How to Let F&I Ease the Squeeze

Many believe that we have officially hit the top of the sales curve and must now brace for a certain cyclical decline. Dealers have invested millions in prime real estate, facility upgrades, and additional personnel, only to be told no one wants to visit their dealerships. Managers and staff are ready to buy into the technology craze, but few dealerships have fully implemented the new processes that their technologyrequires. Factory money has become an essential component of the financial statement and pre-owned vehicles are more expensive than ever. When volume drops, these costs become harder and harder to manage. 

It is time to make sure we get the mostrevenue from our profit centers. Let’s discuss some changes that can be immediately implemented in the dealerships your agency serves.

The Tough Questions

What if I asked, “What would you do if Amazon opened 15 to 20 new-vehicle franchises in your market?” Would you be prepared to withstand and compete in that type of environment?

Currently, margin compression is attacking your dealers’ profitability like a slow burn. When we look deeper into margin compression, we see that the average front-end gross on financial statements is starting to trend toward dead zero. Competition for market share is at a blistering pace. Every dealer is after every consumer — whether it is retaining their own customer or conquering the competition’s. 

Another consequence not often considered is the phenomenon that margin compression is driving good personnel out of our business. This unintentional side effect could cause voids in the dealership where we cannot replace the talent in an equitable way. It will also increase the number of owners who were once catered to for years by a single associate and are now cast into an abyss of customers we do not really contact anymore. This puts them in play for any dealer in the marketplace willing to connect with them.

Now, when we think about the challenges customers face in being able to afford these new vehicles, it is only in defense of their budget that they are after every penny they can get their hands on. Can you blame them? Average transaction prices of new vehicles in August 2018 were over $36,000. New-vehicle average monthly payments are over $536 per month. Furthermore, pre-owned vehicle transactions hover around $22,413, and with payments still in the $300 range with extended terms, as reported in The Wall Street Journal’s “Used-Car Sales Boom as New Cars Get Too Pricey for Many.”

Let’s not forget or lose sight of the squeeze on the exodus from new vehicles toward pre-owned inventory, now that so many lease turn-ins are coming from 2015 and ’16. This is going to have a dynamic effect on the factory money in play for dealers enrolled in standards for excellence or other volume stair-step promotions. Dealers rely on this money for solvency, advertising, and gross.

And do I need to talk about interest rates? The perils of rising rates have given credit unions and outside finance sources more leverage with our customers because their rates are regulated by their board members and shareholders. Rising interest rates are keeping customers on the sidelines because the cost of money is becoming unaffordable. Customers in our industry might be more apt to hang on to their vehicle longer and ride out interest rate ascension until rates become more manageable and entice them to do business. 

While there is temptation to hold out for better finance rates, sooner or later the customers are going to have an itch only a newer vehicle can scratch. However, with the value proposition that certified pre-owned vehicles offer combined with manufacturers subsidized certified interest rates that are often more competitive than market, it is going to attract customers en masse towards CPOs and away from new vehicles.

Couple all of this with manufacturers offering longer limited warranty coverages and subscription services that give consumers alternate opportunities to utilize vehicles without the commitment of higher prices and higher interest rates. Now is the time to make the case that F&I, more than ever, is a crucial part of making sure our dealerships withstand the downturn that we are currently in, which inevitably will get rockier. 

F&I on the Rise

While F&I production has always had adirect connection to overall store profit, F&I as a percent of variable gross has been up over the last three years in a row. In fact, in 2010 F&I represented 33% of total new-vehicle gross. That number now is 52%, as reported in the NADA’s most recent annual report. The insidious part of that equation is that, even if F&I production stabilizes, the percent of F&I in relation to gross could rise because it is offset from the evaporating average front-end gross.   

This is why ancillary products and aftermarket products are on the rise. They are an equitable alternative to rate income that is contracting before our eyes. 

