Public retailers' F&I revenues rise; service contracts still the workhorse

The six large public new-car retailers saw higher F&I revenues in the first quarter than they did a year earlier. And for all the dealership groups, F&I revenues were a major contributor to gross profits overall.

Executives from Lithia Motors Inc., AutoNation Inc., Sonic Automotive Inc. and Group 1 Automotive cited three common factors that contributed to their F&I success:

• Dealerships worked harder to sell F&I products. Stores especially stressed selling extended-service contracts, which not only are profitable but also generate service business and customer loyalty.
• Shoppers are more willing to buy. Consumer confidence has slowly improved, and auto sales have increased. In the first 3 months of 2012, U.S. new-vehicle sales rose 13 percent from the year before to 3.5 million units. In April, U.S. sales rose 2 percent from the year before to 1.2 million units. The month saw a seasonally adjusted annual sales rate of 14.4 million units.
• Auto lenders are more willing to lend. That includes higher approval rates and higher loan-to-value ratios. The ratio measures how much the lender will lend vs. the value of the vehicle. A higher ratio makes it easier to finance negative equity on trade-ins and to tack F&I products onto the same finance contract as the vehicle.

"If there's one thing that's going to decide how well we're all going to do, it's how much credit can we get for our customers," said Sid DeBoer, chairman of Lithia, which saw first-quarter F&I profit per vehicle of $1,060, up about 5 percent from a year earlier. Lithia ranks No. 9 on Automotive News' list of the top 125 dealership groups with total new-vehicle retail sales last year of 44,537 units.

Lithia said increased willingness to lend was especially important for subprime customers. The company reported that 15 percent of its financing volume was with subprime customers -- defined by Lithia as those with a FICO credit score below 620 --up from 12 percent a year earlier.

AutoNation COO Mike Maroone said the comeback in subprime isn't brand-new, but it's a big improvement over a couple of years ago.

"The subprime environment has been good for several quarters. So we're not seeing huge growth there," he said. "If you compare it back to 2008 and 2009, certainly, it's a very different market."

AutoNation, the nation's largest auto retailer, reported the highest F&I revenue per vehicle -- $1,210 -- among the six publicly traded new-car dealerships groups. AutoNation has topped an average of $1,200 per vehicle for four consecutive quarters.

Sonic saw per-vehicle F&I revenues of $1,054 in the quarter. The company ranks No. 3 on Automotive News' list of the top dealership groups with total new-vehicle retail sales of 114,132 in 2011.

Richard O'Connor, Sonic's vice president in charge of F&I, said that among finance and insurance products, Sonic is concentrating on selling extended-service contracts first and foremost. "The service contract is one of the best products in terms of getting people to come back," he said in an interview.

AutoNation is emphasizing extended-service contracts as well as prepaid maintenance, COO Maroone says. "The focus on F&I continues to be very simple," he said, adding: "We had improvement in every single sector. F&I was strong."

Group 1 said its F&I revenue of $1,175 per unit was a first-quarter record. Group 1 ranks No. 4 on the list of top 125 U.S. dealership groups with total new-vehicle retail sales last year of 102,022 units.

The company's first-quarter record was a 10 percent increase from a year ago but down about $10 from Group 1's best-ever three months in the fourth quarter of 2011. Group 1 said its first-quarter sales penetration for extended-service contracts grew to 39 percent, up from 35 percent a year earlier.

Amy Wilson and Jamie LaReau contributed to this report