Wards Dealer Business – December 6, 2018 – By Jim Maxim, Jr., MaximTrak Technologies

A few years ago, my company conducted a study for a domestic OEM to determine whether the use of digital F&I processes would improve F&I performance. Those results were conclusive – and necessary if you hope to maximize the opportunity before you.

New-car sales have flattened and are even declining. J.D. Power/LMC projected a 2018 seasonally adjusted SAAR of 16.1 million to 17.1 million units, the lower forecast similar to 2014 levels. Used-car sales are intensifying rapidly. Edmunds reported that more than 10 million used cars sold in the second quarter of 2018, a 2.5 percent increase over the same period in 2017.

Other factors also fuel the demand for used cars:

  • The flow of off-lease vehicles – from originations as much as 30 percent in recent quarters – into dealer used car inventories.
  • Increasing interest rates.
  • A widening payment gap of $147 a month between new and used car purchases helping to make used cars a more attractive buy for many consumers.
  • Uncertainty over consumers’ car ownership interests as baby boomers, millennials, and now Gen Z increasingly choose alternative transportation models such as vehicle subscriptions, ride-share, and ride-hail services (Uber, Lyft).

Higher used car volume depresses prices – which a strong F&I effort can help offset. Used car grosses continue to decline, with an average gross profit per used vehicle retailed of  $1,265 for the first quarter of 2018, noted Automotive Benchmarking Survey – First Quarter 2018 by the accounting and advisory firm Baker Tilly.

While the firm noted that used car F&I product penetration had decreased for both new and used car transactions in the first quarter of 2018 from fourth quarter 2017, “the decreases do not have a significant impact on F&I productivity, with the net F&I income before compensation per used-retail unit sold up $3 to $765 from Q4 2018,” it noted.

Baker Tilly reported:

Penetration Rates – Used Vehicles Q1- 2018 Q4 – 2017
Finance 55.3% 58.9%
Insurance 20.6% 23.2%
Extended service contracts 43.7% 47.3%

As unsettling (or welcomed) as these changes are, they are the soil in which car dealers thrive. In this market, as you plan future strategies, don’t lose your focus on the main thing before you: the opportunity to sell more F&I products to the increasing number of used car buyers doing business with your dealership.

According to May 2018 data from the National Automobile Dealers Association, new car F&I product penetration was 89.6 percent. Used car penetration was 73.3 percent. Dealers I’ve recently spoken to regarding this topic tell me their ratios are similar. This decline in used car penetration can be explained by the following:

  • Tighter lending practices: Resulting in less loan advance, pressuring margins, and restricting buyer ability to purchase a vehicle and aftermarket products.
  • Negative equity: Makes it a challenge for some buyers to purchase the vehicle they want, much less buy aftermarket products.
  • Used car buyer credit worthiness: Experian reports the average used-car buyer had a score of 652.
  • Uniformed consumers: Taking time, whether online or in the office, to explain the features and benefits of products puts an informed buyer before you.
  • Neglected training: The record-setting recent market has lured many into dropping their sharpness and neglecting to match buyer profiles with product needs, which would allow F&I to sell value that customers notice and desire.

Time will tell how this market shift will influence used car F&I penetration, but digital F&I will drive deeper product penetration. Consider:

  • Increased volume of used cars being sold – more opportunity to sell products
  • Increasing average trade-in cycle, now 4.7 years – more opportunity to sell prepaid maintenance and protection products to retain value and offset maintenance costs
  • An aging fleet, with the average age of cars on the road at 11-plus years – more opportunity to sell service and parts
  • An increasing number of high-mileage cars on the road – opportunity to sell vehicle service contracts designed to specifically address the needs of the owners of these vehicles
  • Typical American’s inability to cash flow a $400 emergency repair, according to the Federal Reserve Boardinvestment protection aftermarket products may be increasingly attractive to buyers

As IHS Markit reported recently, the volume of vehicles in the new to five-year range will grow by 16 percent within two years, and cars in the six-to-11-year age will grow by 5 percent. Vehicles aged 12 years and older will increase by 10 percent – and more than 20 million cars on the road in 2021 will be more than 25 years old.

This data should excite an F&I manager.

Use of digital technologies like e-menu systems, interactive and mobile F&I product presentation tools, and predictive behavior surveys help dealers deliver the experience buyers demand today – online and in-store, dynamic, transparent, and consumer-controllable.

The performance results mentioned at the start of this article help tell this story. The OEM’s dealers using digital menu technology enjoyed:

  • 58% increase in profitability
  • 50% increase in service contract penetration
  • 35% increase in GAP penetration
  • 60% increase in other aftermarket products penetration

People’s interests and attention are diffused and more splintered than ever, driven by noise, choice confusion, option anxiety, and anti-institution emotions. Digital retailing helps alleviate uneasiness by putting more shopping control in consumers’ hands, by providing greater clarity and transparency in products and pricing, and letting them consider options at their own pace, in their comfort zone.

Digital retail and F&I technologies make it possible to pre-sell F&I products well upstream, to meet and convert shoppers when and where they are, whether shopping online, social media, print, and in-store.

Being out of touch from the digital eco-system will not improve the odds of being in the mind of the shopper when they are ready to make the decisions involved in vehicle choice, dealership selection, and aftermarket product considerations. If you want to seize more opportunity from the growing used car market, going after it using digital retail sales technologies is today’s better mousetrap.

Jim Maxim Jr. is the president of MaximTrak, a RouteOne company, and chief digital officer of RouteOne Holdings. He is a pioneer of the electronic F&I menu process.