So what do customers look for today in their dealership experience? What needs to happen for them to end their shopping? They are looking for a dealership that is considerate of their time. Make no mistake, time is the new currency. Customers want fair prices and a transparent exchange. They are not going to spend time researching only to be told they are wrong by someone who does not know if they are wrong. They are also looking for the best value for their dollar — not only in the vehicle, but in all the products and services we offer in F&I. 

I recently was training and consulting at a dealership and discovered they had 11 products on the “Platinum” selection of their F&I menu. Eleven! I had to remind them, that at the end of the day, a product or service that does not have a direct benefit to our customer will always be perceived as a cost in their eyes. If they are not impressed, enticed, or inspired to look at it, they may shut down the presentation altogether. 

So here we are. What are the things we cannot revert to as we start to see this shift in activity and a drop-in volume?

• We cannot treat customers like it’s 2008, 2009, or 2010. 

Looking for just home-run deals is not going to be an effective way to offset the loss in volume. You cannot win a game by counting on grand slams every night. You need singles, doubles, and triples along the way as well as great defense and pitching. This is going to require the entire team. More on that in a minute.

• We cannot slash expensesto save our way to profit. 

That can make things much worse in the short term and long term when the SAAR comes back. Now don’t get me wrong, in some cases, 2008 made the dealerships leaner and healthier. But if the culture and practices back then are still in place today, it will be harder to find places to trim down if you stayed disciplined to those expense management best practices implemented in 2008.

• Your dealers must be careful with their allocation. 

There is a great temptation to cut it back dramatically in the face of rising floorplan costs. Look at your dealers’ inventory, manage it well, and make sure that it does not become undesirable by a lack of vehicles with equipment that customers are looking to buy. If the inventory is unattractive to customers, then it’s going to be undesirable to the sales team, and they may leave for a dealer with more confidence in the marketplace and who has vehicles to sell that people want to buy.

Action Items

So, how can we get F&I to help “ease the squeeze”? How can we calibrate ourselves to make sure this profit center sustains its footprint in our overall portfolio, and perhaps even grow it with more product sales? We must treat the F&I department like a dealership. How does that happen you ask? Here are a few simple steps to help improve the profitability, but more importantly, the net to gross of this department.

Be bold with pricing models. Retail pricing standards or fixed prices for all your products will benefit you in several ways. You will have a compliant consistent message and menu with your customers to help offset any indications of discrimination. You will also create transparency for customers who understand that retail pricing standards are the same for everybody. This will make the customers feel at ease in knowing that they are being treated fairly because everything is out in the open. 

Standard pricing will also give the dealer the opportunity to evaluate what type of F&I producer is needed in order to shape the next generation of producers.  We will need less entrepreneurial talent and more product presentation talent. People must believe in your products. F&I pros must have a desire to help the customer. Do not try to roll to payments and hold gross and rate to make a paycheck.

It is time to rethink our gross PVR. Not so much the objectives, but the composition of the PVR. Back in the day, you could hold a point or so, make $1,100 on a warranty, and maybe sell GAP four out of 10 times to lead you to $1,500 per copy. Today, this will expose the department to chargebacks at alarming levels and that is just not going to get it done as we need to retain as much gross as possible. 

When we look at such ancillary products as tire-and-wheel, prepaid maintenance, and key replacement, we see averages of anywhere from $250 to $400 per  copy, per product, across the nation. When you move your products per deal index from 1.2 to 2.5, you will be there in PVR. Think about that: Instead of          home runs on warranties or a big number on rate reserve, if we instead get $300 in prepaid maintenance, $400 in tire-and-wheel gross, and we make $700 on the service contract, we are at a robust $1,400 on that deal — not including whatever flat we get for putting out at buy rate or marginally holding a little bit of rate. 

The benefit of this model of F&I is that we are not compromising our overall PVR. By adding products like tire-and-wheel, prepaid maintenance, key replacement, and windshield protection, we are including product sources that earn out quickly. We have seen in the past that, when a customer cancels a service contract, they usually cancel everything. Some of the ancillary products mentioned above are noncancelable and will mitigate our chargeback dollars which in turn will continue to drive the net closer to the gross of the department. 

