F&I Showroom – Feature
By: Gregory Arroyo, May 2017
Read time = 1 ½ minutes
The script was written: The record 3.6 million off-lease vehicles set to return to the market this year was supposed to set off the long-awaited collapse in used-vehicle pricing. Prices have softened, but not to the levels or pace most market insiders predicted heading into 2017.
And instead of lease returns, bloated new-vehicle inventories have been the story. And vehicle OEMs are keeping their foot down on the incentive peddle to keep those vehicles moving off dealer lots. The more they do, the more dealers will be pressured to decrease pricing on used units.
The cycle could play right into the hands of F&I product providers which specialize in service contracts for high-mileage vehicles.
Used-car prices have been on a slight decline over the last year or so, which can be good for used-car sales. The sweet spot is five- to seven-year-old vehicles with 50,000 to 125,000 miles. Dealerships understand if prices get too high, they can’t make a whole lot of money. And I’m sure you’ve seen that the average age of the vehicles continues to rise to stated levels of 11.6 years.
With the margin compression on the new side, dealers who have been holding onto those high-mileage trade-ins view them as a critical piece of overall profitability, and it’s clear franchised dealers realize that having a quality vehicle service contract available is essential, especially on those vehicles with 125,000, 150,000 and more miles. Let’s face it, if you’re buying a 125,000-mile vehicle, there’s a fair chance that you’re subprime and may not be able to afford a $4,000 transmission replacement.
Aside from CSI and customer loyalty, why else should a franchised dealer want to complement those high-mileage trade-ins they’re keeping with a service contract?
F&I is about production. If I’m a dealer and we’re retailing high-mileage vehicles but we don’t have a reasonably-priced high-mileage service contract, everybody in F&I runs from those deals. Why? They can’t make any money on that deal, and it usually counts against their pay plan.
There’s a huge need out there. Most franchised dealers are reinsured, and these are vehicles you don’t necessarily want in your reinsurance because the losses can be stout and adversely impact the performance of your entire book of business. The providers who focus more on new vehicles may have coverage for these higher mileage vehicles, but it can be astronomically expensive.
The customer is more likely to purchase a more price-competitive service contract for that 150,000-mile vehicle. Perhaps more importantly, they can get it financed.
Lower prices also give independent dealers more opportunities to buy vehicles at reasonable prices. If they’re buying them, they are selling them, and that creates more opportunities to sell service contracts. We have been waiting for the market to turn for the independent dealers, and it feels like we’re going to start getting some tailwind in 2017 and beyond
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