Prices of used vehicles are still near historic highs. This presents a problem for many independent dealerships with smaller floor plan availability or limited cash available for inventory. It’s difficult to go to auctions and compete with franchise dealerships that have large floor plans, rental car companies, and online retailers of the world like Carvana and CarMax that have the willingness and availability to pay what the vehicle brings at auction regardless of actual value.
Of course, if a dealership needs inventory, they have no choice but to bid competitively. But the more aggressive the price, the tighter the squeeze on front-end profits. You can only raise the price of a vehicle so much before the consumer balks or the bank won’t finance it.
This trend has caused a significant shift in how independent dealers are making money. Many are making upwards of 50 percent of profits from F&I products. As a result, F&I has become a huge focal point for many dealers. Not only do they want to know how to increase F&I penetration rates, but they want to know how to maintain or improve their per vehicle retail (PVR).
Currently, three trends are impacting the drive to higher F&I profitability.
Demand for Transparency
Consumers have been asking for price transparency for years, and for years the automotive industry avoided the issue in order to keep control over the process. This all changed last year.
The pandemic forced dealerships to be more transparent because so many consumers couldn’t or wouldn’t come into the showroom. The only way to sell a vehicle remotely is to provide customers with all the information they need to make a decision and complete the transaction.
Many dealerships were left scrambling to find ways to protect profits and present products the way they’ve always done it, and, frankly, it didn’t work. Dealerships were then forced into a transparent presentation philosophy. Dealers had to give customers more information than they were accustomed to doing prior to the pandemic.
I think many dealers were surprised when pricing transparency didn’t send customers running to the next dealership to try and buy a car for a dollar cheaper. In fact, the opposite happened. When pressure is removed and consumers have the information they need to make a decision at their own pace, they often spend more and feel more confident and satisfied with their purchase.
This was especially true in the F&I department. When F&I presentations are the last step in a long sales process, customers feel pressured and impatient and are more likely to decline products. When dealers give out F&I pricing upfront and early in the process, consumers are more likely to take their time, review product selections, and factor pricing into their monthly payment calculations.
Because of this trend, most dealers have increased both F&I product penetration rates and PVR profits in the last year. Now that consumers have had a taste of transparency, they’re not going to give it up. Transparency is the new normal and a trend that should be embraced going forward because it is a win-win for both the customer and the dealership.
Increased CPO Program Participation
In 2020, before inventory shortages hit, just 12 percent of independent dealerships participated in a CPO program. Now, GWC estimates that 17 percent of independent dealerships participate in a CPO program. That’s a whopping 41 percent increase in CPO program participation in less than two years.
Franchise dealers have long used certified pre-owned (CPO) programs to deliver peace of mind to consumers and generate higher profit margins. A designated CPO status signals to the consumer that this is a higher-quality vehicle with no major mechanical defects. CPO vehicles also come with a limited warranty that provides consumers with confidence in their purchase decision. Many consumers are willing to pay more for a vehicle with CPO status. We have seen many independent dealers make $750 more for CPO vehicles compared to like vehicles in age, model and mileage. When you compare that to what it costs to adequately certify a vehicle, it’s a winning proposition for the dealer and the consumer.
Only high-quality vehicles should be designated with a CPO status. Selectivity is key as your dealership brand’s reputation is closely connected with all CPO guarantees.
Expanded F&I Portfolios
Another trend we have seen in the past year is that as used vehicle prices have risen, consumers are more willing to pay for products to protect their investments. As a result, independent dealerships are expanding their F&I product portfolios.
Traditionally, independent dealerships have limited F&I product offerings to vehicle service contracts (VSCs) and GAP coverage. Now larger independent dealers are selling more ancillary products, such as tire and wheel protection, key replacements, and appearance protection.
Expanding your F&I portfolio allows you to customize products to your consumer’s needs and driving habits and creates more profit opportunities for dealers. Your F&I provider should be able to offer you a wide variety of products to enhance your product portfolio, profits, and consumer experience.
Independent dealerships are relying more on F&I profits than ever before. Dealerships that embrace consumer demand for transparency, CPO program participation, and expanded F&I portfolios will continue to drive higher levels of consumer satisfaction moving forward. With higher levels of consumer satisfaction comes higher profits for our dealers. In times such as these, getting higher customer satisfaction and loyalty can be the difference between a good month or a bad month.