F&I product sales could keep elevated dealership profits going

The inventory shortage of 2021 fostered higher finance and insurance gross profit per vehicle as customers borrowed larger amounts and sought to protect the vehicles they could find.

But at least some of the elevated F&I profitability dealerships experienced could be sustainable even when inventory returns and vehicle prices fall, experts say. F&I managers have been increasing vehicle protection product penetration — and that gain might endure.

"That is a little more structural," J.P. Morgan autos analyst Rajat Gupta said. "That is a little more permanent. And maybe it can even go higher."

But Elliot Schor, vice president of sales operations for F&I products provider JM&A Group, said a decline also is possible.

"As supply increases, we can expect that downward pricing pressure on overall [profit per vehicle] will exist — on front-end gross, finance reserve, and on F&I income," Schor said in a statement this month.

All of the major public dealership groups reported double-digit growth in same-store F&I profit per vehicle last year, with the exception of Asbury Automotive Group Inc., which was up 9.2 percent. Three of the six exceeded $2,000 in F&I profit on each vehicle last year, and four did so in the fourth quarter.

AutoNation CFO Joe Lower told Gupta on the company's earnings call last month that 70 percent of the retailer's F&I profit stemmed from product sales. CEO Mike Manley said AutoNation had "appropriately" concentrated its efforts on selling F&I products.

Manley said AutoNation would experience a reduction in its financing margin as interest rates increased. However, if the company continued to train staff to explain F&I products to customers, product revenue "shouldn't necessarily be hit in an adverse way just because we see price movement."

AutoNation reported same-store F&I gross profit per vehicle had risen 13 percent to $2,449 in 2021, the highest amount among the six publics.

Penske Automotive Group Inc. CEO Roger Penske said on an earnings call last month that dealership financing reserve represented about 40 percent of F&I income, with the rest coming from products.

"There's more product being sold, add-ons, to the vehicles today maybe than there was in the past," Penske said.

Penske grew its same-store global F&I gross profit per vehicle to $1,703, up 21 percent from 2020.

Monthly statistics from F&I data firm StoneEagleMetrics indicate the industry had great success with F&I in 2021. The average F&I gross profit per financed vehicle rose 24 percent year over year to $2,499 in December.

StoneEagle's data also found F&I gross profit to be influenced more heavily by products, which contributed about 60 percent of the profit in December of 2019, 2020 and 2021.

The industry had been improving F&I penetration before the inventory challenges of 2021, according to JM&A's Schor. "Attachment rates have been growing," he said. "That's a long-term trend."

Dealerships attached 1.59 products to vehicle transactions in December, an 18 percent increase from a year earlier, according to StoneEagle.

F&I experts have theorized ways the inventory situation has improved product sales. For example, customers might wish to protect a vehicle they're not sure can be replaced, according to Schor. Or, from the dealership's perspective, fewer transactions means F&I managers can spend more time with each customer, according to Marie Knight, head of strategic services for direct markets and programs at Zurich.

But experts also felt retailers could keep product sales strong after inventory normalized.

Jeff Strickland, Assurant senior vice president of dealer services and strategic accounts, said his company had seen penetration on vehicle service contracts grow steadily, "certainly heavy in '21, but even a little bit here" during the first quarter of 2022.

Knight said dealerships could preserve F&I performance even after managers get busier by delegating parts of the process to the salesperson or even the customer. She also felt customer demand for products would endure.

Paul McCarthy, AUL Corp. senior vice president of sales, said increased supply might decrease transaction prices, but customers would still need to protect their vehicles.

"I think that the progress that we've made with profitability and product sales is very sustainable," McCarthy said.

Gupta said he thought product sales would be enough to maintain F&I gross profit.

"I would say in the near term, I think the bigger offset is just that penetration of the warranty products will offset any pricing declines that happen," Gupta said.

Should vehicle prices crash sharply, it's possible gradual F&I product penetration increases might not be enough to offset reduced F&I reserve revenue in the short term, according to Gupta. But over time, penetration improvements would restore today's F&I profit levels, he said.

Gupta felt product penetration could increase because vehicles are becoming more complex, deterring customers from attempting their own repairs. Electric vehicles could yield even greater complexity, he said.

"Which means that the penetration can be even higher," Gupta said.