Lithia makes fat F&I profits without using a menu

For more than a decade, many dealerships have sold aftermarket products using a paper or electronic menu, similar to the menus used in restaurants. Menu sales tools have contributed to healthier profits in the finance and insurance department.

But Lithia Motors Inc., the nation's ninth-largest dealership group, has bucked that trend and still continues to average close to $1,000 or more in F&I income per transaction.

What's Lithia's secret?

Reporter Donna Harris spoke with the company's CFO, Chris Holzshu.

How do you measure success in the F&I office?

We look at dollars per transaction. One of the biggest opportunities for growth when we buy a new store is in the F&I office.

What is your best-selling product, and what sales penetration do you see on it?

There are two products: our extended service contracts and lifetime oil change product. They generate additional service and sales opportunities. We see a 40 percent penetration on service contracts and 35 to 37 percent penetration on the lifetime oil change plans.

You've said the lifetime oil change is a successful customer loyalty tool. What does it sell for?

It retails for $499 to $799, depending on whether it is a standard or executive contract (for high-mileage business vehicles), for petroleum or synthetic products. We see at least 99 percent of our customers at least once in a four-year period because of the program.

Do you sell it from the service lanes?

That's an area of focus for us over the next year. The key is deciding on the delivery mechanism. We have a number of things in the pipeline.

We offer both the extended service contract and lifetime oil-change plan in the service drive to current customers and new customers in every one of our stores. We've been working on this almost a year, and it's definitely generated incremental volume.

Do the service writers sell it, or do they refer the customer to the F&I office?

The service advisers can do a good job selling it. They just need the right tools. We also train them on the benefits of the program and how to sell it.

Are you experimenting with any promising new products?

For the last 15 years we've been selling the same number of products: extended service contracts, lifetime oil-change plans, coatings and GAP (guaranteed asset protection). Those are our four core products.

Do your managers present them on every deal?

We offer them on every transaction.

And you achieve that without using a menu?

We've experimented with menus — especially in markets where F&I penetration has been more difficult — but we believe the products are best sold without a menu. We've used both paper and electronic menus, and it does not change penetration or profitability.

How do you achieve high F&I income without using a menu?

We back into the sale using what we call a package sales technique. We offer a payment without product and with product. We call the package “fully protected,” and it includes a service contract, lifetime oil change contract, GAP and coatings.

We go through and make sure customers understand the products that are included and take out the products they don't want.

How do you prove the customer has agreed to purchase the products?

We have a one-page closing statement that walks through exactly what the customer bought and what they paid in the payment for each product. You have to sell and educate the customer on the benefits of the product. The customer has to sign off on it every time.

So this is a disclosure statement?

Yes, it's a paper notice tied back to the retail installment contract. It's modeled after the state of California's “Car Buyer's Bill of Rights.” We applied it to all of our stores. We're consistent from store to store and market to market.

Some auto retailers are experimenting with no-haggle pricing in F&I. What about you?

We have fixed prices. No matter who you buy it from, you pay the same price every time. We have the opportunity to reduce the price by changing the term and deductible on the product. Going from a zero deductible to a $200 deductible can drop the price 30 percent.

Why do you feel it's important to avoid haggling?

We don't negotiate on the back end because it's more customer-friendly. In the F&I office, customers would be negotiating something they don't understand as well as they would a tangible product like a vehicle.

It helps us from a training perspective, from a compliance perspective and from a customer service perspective.

How do you motivate your F&I managers?

We've not changed our pay plans in a long time. Our pay plan is pretty competitive. It's geared toward products versus finance reserve. Commissions are pretty consistent. There are also extra programs to reward top performers and motivate underperformers.

For example, we might pay an additional bonus for an average $1,000 income per transaction, and 20 percent of it has to come from a certain product like GAP — if we want to promote GAP.

You also have a new course for F&I managers.

A year and a half ago, we redirected training to a centralized program in a classroom setting at our headquarters. We teach new F&I managers about our sales philosophy and products and do some role-playing so they get used to our system.

Lithia is a highly automated and centralized organization. What do you think of electronic contracting?

A couple of our franchises do it, but we're not leading the charge. I know some dealers say it speeds up the transaction, but we haven't seen any incentive to make it a top initiative.

Why not?

It doesn't streamline our process or reduce the time. You still have to pull the car deal and meet the lender requirements and the department of motor vehicle requirements. There are other forms (besides the contract) that are required. The electronic contract doesn't change that. It's easier for our finance managers to just print out a standard contract.

Others say they're seeing efficiencies.

Nissan is big on e-contracting, and if you have a high-volume Nissan store, then e-contracting might be top-of-mind. And a company like AutoNation with higher-volume stores might have more of a volume incentive to do that. We are in smaller markets and have smaller stores.