Auto dealers and their manufacturing partners have long understood that F&I products are an excellent way to boost customer satisfaction levels because they help to protect and preserve the vehicle investments consumers make.
However, a changing economic landscape in 2023 means dealers and manufacturers are now looking at F&I as a more critical element of their profit centers. In addition, F&I is an important way to preserve bottom line profits, which are experiencing increasing erosion from several areas of the business.
Overall Profit Erosion
Dealers are exploring ways to boost additional revenue from the sale of F&I products for a few key reasons, with slipping overall profits on vehicle sales being among the most prominent motives.
According to a recent report by Haig Partners, profits reached an estimated $6.5M per location for dealerships owned by the public auto retailers1, representing more than three times what they were before the pandemic. However, it’s believed that profit levels for new and used vehicles are now beginning to fall. Profit erosion is also reaching retailers’ fixed operations and service centers, and macro-economic pressures are slowing demand for vehicle purchases. The report also indicated that dealers expect overall profits to fall anywhere from 10% to 15% during 20232.
Incentives Are Also Rising
Dealers and OEMs are keeping a close eye on profits, especially since higher interest rates continue to place downward pressure on consumer demand for vehicles. As a result, a nearly two-year trend was broken in March, as Cox Automotive reported that the average price Americans paid for a new vehicle fell below the manufacturer’s suggested retail price (MSRP) for the first time in 20 months. According to the data, the average transaction price of a new vehicle in the U.S. declined to $48,008, a month-over-month decrease of 1.1% ($550) from a downwardly revised February reading of $48,5583.
Placing further pressure on overall profits, the report also noted that auto manufacturers’ incentive spending rose to the highest level in a year, reaching 3.2% of the transaction price. This compares to 3.0% reported in February3.
Floor-Planning Credits Are Slipping Away
The financing instrument known as floor-planning enables dealers to finance the automobiles they display and sell to customers on their showroom floors and lots. To secure this kind of loan, dealers borrow from lenders like banks and the captive finance divisions of automakers.
In 2021, floor-planning turned into a profit center for dealers as borrowing rates declined and floorplan assistance from automakers helped to offset interest costs as a motivator for stores to purchase new automobiles. When a dealership purchases a vehicle at wholesale — rather than selling it to a customer at retail — the dealer receives assistance in the form of payments that are occasionally referred to as credits.
While floor-planning profits aren’t realized each year, floor-planning has been lucrative for many dealers in recent years. According to published data, dealerships made an average profit of $108,3954 in 2020.
However, floor-planning costs begin to increase as interest rates rise and dealers must then finance more inventory over longer periods of time, creating a dealer pain point across the industry.
F&I product options can help offset slipping profit levels, and recent shopping trends based on changing consumer preferences illustrate why. Roughly 70% of consumers researched and shopped for GAP coverage for their last vehicle purchase, and another 69% researched and shopped for vehicle protection plans. This was followed by ancillary products such as interior/exterior appearance protection (67%), and tire and wheel protection (64%)5.
In particular, the GAP coverage and protection plans are growing in demand because today’s still-high vehicle prices are forcing people to hold onto their vehicles longer. An estimated 37% of people in a recent survey said they plan to hold onto their vehicles longer because of the pricing climate, and another 39% said they might hold onto their vehicle longer but are unsure5.
More consumers today see the importance of F&I products such as protection plans and GAP coverage, along with various ancillary products that help protect vehicle appearances and theft deterrents. Dealers would be wise to recognize that this is an important opportunity to build long-term satisfaction ratings with their customers, but they’ll also see it as a win-win since it will offset lost profit margins in other areas of the operation.
1: https://www.businesswire.com/news/home/20230317005205/en/Profits-at-Auto-Dealerships-Reached-a-Peak-in-2022—Driving-High-Demand-for-Acquisitions-and-Record-High-Prices-for-Some-Franchises
2: https://www.reuters.com/business/autos-transportation/us-auto-dealer-profits-ease-2022-peak-ma-drive-stays-high-report-2023-03-17/
3: https://www.coxautoinc.com/market-insights/kbb-atp-march-2023/
4: https://www.autonews.com/finance-insurance/floorplanning-may-migrate-profit-cost-dealers
5: Consumer F&I Survey presented to more than 2,500 U.S. drivers; Protective Asset Protection, February 2023
