Otto Belovich believes it is a disservice to his customers -- especially those who buy used vehicles -- if he doesn't offer them the opportunity to purchase a service contract.
The owner of Cherry Capital Cadillac-Subaru in Traverse City, Mich., makes sure his finance and insurance staff always explain to customers the benefits of protecting themselves from costly mechanical repairs down the road. His managers tell them that prepaid maintenance is a good idea, too, as is a road hazard policy to cover mishaps to expensive tires and wheels.
About 65 percent of Belovich's used-car buyers take him up on the offers and spend an average of $1,500 to $1,800 to purchase one or more vehicle protection products, he said. That's about equal to the percentage of new-car customers who buy one or more products, he added.
Although the sales generate revenue for the dealership, Belovich said, the products protect consumers from expected out-of-pocket costs related to unexpected vehicle repairs. They also help with customer satisfaction by alleviating confusion over who should pay those costs, he said.
"I had a situation where I sold this fellow a used car and sold him a service contract that had a $100 deductible -- this is going back a few years," Belovich recalls. "He never had any issues. He comes in a year later and buys another used car, turns down the service contract, and guess what happened? Six or eight months later, he needed it.
"I covered it just to make him happy. Then I sold him a service contract."
Industry data that separate F&I revenue generated by used-vehicle sales from that generated by new-vehicle sales are hard to come by. But dealers and industry watchers agree there are as many opportunities to sell protection products to used-car customers as to new-car customers.
According to NADA Data 2014, the National Automobile Dealers Association's latest annual financial profile of America's franchised new-car dealerships, combined sales from F&I, service contracts and other products accounted for 39 percent of gross profit in the new- and used-vehicle departments in 2013, up from 37 percent in 2012.
The report also noted that the used-vehicle service contract penetration rate declined 1.5 percentage points in 2013 while new-vehicle penetration declined a slight 0.2 percentage point.
Alan Haig, president of Haig Partners, an auto dealership brokerage firm, said though there is more finance income resulting from new-vehicle sales because those vehicles' average price is higher than the average price of a used vehicle, there is generally more insurance income on used vehicles. That's because consumers who buy used vehicles sometimes want the peace of mind that a service contract and other F&I products buy them.
Haig said his data show that through September, the average F&I gross profit per new and used vehicle retailed for the six publicly held new-car dealership groups was $1,300. His compilation is for new and used vehicles combined and does not include data for CarMax Inc.
The average gross profit per used vehicle retailed for those six groups, not including F&I, was $1,759 through September; the average gross profit per new vehicle retailed, not including F&I, was $2,275.
Dave Robertson, executive director of the Association of Finance & Insurance Professionals, said the F&I manager's first priority is to help secure financing that gets the vehicle sold. The second job is to provide buyers with owner protection products, he said.
But Robertson points out that the dynamics of buying a used car are usually different from the dynamics of buying a new car.
He said used-vehicle buyers are generally "more receptive" to a dealership's in-house financing options because they often are excluded from manufacturers' subvented or special finance programs that provide incentives that help with funding loans.
Second, many used vehicles have little or no factory warranty left on them. "So a service contract is a good purchase," he said.
Robertson agrees that service contracts help promote customer satisfaction because consumers are happier when they don't have to pay for repairs. But the contracts promote customer loyalty, too. "Service contracts usually mean that customers come back to the selling dealer," he said. "F&I fulfills a vital role for the used-car buyer."
Higher for used
Ben Cantanese, dealer principal of Volkswagen of Salem County in rural Monroeville, N.J., said the amount of F&I products per vehicle retailed at his store is higher for used vehicles than for new vehicles.
"A used car with miles on it -- especially a higher-priced used car, out of factory warranty -- those people are more inclined to buy service contracts," said Cantanese, who sells roughly 28 new and 43 used vehicles per month.
He said that though tire-and-wheel protection and key replacement appeal to some customers, GAP policies are generally an easy sell because customers expect and understand vehicle depreciation. They are concerned that if they have total loss of their vehicle, their loan balance would be more than the value of their vehicle. GAP and service contracts, he said, go "across the board."
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