Executives for several of the publicly traded new-car dealership groups say they're resigned to flat fees instead of dealer reserve as compensation for negotiating loans, thanks to pressure from the Consumer Financial Protection Bureau.
Publics: Flat fees likely but no threat
What's more, the groups say, their businesses wouldn't be hurt much if that happens since dealer reserve already is minimal. That's because competition keeps rates low and because auto lenders -- and in some cases the groups themselves -- already impose ceilings on dealer reserve.
Not all public groups disclosed how much of their F&I revenues come from dealer reserve, but those that did averaged about one-third from the reserve as opposed to F&I product sales.
"I don't believe it's a big problem," Sid DeBoer, executive chairman for Lithia Motors Inc., said last month during a conference call. DeBoer said he's generally OK with the concept of limiting dealer reserve: "I think it's good, the pressure there to be sure dealers don't overcharge a customer, and I think that's really valid."
Here's what executives from the six publicly traded new-car groups said about dealer reserve and flat fees during conference calls reporting first-quarter earnings as well as in follow-up interviews.
Asbury Automotive Group has "very hard caps" on rate, COO Michael Kearney said. "And as a practice, we never even get close to the caps." Asbury's dealer reserve averages 1.25 to 1.5 percentage points, he said. He said about 30 percent of Asbury's F&I income comes from finance.
CEO Craig Monaghan said that switching to flat fees probably wouldn't hurt very much. "You're starting out from a very small base, and you've already got a cap in place. ... So, therefore, the number, or the exposure, gets even smaller. That's why we think it's something we can manage."
AutoNation Inc. reported it reached an all-time high of $1,323 in average F&I revenue per vehicle in the first quarter. That was up 9 percent from a year ago, and it beat the previous all-time record of $1,307 set just one quarter earlier, in the fourth quarter of 2012.
CEO Mike Jackson said AutoNation's current dealer reserve is about 1.25 percentage points, compared with flat fees that potentially could provide the equivalent of 1 percentage point. "So it seems to me to be an entirely manageable situation, if that's what it comes to," Jackson said. "But I think it's got a long way to go before we can say for sure how it's going to go."
Group 1 Automotive CFO John Rickel said that in the first quarter, Group 1 got about 35 percent of its F&I revenue from dealer reserve.
Group 1 reported average F&I revenue per vehicle of $1,339 in the United States. Group 1 also has operations in Brazil and the United Kingdom. The first-quarter results marked the first time the group broke out its results by markets.
CEO Earl Hesterberg said U.S. F&I results were "spectacular" but that the group has room to improve. "We still have dealerships that perform significantly below our average dealerships," he said. "So we continue to try to grow that business also."
Lithia Motors wouldn't disclose how much of its F&I revenue comes from dealer reserve. However, CFO Chris Holzshu cited recent reports that put the industry average around 35 percent.
"We're not very concerned about what happens here," said CEO Bryan DeBoer. "If it becomes a flat rate or if it becomes a reduced rate, we sell our product through sheer transparency and through selling the cost benefits of those things."
Penske Automotive Group averaged around 1.5 percentage points in dealer reserve over the past 12 months, Chairman Roger Penske said.
However, Penske pointed out that dealer reserve already is subject to "caps and collars" from the captive finance companies, which is where the group sends most of its volume. Penske said his group also has a large lease penetration. He said that for leases, the retailer typically already gets a flat fee.
Sonic Automotive Inc. wouldn't be materially affected by switching to flat fees, President Scott Smith said.
He said Sonic currently averages a 1 percentage-point dealer reserve on finance rate, well below a theoretical cap at lenders of 3 percent.
"So we'll have to deal with that as it comes at us, but it would be a level playing field," if everyone switched to flat fees, Smith said. "All dealers would have a similar situation, and all the lenders would be in a similar situation."
Jamie LaReau contributed to this report
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