Adapt or perish

Clint McJenkins is grateful that the store he runs, Tuscaloosa Hyundai, outperforms the market on new-car sales. But he acknowledges lousy conditions are dragging down the central Alabama dealership's finance and insurance operations.

"We've lost our dedicated F&I staff," says McJenkins, who is both general manager and F&I manager. "The opportunity to make a living at this just went away."

McJenkins has lots of company. F&I profits are down at five of every eight U.S. auto stores, dealers say in an Automotive News survey.

Half of the 122 dealers who responded to financial-results questions in the online survey say their current F&I profits are down between 1 and 50 percent compared with September 2008.

F&I profits are off even more than 50 percent, say 12 percent of dealers. Or flat, say 15 percent.

But despite the worst auto sales in decades, 23 percent of survey takers say they have managed to boost F&I profits from last September.

The survey was conducted Sept. 25-27 and is unscientific because responses are not random. A total of 166 dealers responded. They identified 28 different marques as their best-selling brands, led by Chevrolet, Ford, Honda, Toyota and Nissan.

Tuscaloosa Hyundai -- situated among most of the town's auto dealerships along Skyland Drive just off Interstate 20 -- has benefited from the Korean brand's surge during the current sales slump. This year nationally, Hyundai sales are up 1 percent while the market is down 27 percent.

"Most dealerships here on auto row are talking about how hard it is to sell cars these days, but we're doing pretty well on sales," McJenkins says. "But F&I is tough. We are getting a lot of cash buyers, check writers. We lose a lot of opportunity to sell financing and services."

For cash buyers who want to avoid monthly payments, McJenkins says he has been forced to develop a post-sale campaign to pitch service contracts, road-hazard tire warranties and other traditional F&I products.

"We try to at least plant the idea during the sale," he says. "Then we can follow up via direct mail, e-mail and phone."

Other problems also cut into F&I income at Tuscaloosa Hyundai, even though its customer base has relatively few problems with credit availability.

McJenkins runs through a litany of difficulties: tighter credit standards, turnover in lenders, lower loan-acceptance rates, lower margins on financial products.

"The customer knows he has a choice," he says. "The credit unions in town are a lot more active than they have been, so I have to be more competitive. Last year we could make $200 on a finance deal, but this year it may be just $100."

Dealers surveyed cited the same factors affecting F&I operations.

On average, the most serious F&I problem was tighter credit standards that make it harder to finance would-be buyers with affordable loans. A full 95 percent of respondents said tighter credit reduced F&I income.

Similarly, 91 percent of those surveyed said lower loan-acceptance rates hurt their F&I profits.

Only 23 percent said their F&I profitability was unaffected by lenders reducing dealer margins, with more than a third saying it was a substantial drag.

All these factors limiting per-unit income are compounded as reduced new-vehicle sales slash overall F&I revenue

So dealers must react.

Some call this a year of constant change.

"We adjusted to lender guidelines, inventory staffing and compensation issues as they occurred," says one Honda dealer. "Dealers have to adjust to the situations they are faced with as they happen. After that, get ready for the next play and don't dwell on the past."

The most common move among dealers surveyed was cutting F&I payrolls. Almost two of every five dealers cut at least one F&I employee.

Not all were layoffs. Some dealers have reduced staff hours. Others converted F&I specialists into salespeople or other positions within their dealerships.

"For years I had full-time F&I employees who checked rates at lenders, dealt with GAP claims, did all the paperwork, and I just oversaw the operations," says McJenkins, who turned one F&I full-timer into a new-car salesman. "Now I have one salesman who knows how to handle F&I, but I do nearly all of it."

Beyond staffing, more than a third of responding dealerships adjusted F&I compensation.

Almost as many lowered commissions to conserve profitability as increased commissions. Still others changed F&I staff to straight salaries or to a mix of commission with a salary guarantee.

But most of the responding dealerships made only minor tweaks, either up or down, to their F&I compensation.

"Positive reinforcement is necessary during uncertain times," says one Southern Kia dealer.

A few dealers boosted training or turned to outsiders for staff training or financing. About one in eight of those surveyed -- like McJenkins -- folded F&I into the sales operation.

Despite the downturn and loss in F&I business, five of eight dealers say F&I staff turnover has remained flat. Only 31 percent reported an increase in turnover, and 8 percent said they are retaining F&I employees longer.

Some F&I managers are focused on what they can do to improve the situation.

Lyle Johnston, F&I manager at Jack Kissee Ford Inc. in Claremore, Okla., wants to strengthen relationships with lenders' credit and customer service departments.

"If we lose a customer because of a repo instead of working the customer through these tough times, the dealerships and factories lose a customer forever," he argues. "The lack of customers is our No. 1 problem -- we do not need to reduce that number even more."

Johnston also thinks protecting captive finance companies is enlightened self-interest for dealerships.

"We need to concentrate on reducing debt upfront with more cash down payments and selling GAP insurance, warranties and credit insurance," he says. "Any losses we prevent help finance companies make more loans."