren’t we selling more etch on high-mileage used cars? It’s a tremendous benefit with a relatively low cost to the dealer and a nice margin for the agent and the F&I department.”

Ultimately, Teuscher says, agents will have to take the lead to effect an industry-wide change. “It’s the mindset, again, of the dealer principal and the agent servicing that account. Why do we have a dealer on one side of town running at 80% etch penetration and the same franchise across town running at 15% or less? It’s how we’re installing the product in the dealership and the training that we’re providing to hit those numbers. Develop a marketing approach with the materials themselves and then really have the passion to follow through and make it happen at the individual dealership level.”

With more products designed specifically for the rapidly growing lease and used-vehicle segments, new income opportunities are clearly on the rise. While they may require agents and dealers to reevaluate the way they look at sales opportunities in the F&I office, it seems that the industry consensus is that there is money to be made and this segment of the market will continue to experience growth. When unsure what approach might work best in this changing market, consider a word of good advice from Meinke: To be successful, “Treat them like a new-car customer.”