How changes in the way consumers want to purchase vehicles are impacting F&I strategy at the dealer level
If you were to look at our industry today, it’s probably fair to say the business of auto retailing has changed more in the last 10 years than it has in the preceding 50. Consumers today expect more and dealers face stiffer competition than ever. Plus, with vehicles less distinguishable in terms of quality and features, it often boils down to the customer experience. A big part of that relates to business office practices. To help paint a clear picture of today’s F&I environment, Canadian auto dealer interviewed Michael Buckingham, Senior Director of the Automotive Finance Practice at J.D. Power. Here’s what he had to say.
HE: Today, F&I is becoming an ever more important source of revenue for dealerships. Based on your own research, do you think dealers’ F&I partners are perceived as doing a good job?
MB: Overall, when you look at the market today, I’d say you’ve got two sets of partners. You’ve got third party providers and via the OEMs, captive financing partners, which, through their own suite of offerings, are bringing more products to the table on the warranty side, such as wheel and tire protection and Guaranteed Asset Protection (GAP). Overall, things appear to be good. Most dealers have adopted the menu selling approach to stretch the value of the products they provide. Where we can see the results, such as data from public dealer groups, F&I partners are driving revenue of over $1,000 per unit but it’s important to note that 80 per cent or more of that is coming from the product side — only 20 per cent or so is down to reserve or dealer participation.
HE: Are there particular aspects of the F&I process where dealers appear happy when it comes to their vendor partners?
MB: At the dealer level, I think it really boils down to having a good, effective sales process. Over the last few years we’ve seen a growth in menu selling, especially as consumers have become more educated. If you have a customer who is more aware, they’re going to be looking for value in the products and services they purchase. Some insurance products provided by dealers that really were the focal point in the past have fallen out of favour — today, it’s more about the value proposition and how it complements the vehicle purchase. That’s why we’ve seen an emphasis on wheel and tire protection, GAP, and programs such as pre-paid maintenance plans and service agreements. Dealers can look at these and see the value in them, as can their customers.
HE: Has the growth in extended term vehicle financing put pressure on dealers to bundle packages for their customers through the business office?
MB: Most definitely and again, that ties into the focus on the product side. In the past, many business managers at the dealer level emphasized finance reserve, participation and absorbing or trying to garner some good gross profit out of the mark up. Today, besides consumers that tend to be more knowledgeable, there are, candidly, more lenders in the marketplace offering to refinance. Dealers know that customers are vulnerable to mark ups of a point or two and while they might still be able to close a deal at that rate, it will get refinanced and it simply won’t stick. Consumers are far more in-tune to market pricing and you’ve got direct lenders who are soliciting and willing to refinance them. With bundling, the focus needs to be not only on helping the dealership generate a profit but also keeping the customer satisfied.
HE: Is there a recognized difference from a satisfaction standpoint between captive finance, non-captive partners among dealers?
MB: You really need to look at this from a couple of different perspectives on the product side. If we look at new car loans, the amount of subvention the captives are garnering is much more. Because the cost of funds is so low, OEMs are using low interest rates in an effort to get customers to buy. If you look at it from a processing standpoint and working with dealerships, captives tend to perform better. They tend to have a sales force that services fewer clients, so that means a greater number of touchpoints with the dealers they do business with. When it comes to used cars in Canada, that’s where the banks really dominate. There is some subvention but for the most part it’s an open market. With their lower cost of funds, the banks are really garnering a good share of the used vehicle business. Although OEMs have Certified Pre-Owned (CPO) programs, not all are incentivizing them, so this sector of the market really represents a sweet spot for the banks. Where used car rates are not being subsidized, the banks have a cost of funds advantage.
HE: Do you think the growth we’ve seen in negative equity is likely to impact the F&I process?
MB: Financing terms have been getting longer and we’ve seen a growth in negative equity but at the same time, we haven’t been hearing from dealers or lenders that their appetite for loans has decreased. At the present time, if we stay in range, lenders appear willing to absorb a good part of that negative equity. At present, we haven’t seen significant problems surface when it comes to taking a consumer’s trade and financing them in a different vehicle. The only exception perhaps is for those consumers that are already struggling with marginal credit.
HE: Based on your analysis, how have changes in the marketplace impacted leasing?
MB: Whether it’s in Canada or in the U.S. we always say that leasing is captive or “captive-like.” There really isn’t much open market leasing anymore, since most of it tends to be done by captive finance partners, or situations where you have companies like Canadian Dealer Lease Services who support the OEMs. Since the recession of 2008-09, we’ve seen leasing stage a comeback as capital markets have freed up, especially in the luxury segment where leasing penetration remains strong. A combination of buyers who tend to be more sophisticated and prefer to change vehicles more often, along with attractive payment plans on relatively expensive vehicles, have continued to make leasing an enticing option for both dealers who represent luxury brands and their customers.
HE: Do you think that leasing penetration will continue to increase in the coming years, not just for luxury brands but for the industry as a whole, especially as OEMs continue to push for volume and both expansion and frequency in new product offerings?
MB: In a word, yes. Our data has shown that transaction prices continue to climb, while at the same time consumers are gravitating towards higher priced and higher contented vehicles. For OEMs and captive financing partners, providing a consumer with $2,000-$3,000 extra in equipment for $20-$30 per month through leasing makes a good deal of sense, especially considering the amount of extended term (84 and 96 month) financing in the marketplace. Additionally, when it comes to leasing there is also the comfort factor in keeping MSRPs and transaction prices high.
HE: With vehicles tending to last longer today, how do you think that is likely to impact the F&I side of the business?
MB: We’ve seen that as vehicle quality has improved, consumers are tending to keep their cars longer. The average age of the vehicle fleet, both in Canada and in the U.S. has continued to climb. As cars get older, the depreciation curve really starts to slow down. A car with 200,000 kms that might have been considered at the end of its life a decade ago is today, in many cases, still valuable. You might see an aggressive push toward certifying older vehicles down the road, which could be interesting. It’s important to note that overall, with more technology being added to today’s vehicles, this is increasingly becoming the draw for consumers and a driving force in the market. With interest rates expected to remain low and consumers looking for vehicles that fit their needs and lifestyle, there’s likely to be a continued emphasis for the business office to provide a suite of F&I products and services that fit the needs of individual dealership customers.
To see the results of J.D. Power’s most recent Dealer Financing Satisfaction Study, visit: http://canadianautodealer.ca/2014/07/jd-power-dealer-satisfaction-with-lenders-remains-high-in-canada/
