It’s that time of year again: a time for pumpkin spice lattes, autumn leaves and…automaker Consumer Price Index agreements? Yep, now is when you may see pending CPI agreements for warranty work come across your desk.
Automakers and dealers have battled over factory reimbursements for warranty work for as long as there have been franchised dealerships. Yet, over the past several years, the fight has turned in dealers’ favor. This is because nearly all states have introduced amendments to franchise laws that mandate retail reimbursement on warranty parts and labor.
Which brings us back to those CPI agreements. It’s no surprise that automakers will do whatever it takes to keep warranty costs in check; that’s why they send agreements that lock dealers into a rate increase for a period of up to three years in some cases, depending on the automaker. Not a retail rate, mind you, but a factory rate increase that the automaker deems acceptable.
This rate increase could be fair, or it could be much less than a dealer’s true retail rate. What’s certain is that every dealer should carefully consider their options before signing on the dotted line. Let’s explore what’s at stake and the best next steps to take when that letter crosses your desk.
What’s at Stake
CPI agreements offer dealers an across-the-board increase for warranty work. Automakers entice dealers to sign by granting “automatic” increases tied to CPI, but in most years that increase is nominal. The majority of the time, it’s well under 10%.
The problem is that the retail rate, which dealers are legally entitled to, could be an increase of 20% or even 30% depending on state statutes. That means a dealer who accepts the automaker rate could be leaving thousands, even tens of thousands, of dollars on the table every year.
For example, a BMW dealer signed their annual agreement in December 2022. After signing, they underwent a warranty-reimbursement analysis that revealed a retail rate between $30 to $40 per hour higher than that in the automaker agreement, equating to approximately $200,000 in profit annually. That profit will go unrealized until 2024 when the agreement expires, and the dealership can submit for the rate they are legally entitled to.
One More Piece of Paper
For dealers, a CPI agreement that comes across their desks can seem like just one more piece of paper. Especially when you consider the dense legalese in these letters. Wading through all the jargon and terms can feel overwhelming.
Automakers may also make it seem like signing the letter and accepting the increase is the dealer’s only choice. After all, it benefits them to hold dealerships to a standard rate. Simply signing the letter is the path of least resistance, especially when any warranty rate increase that doesn’t require work on the part of the dealer sounds like a good deal. However, when you consider the implications of not receiving the true amount owned, it pays to recategorize that piece of paper as vital to your bottom line.
After all, the service department is one of the chief financial engines of the dealership. Optimally, service business provides enough money to pay a significant chunk of overhead for running the entire operation. Securing the highest warranty rate allowed by law, therefore, benefits every aspect of your business. It’s also worth mentioning in light of the industrywide shortage of technicians, that higher rates can translate to higher pay which can help attract and retain talent.
How to Proceed
The No.1 thing to remember is that every dealer has options. No one is required to accept an automaker’s CPI rate increase. That being said, the increase may be fair. The only way to know is to complete an analysis to determine a dealership’s true customer-pay retail rate.
An analysis is a big undertaking. It requires pulling potentially thousands of repair orders. Few dealerships have the time or resources to do this work in-house. That’s why the trend today is to outsource the work to warranty reimbursement vendors. The right vendor has the expertise and experience to streamline the process and maximize the impact.
A qualified vendor will demonstrate years of experience with a wide range of automakers, along with the ability to leverage data, technology and statutory nuances to determine reimbursement rates equal to repair rates.
It may be the season for automaker CPI agreements, but that doesn’t mean a dealer has to accept them. Taking the time to analyze if the offered rate is equal to retail pay instead of simply signing on the dotted line could equate to many thousands of dollars in added gross profit.
Christopher Forgione (pictured, above left) is a partner and co-founder of Formula Automotive Consulting and Technologies, a new company specializing in warranty reimbursement for automotive dealers.
