What will drive F&I profitability in 2022?

Despite challenges related to the supply chain issue, auto dealerships had a highly profitable 2021. For the short term, dealers have figured out a profit model that works: high margins on new and used vehicles; increased F&I per vehicle retail profit; and higher F&I product penetration rates.

In fact, more than half of a dealership's combined sales and F&I profit is now generated by finance and insurance sales, according to data from APCO Holdings. What is driving the F&I department to new levels of success?

Three trends contributed to a banner year and will continue to drive higher F&I profits in 2022.

The last two years have ushered in a new era of uncertainty. Consumers are concerned about the pandemic, inflation, empty shelves and a host of other issues. In uncertain times, consumers are more willing to purchase insurance and similar types of products that provide them with a sense of financial security.

One advantage of F&I products such as vehicle service contracts and guaranteed asset protection is they shield the consumer from unforeseen expenses. Every car owner knows their vehicle needs to be serviced on a regular basis. The question becomes: Do you want to spread the cost of those repairs over time? Or are you prepared to pay a large service bill all at once? Many consumers are taking the first option.

Today's consumers have become accustomed to purchasing warranties on a variety of products. AppleCare, for example, is a limited warranty that comes free with the purchase of any new Apple product. AppleCare+ is an add-on service that costs money but covers accidental damage, loss or theft and extends the warranty coverage period. The difference is similar to that between a limited vehicle warranty and a vehicle service contract.

Many people see the value in purchasing a protection plan for an expensive product. It would be ridiculous not to insure your house, right? Consumers also understand the value of having auto insurance to protect them from costs related to accidents or theft.

The need for protection plans has become even more magnified due to recent inflationary pressures. Not only has the price of vehicles increased, but the cost of labor and parts has as well. Service contracts protect car owners from having to shell out hundreds, if not thousands, of dollars for unexpected repairs. GAP, on the other hand, protects them from being in a situation where they owe more money than the vehicle is worth in the event of a loss. Customers who buy a pre-owned vehicle today might find that the value of their vehicle plummets rapidly once inventories normalize, so GAP products make even more sense.

During the pandemic, dealerships have adapted their F&I processes for consumers who purchase remotely. Now, dealers are finding these same processes can be used in other situations. For example, customers who have ordered and are waiting for a vehicle.

An old adage in dealerships was the longer the transaction was dragged out, the higher the gross. Today, the opposite is true. Conducting a virtual F&I products presentation — then giving the customer space and time to think about it — has proven to be a formula for success.

A virtual presentation removes the pressure that many consumers feel while "in the box" at a dealership, especially at the end of a long sales process. As a result, they are purchasing more products. According to a Roadster Dealer Impact Study in May, 90 percent of car buyers who bought vehicles online added F&I products to their deal vs. 61 percent of consumers in the showroom.

Nobody knows what the upper limit will be for F&I per vehicle profits and penetration rates. Is there still room for growth in 2022? As long as these trends continue, I believe that dealers can rely on F&I revenue to help grow profits.

Scot Eisenfelder is CEO of APCO Holdings.