Extended contract sales now can mean future shop profits
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December 18, 2017 12:00 AM

Extended contract sales now can mean future shop profits

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    Ford Motor Co. says 40 percent of its new-vehicle buyers get extended warranties

    The growth in sales of vehicle service contracts in recent years means more work — and more income — for dealerships’ fixed operations.

    But it also requires service departments to pay attention to the often complicated features of extended service plans. Among other things, dealerships sometimes must bet that payment rates for maintenance and repairs spelled out in the contracts won’t be less than the actual rates when work is done years later.

    The share of new-vehicle buyers who purchased a service contract rose to 44 percent in 2016 from 38 percent in 2010, according to the National Automobile Dealers Association. NADA says it expects the rate to rise this year.

    In the same period, the volume of work performed under service contracts increased even more sharply, to more than 15 million repair orders from fewer than 5 million, NADA says.

    That growth, in part, represents the greater variety and breadth of extended service plans available to consumers, according to industry analysts. Surging U.S. new-vehicle sales during that period also played a role.

    When a dealership sells a service contract, it typically earns a commission from the F&I product vendor. But it doesn’t collect service revenue on cars and trucks with extended plans until the vehicles are no longer covered by factory warranties.

    The payment rate for future work often is set when a service contract is sold, says Elgie Bright, chairman of the automotive marketing and management department at Northwood University in Midland, Mich.

    “It may not be the door rate when repairs are needed later on,” Bright told Fixed Ops Journal. And dealership body shops may have their own rate sets, he says.

    Prolonged revenue

    Growth in dealership repair orders for work done under extended service plans
    20104,684,794
    201615,406,997
    Source: National Automobile Dealers Association

    Plans differ

    The extended service plans of automakers such as BMW and Fiat Chrysler Automobiles reimburse dealerships for factory parts and retail labor rates in effect when claims are made.

    BMW of North America’s extended program builds on the luxury automaker’s factory warranty, says spokesman Hector Arellano-Belloc. Repairs under these service plans do not require preapproval, he adds.

    BMW has made extended service plans available for older and higher-mileage vehicles in recent years, Arellano-Belloc says.

    Service contracts sold by FCA’s Mopar Vehicle Protection program are treated like the automaker warranty in setting parts and labor rates, says Paul Hrnchar, vice president of Hrnchar Automotive Group in North Olmsted, Ohio.

    The only variable, he adds, is the amount of the buyer’s deductible.

    Follow the money

    Management of service contracts has grown more efficient, says Jim Roche, senior vice president of marketing and managed services for Xtime, a subsidiary of Cox Automotive.

    “Administration of these things is now a standard practice, very straightforward,” Roche says.

    A new-vehicle owner can buy a service plan after the initial car or truck purchase, even after the factory warranty expires. But it’s easier to tailor coverage when a vehicle is new, says Mark Bardusch, general manager of Ford Motor Co.’s Extended Service Business.

    Dan Hutko, U.S. operations manager for the extended service programs operated by the Ford and Lincoln brands, says he has seen “a steady growth in interest” in service contracts among car buyers.

    “Forty percent of customers purchase a plan,” he says.

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