“We are in unchartered waters,” says Tim Blochowiak, vice president of dealer sales for Protective Asset Protection as he sums up the state of the automotive industry and F&I sales in 2022.

Since the pandemic, the automotive industry has ridden the waves of a sea of change. The first wave crashed in as country-wide COVID-19 shutdowns. The second wave involved a critical shortage of semiconductor chips and other raw materials that limited vehicle production and tightened dealership inventories. Now higher interest rates and inflationary pressure are crashing into industry shores.

Fortunately, says Blochowiak, “U.S. auto dealers are a resilient bunch that perseveres amid uncertainty and turns trouble into opportunities.” 

But as a sea of change continues to churn, Blochowiak stresses the time is now for dealers to ready their F&I programs for challenges ahead. Low inventories, inflation, higher interest rates, and shifts to electric vehicles (EVs) all promise to present obstacles for dealers to overcome.

State of the Industry

According to industry estimates, new vehicle sales are on the decline, constrained by a lack of supply. 

But lower demand is not the reason for the decline, Blochowiak suggests. Rather, it’s tightened inventory as auto manufacturers struggle to get semiconductor chips and other needed parts from suppliers. Cox Automotive reflected this sentiment, lowering its full-year U.S. auto sales forecast to 14.4 million units, down from its original forecast of 15.3 million.

“Demand is at an all-time high and acceptance rates for F&I products are incredible,” he says, noting Protective Asset Protection has programs in numerous dealerships nationwide.  

F&I profits also continue an upward trajectory begun during the pandemic, he explains. Total F&I revenue for the largest U.S. dealership groups soared to 4.5% in 2020 but kept climbing until it hit today’s rate of 5.1%. Also, several U.S. dealership groups now report an average F&I revenue per vehicle (PVR) over $2,000.

“We’ve definitely seen a lift in F&I product sales,” he says. “A contributing factor is the inflated prices of both new and used vehicles. People realize vehicle purchases as a major commitment and want to protect it long term, so they retain their trade-in values.” 

This sentiment may linger, he adds, as industry analysts do not expect record vehicle prices to decline quickly as long as inventory remains low. 

The average new vehicle transaction price hit $44,832 in May, reported J.D. Power-LMC Automotive in their May 2022 forecast. This figure is slightly lower than the record high of $45,247 set in December 2021, but still markedly higher than May 2019’s average transaction price of $33,457.

Used vehicles figure little better. The average price of a used car in 2022 is $34,429, according to iSeeCars. That's up from 2021, where the average retail selling price of a used car was $26,709, according to the National Automobile Dealers Association (NADA). 

Car shoppers also encounter slim pickings on dealership lots as inventory levels remain at critical lows, he adds. Fewer new vehicles have a positive side for F&I profitability. With fewer new vehicles to choose from, consumers have turned to used vehicles. Consumers then turn to vehicle protection plans to keep older model or gently used vehicles running well long after purchase. 

“The outlook is exciting,” he says. “Demand is strong, and we are not sitting on a glut of inventory.”

He adds, “As consumer goods climb, there are some who feel we will see a decline in automotive sales. But a lot of consumers have sat on the sidelines waiting for more normalized pricing before buying a new vehicle. The consumers who took a wait-and-see approach will buy a vehicle once prices normalize.” 

Pick the Right Mix

In this climate, there is a need for dealers to pick the right product mix. “Dealerships value programs with proper margins and additional support that help them deal with uncertainty,” he says. 

Here, Blochowiak offers a few suggestions:

• GAP (Guaranteed Asset Protection): GAP covers the difference between the actual cash value of a vehicle and the balance owed the lender in a total loss or unrecovered theft. As vehicle prices have soared, this product has grown in popularity. “We are seeing vehicle sales above MSPR, and GAP coverage underwrites the risk if the market normalizes and prices slide back to a place below MSRP,” he says. 

• Vehicle Service Contracts: Offering these contracts for both new and used vehicles makes sense “The service contract offers consumers protection as inflation causes the costs of parts and labor to increase,” he says. “We must continue to offer a product with a high dealer profit margin that guards the consumer against out-of-pocket major repair needs,” he says. “Dealers must keep a keen focus on parts prices and where they are going. We also need to keep F&I attainable for consumers with deductibles that make sense. A program with a $500 deductible hasn’t been overly popular, though it could be revisited as it is a more affordable option for the consumer.”

• Ancillary Products: These programs are in high demand, says Blochowiak. They protect key parts of the vehicle and include programs like Tire and Wheel, Appearance Protection, Windshield Repair and Key Fob Replacement. Data shows today’s consumers favor key fob replacement programs and tire and wheel replacement, but other programs are growing in popularity. 

Pay Attention to EVs

There’s no question that EV sales are increasing. In 2021, dealerships sold around 6.4 million electric vehicles, up from 4.5% of all new vehicles sold in 2020 to 9% in 2021.

Experian car registration data shows consumers registered 158,689 battery-electric vehicles in the first quarter of 2022, which is 60% more than a year ago. Electric vehicle market share overall also grew to 4.6% nationwide.

Now F&I products must align to follow the consumer shift to EVs, stresses Blochowiak.

“We must make sure that EVs have proper coverage and that dealers can educate consumers about EVs and how to protect them,” he says.

He explains Tire and Wheel protection is vital for EVs.

“Electric vehicles are heavier and that wears out the tires faster. As tires wear out faster, a good Tire and Wheel offering makes sense,” he says.

Headwinds Ahead

The market has been hot, but dealerships also must pay attention to the headwinds of change, adds Blochowiak, citing inflationary pressures and higher interest rates as two risks before the industry. 

In May, the rate of inflation jumped to 8.6%, a 40-year-high, causing consumers to pull back their spending to cover the cost of higher household goods and rents, gas and food prices. Interest rates also began an upward trajectory. The Federal Reserve's federal funds rate target went from 1.5% to 1.75% as a response to high U.S. inflation in June. 

Edmunds reports the average monthly payment on a new car loan also hit a record high of $686 in June, up 4% from January and 13% year-over-year. And a record 12.7% of new-car buyers who signed up for a loan in June had a monthly payment of at least $1,000, up from roughly 7% in 2021.

“It’s critical that we keep an eye on things,” he concludes. “Rising interest rates can affect consumer budgets and how much they can spend. This may affect the car they choose and how much they spend on F&I. Though with the size of the financial commitment, it’s possible consumers will choose to protect these assets longer.”

Ronnie Wendt is an editor at F&I and Showroom.