More dealerships are capping the markup allowed on aftermarket products in the finance-and-insurance office. One retailer's explanation for the trend? "Large pigs go to slaughter."
It's another way to say the extra money isn't worth the risk. Excessive markups on products can lead to lawsuits by customers, scrutiny by regulators and a bad reputation in the dealership's community.
While caps are sometimes dictated by lenders and state regulators, ethical concerns about overcharging are a growing reason for the policies, dealers and F&I experts say.
"It's a huge part of our name and our reputation" as well as a bit of protection, says Randy Hoffman, senior director of sales, training and F&I at Ed Morse Automotive Group in Florida. "In the event that a customer says we overcharged them, we can document that we don't think we did."
Hoffman is among nearly two-thirds of respondents to an unscientific Automotive News survey who said their stores cap the markup on products such as extended-service contracts as a matter of policy. About two-thirds of respondents with those policies said they cap because of ethical concerns.
Although no widespread industry numbers are available, product caps have become more prevalent, particularly in the past five years, says Dave Robertson, executive director of the Association of Finance & Insurance Professionals. He estimates that a clear majority of the nation's dealerships now cap the markup on products. The percentage of dealerships with such policies will only increase, he says.
"The reasons dealers are doing it is they want to ensure no one is ever gouged on a situation within their store," Robertson says. "It's truly good consumerism on the part of the dealer."
Robertson also says that lenders are more mindful of how much they will advance on products. "Even if you wanted to go crazy, the lender probably wouldn't let you," he said.
The specter of increased regulatory oversight is another factor. Even though dealerships are exempt from direct oversight by the new Consumer Financial Protection Bureau, the presence of the agency has made dealers more aware of the need for good business practices, Robertson says.
Big and small dealership groups limit the markup.
The nation's third-largest dealership group, Sonic Automotive Inc., caps all F&I products and has for years. The policy helps prevent legal problems that can arise when customers feel taken advantage of, Sonic President Scott Smith says.
"I never ever want to have to worry at night when I go to bed about what we're doing in dealerships and how we're treating our customers," Smith says. "We charge a fair and reasonable price, and we don't gouge our customers."
Sonic could probably make more money in the F&I office without caps, says Jeff Dyke, executive vice president of operations. But it's not worth taking that risk, he says. Sonic already is collecting record income from the F&I office. It set a new high during the third quarter with $1,068 per vehicle in F&I revenue.
The company has checks and balances in its system. If a deal being processed shows a product price above Sonic's cap, it automatically gets bounced back for re-contracting at the lower price, Dyke says.
Charging "whatever the market will bear," a refrain sometimes heard in F&I circles, is bad business, Smith said. He foresees the industry continuing to implement caps.
AutoNation Inc., the nation's largest retailer, doesn't formally cap the product markup, COO Michael Maroone says.
In Florida, home to many of AutoNation's dealerships, prices are regulated by the state. Product prices are registered with regulators, and dealership personnel cannot deviate, making it a one-price environment.
In other states, AutoNation has suggested pricing for F&I products. Those prices can be negotiated down, but they can't be increased, Maroone says. AutoNation audits its dealerships' F&I processes regularly.
"The higher the performance, the more you can get audited," Maroone says. "We are very cognizant of being fair with the customer and being transparent."
AutoNation also is setting F&I records. It posted a high of $1,290 in F&I revenue per vehicle in the third quarter.
Hoffman, of the 14-store Ed Morse group in South Florida and Tampa, has mandated fixed pricing on all products, even those not regulated by the state, for at least 10 years. The policy hasn't hurt department profitability "one iota," he says. He declined to share per-vehicle F&I revenue, but he says the group's results meet or exceed competitors.
And with everyone selling at the same price, it helps Hoffman evaluate the effectiveness of his 47 F&I staffers.
'I know it when I see it'
So what is an excessive markup?
Robertson referenced the oft-quoted line by U.S. Supreme Court Justice Potter Stewart on hard-core pornography: It's hard to define, but "I know it when I see it."
Given an example of a service contract that sold for 4 1/2 times the dealership's cost, Robertson deemed the markup egregious.
Hoffman says the Ed Morse group marks up prices by 100 percent on average. That is "fairly common" in the industry, he says.
Earlier this year, the state of Pennsylvania repealed a 10-year-old cap that limited the markup of service contracts and other aftermarket products to 100 percent of dealership cost.
The state, however, maintains authority to review transactions and determine whether markups are excessive.
By limiting markup, dealers must concentrate on volume instead, Robertson says: "If I want to make so much money, I have to sell you more than one product. I can't just lay you away and get rich on one."
Woods: No home runs
Playing for volume
Gene Woods, finance director of Mercedes-Benz of St. Charles, Ill., has been using the volume playbook for his seven years at the store.
The dealership sells products offered by Mercedes-Benz Financial Services at the retail prices suggested by the captive.
That consistency brings credibility, Woods says. By not discounting or upcharging, he doesn't have to wonder what he quoted a customer a month ago.
"I'm not trying to hit a home run every time I step up to the plate," Woods says. "I just want to get on base."
Minding the markup
Dealerships cite these reasons for capping the markup on F&I products.
• Ethical concerns about overcharging: 67%
• Government/regulatory restrictions: 25%
• Other reasons, including lender requirements: 7%
• Customer complaints about product prices: 1%
Source: Automotive News online survey