F&I profit likely hasn't reached its peak, insiders say, but most agree that its growth will slow. To maintain strong F&I revenue, dealerships should ensure that they offer the right product mix, thoroughly understand the products and the regulations covering them, and work to maximize F&I sales after vehicle purchases.
Dealerships will benefit by offering a mix of products that will generate profit and meet the needs of their customer base, experts say.
Service contracts make sense for customers who take out loans. John Stephens, executive vice president of dealer services at EFG Cos., said some dealerships he works with sell service contracts on 80 percent of their transactions. Industrywide, service contract penetration on new vehicles reached 43 percent in 2015, according to the National Automobile Dealers Association.
For lease customers, though, the need for a service contract dwindles. The factory warranty typically covers them for the term of the lease. With lease penetration reaching 33.6 percent of new-vehicle financing in the fourth quarter last year, according to Experian Automotive data, automakers' captive finance companies and F&I product providers make sure they have lease wear protection in their F&I product arsenals.
"Manufacturers are staying in tune with the products and services customers want," and that strengthens dealerships' F&I operations, said Karen Rowe, finance director at Elk Grove Toyota in Elk Grove, Calif.
Having maintenance products in the mix, covering such items as oil changes and tire rotations, can provide a boon to dealership profits beyond F&I, said Mike Casey, group vice president of sales for JM&A Group.
"It's a natural product for a customer to buy and for a dealer to offer," Casey said. It "builds a retention tool for the dealerships and helps the customer get married to the service department." That increases the likelihood customers will buy from the dealership when they shop for their next vehicle, he said.
Dealerships also should educate consumers by providing information about F&I products earlier in the shopping process, said Scott Karchunas, president of F&I vendor Protective Asset Protection. They should "widen the consumer lens to see products and understand their value before they get into the F&I office," he said.
Beyond offering the right product mix, dealerships should know all the features and regulations that go along with those products, said Dave Robertson, executive director for the Association of Finance & Insurance Professionals.
"The good times make us lazy," he said. "When times get tight, people have to have a good reason to make that purchase. It's going to be a harder sell."
Being product experts means knowing state and federal regulations, he added. A clear understanding of those regulations increases "the odds of a sale being made and reduces the odds of an early cancellation chargeback," Robertson said.
In the long term, F&I managers should look at selling F&I products beyond the point of the vehicle sale, Karchunas said.
"We as an industry do a great job at the point of sale," he said. But the industry should also think of the customer in terms of the life cycle of his or her vehicle.
F&I managers only "get a snapshot" of the customer's situation at the point of sale, he said. Customers may not be interested in a product on the day they buy a vehicle, but down the road, their needs and financial standing may have changed.
Karchunas suggested that dealerships take a lesson from Amazon and Netflix. Those retailers know what individual customers want and present the products that make sense to them, he said. Consumers have come to expect that type of retail interaction. Like Amazon and Netflix, the auto industry has data streams, and dealers should take advantage of them to personalize offers to consumers, Karchunas said. "As an industry partnering with the whole ecosystem, we have to find a way to thoughtfully put F&I products in front of consumers," targeting products to specific needs.
In doing that, he said, "You put the customer back on the path of going back to that selling dealer, having a better experience and having a higher propensity of buying from that dealer again."
As dealerships look to implement F&I strategies going forward, Karchunas stressed, there are ways they can boost add-on sales today, such as through consumer education and employee training. "While we look to the long-term opportunities," he said, "there are plenty of near-term opportunities."