The Growing Importance of Warranty to Dealer Profitability

The Growing Importance of Warranty to Dealer Profitability

In the next three years, OEM warranty will become an increasingly important factor in dealership operations.

The retail automotive industry is experiencing tremendous upheaval across all profit centers, which has created unprecedented pressure on dealer management to sustain profitability levels going forward. In the next three years, OEM warranty will become an increasingly important factor in dealership operations. Consider the following trends and expected impacts:

NEW VEHICLES

As inventory availability continues to rise it will drive increased sales volume, which reintroduces margin compression. Cox Automotive recently reported that YoY vehicle sales were up 15%, with new vehicle inventory levels up 75% over the same time last year. A slowdown is expected in the second half of the year as “pent-up demand has likely now been fulfilled.”

USED VEHICLES

Per Cox Automotive on 8/7/2023, used-vehicle prices (on a mix, mileage and seasonally adjusted basis) decreased 1.6% in July from June. The Manheim Used Vehicle Value Index declined to 211.7, down 11.6% from a year ago.

F&I

Interest rates have increased substantially in the last 12 months, which has driven up consumer monthly payments, which has a dampening effect on F&I sales.

SERVICE

Fixed operations have historically been the dealership’s largest profit driver, accounting for over 50% of overall dealership profits. However, with approximately 150 new EV models coming to market in the next three years, and with EVs forecast to require 35-50% less CP service due to fewer moving parts, fixed operations is confronting a significant challenge to its revenue and profit contributions.

Which brings us to OEM warranty. Warranty work is forecasted to increase over 20% in the next three years, based on two factors: millions more new vehicle sales will place millions more warranty-covered vehicles on the roads, plus recent analysis shows that initial 12 months warranty costs for EVs run 300% higher than ICE vehicles.

The conclusion is that the dealer’s largest profit center now has a built-in growth engine, driven by OEM warranty. This is a silver lining in the otherwise murky future profit scenarios.

WHAT CAN YOU DO ABOUT IT?

Profit pressure in segments of the dealer’s business drive dealership managers to seek gross margin optimization across all dealership profit centers. Low hanging fruit can usually be found in previously unexamined areas. Such is the case with OEM warranty.

Typically considered an “auto-pilot” part of the service business, OEM warranty and related claims processing activities have not been optimized for decades. Today, warranty claims processing is one of the few areas of dealership operations untouched by technology-driven automation. Largely manual look-up and data entry processes still drive claims processing, and these inefficient methods consume on average 12% of the gross profit from warranty revenue. This is a huge expense driven by inefficiency. Add to that the expectation that employee compensation levels are expected to continue to increase and the opportunity comes into focus.

Automating and outsourcing warranty claims processing can reduce the associated expenses by more than 50%, while also driving a host of other benefits, including additional warranty revenue generated by claiming every legitimate expense allowed under the OEM warranty P&P, filing claims within 24 hours to improve cashflow, and improving the OEM metrics associated with warranty claims processing, such as time to submit and first-time success rate. This is just one example of how dealership managers can re-examine existing operations to create new revenue and profit opportunities. There are new technology solutions being introduced every day that streamline and optimize even mundane areas of dealership operations. Examining back-office processes with a fresh eye can yield significant gains that help to alleviate profit pressures in the future.

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