For Asbury, F&I addition will be ‘game-changing'

Total Care Auto will give Asbury Automotive Group Inc. full control of an increasingly lucrative dealership business when its F&I products reach Asbury's stores.

"We see this as game -changing," CEO David Hult said last week. He said Asbury anticipates selling its new subsidiary's finance and insurance contracts within three years.

Asbury wanted to sell its own F&I products years ago, Hult said, but the business would have presented an accounting challenge to the publicly traded dealership group.

Instead, it will incorporate Larry H. Miller Dealerships' longtime in-house provider, Total Care Auto, as part of its $3.2 billion deal for the retail group. Total Care Auto "is a part of the fabric" of the Larry H. Miller group and an "extremely well-run business" that generates large margins, Hult said. It produces about $240 million in revenue, has about 2 million contracts open and delivers EBITDA margins of more than 20 percent, Asbury said in announcing the deal last month.

In some cases, Hult said, Total Care Auto's margins can exceed 30 percent.Steve Starks, CEO of the Larry H. Miller Group of Cos., said Total Care Auto was launched early in the dealership group's life and became "a tremendous resource for our dealerships" over time.

F&I has grown in importance for Asbury over the past decade.

Asbury averaged $1,775 in net same-store F&I profit per vehicle last year, a 7 percent increase over 2019 and a 77 percent increase over the $1,003 per vehicle retailed in 2010. Overall, F&I represented 4.3 percent of Asbury's revenue but 24.9 percent of its gross profit in 2020. A decade earlier, the group reported deriving only 3 percent of revenue and 17.9 percent of gross profit from F&I.

Asbury, of Duluth, Ga., ranks No. 6 on Automotive News' most recent list of the top 150 U.S. dealership groups based in the U.S., with retail sales of 95,165 new vehicles in 2020. Larry H. Miller Dealerships, of Sandy, Utah, ranks eighth, with retail sales of 61,097 new vehicles last year.

Asbury CFO Michael Welch described bringing Total Care Auto to the Asbury stores as "probably a two- or three-year rollout." Spreading out the project would minimize the accounting grief — revenue from an F&I product sale is recorded over the life of the contract, not immediately. Also, Asbury will need time to scale the Total Care Auto business itself, he said.

J.P. Morgan analyst Rajat Gupta said introducing Total Care Auto's F&I products gradually also made sense from a risk-management perspective. Similar to traditional auto insurance, an F&I contract includes the risk that the provider will have to pay a claim someday.

However, if a customer files a claim on an F&I product such as a vehicle service contract, Asbury very likely will find itself paying one of its own service centers to complete the work. In 90 percent of Total Care Auto's claims, the customer has taken their vehicle in for work at a Larry H. Miller facility.

"We really see the opportunity to grow service retention," Hult said.

Operating an F&I products business in-house seems like an obvious move for a dealership. But "it's harder than you would think," Starks said.

Starks said it requires a different business thought process than a dealership and different infrastructure spending. The regulatory bodies and requirements are different, too, he said.

Starks said it was attractive for Asbury just to buy a strong F&I provider. For an F&I company "up and running the way that we have," he said, "it's not really easy to go replicate that from a startup position."