So, given this model, it is obvious that we need to make sure the pay plans drive product per deal versus PVR. We can get to the same end, but in the new model, we get to keep more.

We need to take a more comprehensive look at our chargebacks in relation to miles and years sold. I see it over and over: The dealer sells the customer a 72-month/100,000-mile service plan. Then, 712 days later, the customer cancels all the products because they traded the vehicle in after a couple of years. 

That is a chargeback explosion that was completely avoidable. Instead of looking at chargebacks by dollar amount, let’s go further and look at average days to see what average coverage we should be opening with. 

You will be surprised to see that we are selling coverage almost double the amount of time our customers really utilize. So, let’s get more prescriptive with our term options, and ask the customer if their driving habits are going to remain the same as it is on their trade. If it is a four-year-old trade with 58,000 miles on it and the customer says there will not be any changes, why should we be talking about a 100,000-mile anything? We should be talking about a 48-month/75,000-mile service contract. 

This strategy will also give other ancillary and aftermarket products room to fit in the customer’s budget. They are less expensive than the longer-term plans we are so used to selling with 100% confidence. 

We must make F&I global within all parts of the variable operations. Is each department tied to F&I? Are managers on the sales desk tied to F&I success? Do our sales associates have a small component of their pay plan tied to F&I success? When you make stakeholders out of the sales team, it starts to limit the divide between sales and F&I and becomes a unified team working toward a dynamic end. 

How can it be done outside of pay plans? Let’s look at the trade process. Are you still doing trade devaluations? Those are the only processes that the customers are more aware of and ready for. If we make the trade an evaluation, we will be able to be have a dialogue with our customers regarding the trade that is fact-based and will allow us to trade closer to ACV. 

This can also support finance by giving them a customer with some key intel already discovered for them. For instance, if the customer is only giving us one key with their trade, there is a chip or crack in the windshield, and there is a tire or two with some curb rash or mismatched tires, we can deduce quite a few things about the customer’s trade-in and driving habits. Customers tend not to repair cracked windshields, replace missing keys, or fix up things that are of high expense because they are in the mode that they are getting rid of the vehicle anyway, so why bother? This opens the door to setting up the F&I menu customized even more to our customer by personalizing products against things we discovered from the trade.

Instead of the F&I manager going down the list of all the products offered in a data download manner, they can now artfully connect and personalize the products around things that the customer would enjoy if they had them with their trade in. For example:

“Mr. Customer, I understand we are getting one key today with your trade, is that correct? Let me ask you what would you do if you were not in the market for a new vehicle and you lost this one key you had left? Yes, I agree you would probably be here buying a couple of keys for backup. Do you know how much they cost? They are not cheap. I see the vehicle that you are purchasing has the pushbutton ignition system. That means your key is really a transmitter to a piece of software. Replacing those transmitters is nearly $400 today. Add another hundred dollars to tow the vehicle here because you have no way to start the vehicle, that would make it a $900 day for two new keys and a tow bill. 

“Wouldn’t it be more convenient and give you more peace of mind if you had key replacement for $695? This way, you can replace up to two keys per year with no deductible and always know that if a key is lost, stolen, or inoperative, that you will always have a way to start the vehicle to pick up another one at no cost to you since you are adding that protection today?”

This is how we can utilize our trade evaluation process to support finance and how we can make F&I success a global mission to all the stakeholders on the variable team.

So, in summation, it is clear that destiny is tapping us on the shoulder. We are about to be tested like we were before. We lost a few good dealers in 2008, 2009, and 2010, because they were not prepared. There have been a lot of lessons learned from those times. The question still remains, though: Will mistakes be duplicated again? Protecting and strengthening the F&I department will give your dealers every opportunity to help manage any downturn in volume that affects gross profit and “ease the squeeze” that a lower SAAR might bring. 

Joe Porter is a trainer for American Financial & Automotive Services, Inc.  He has more than 20 years of automotive experience in retail sales, manufacturer advising, and dealership consulting.