New-car sales are ebbing, used-vehicle sales increasing.
Factors fueling the latter include:
- The flow of off-lease vehicles – from originations as much as 30% in recent quarters.
- A widening payment gap of $147 a month between new- and used-car purchases helping to make the former more attractive to many buyers.
- Uncertainty over car-ownership interests as Baby Boomers, Millennials, and now Gen Z increasingly choose alternative transportation models such as vehicle subscriptions, ride sharing and ride hailing services (Uber, Lyft).
Higher used-car volume depresses prices. A strong F&I effort can help offset that. Used-car gross profits continue to decline, with an average of $1,265 for the first quarter of 2018, according to the accounting and advisory firm Baker Tilly’s Automotive Benchmarking Survey.
While the firm noted F&I product penetration had decreased in the first quarter of 2018 compared with the fourth quarter of 2017, “the decreases do not have a significant impact on F&I productivity, with the net F&I income before compensation per used-retail unit sold up $3 to $765 from Q4 2018,” the report says.
Baker Tilly reported quarter-to-quarter penetration rates went from 58.9% to 55.3% for financing, 23.2% to 20.6% for insurance and 47.3% to 43.7% for extended-service contracts.
Dealers planning strategies should focus on the opportunity to sell more F&I products to the increasing number of used-car buyers.
According to May 2018 data from the National Automobile Dealers Assn., new-car F&I product penetration was 89.6%, used-car penetration 73.3%. Dealers I’ve spoken to report similar ratios. The decline in used-car penetration can be explained by various reasons.
Tighter lending practices: Resulting in less loan advance, pressuring margins, and restricting buyer ability to purchase aftermarket products.
Negative equity: Making it a challenge for some buyers to purchase the vehicle they want, much less buy aftermarket products.
Used-car buyer creditworthiness: Experian reports the average used-car buyer had a credit score of 652. (In a 300-850 range, a credit score of 700 or above is generally considered good, Experian says.)
Uniformed consumers: Taking time (whether online or in the office) to explain product features and benefits puts an informed buyer before you.
Neglected training: The record-setting recent market has lured many into dropping their sharpness and neglecting to match buyer profiles with product needs, which would allow F&I to sell value that customers notice and desire.
Time will tell how this market shift will influence used-car F&I penetration, but digital F&I will drive deeper product penetration. Consider:
- Increased volume of used cars being sold presents more opportunity to sell F&I products.
- Increasing average trade-in cycle, now 4.7 years – more opportunity to sell prepaid maintenance and protection products to retain value and offset maintenance costs.
- An aging fleet, with the average age of cars on the road at 11-plus years – more opportunity to sell service and parts.
- An increasing number of high-mileage cars on the road – opportunity to sell vehicle service contracts designed to specifically address the needs of the owners of these vehicles.
- The typical American’s inability to cash flow a $400 emergency repair, according to the Federal Reserve Board – investment protection aftermarket products may be increasingly attractive to buyers
IHS Markit says the volume of vehicles in the new to five-year-old range will grow by 16% within two years, and vehicles age six to 11 years will grow by 5%. Vehicles that are 12 years-old and older will increase by 10%. More than 20 million cars on the road in 2021 will be more than 25 years old.
This data should excite an F&I manager.
Use of digital technologies such as e-menu systems, interactive and mobile F&I product presentation tools and predictive-behavior surveys help dealers deliver the experience buyers demand today – online and in-store, dynamic, transparent, and consumer-controllable.
An OEM’s dealers using digital-menu technology saw a:
- 58% increase in profitability.
- 50% increase in service contracts.
- 35% increase in GAP.
- 60% increase in sales of other aftermarket products.
People’s interests and attention are diffused and more splintered than ever. There is noise, choice confusion, option anxiety and anti-institution emotions.
Digital retailing helps alleviate uneasiness by putting more shopping control in consumers’ hands. It proves greater clarity and transparency in products and pricing, letting people consider options at their own pace in their comfort zone.
Digital retail and F&I technologies make it possible to pre-sell F&I products well upstream, to meet and convert shoppers when and where they are, whether shopping online, social media, print and in-store.
Being out of touch with the digital eco-system will not improve the odds of being in the mind of the shopper when they are ready to decide what vehicle to buy, where to buy it and what aftermarket products might interest them.
If you want to seize more opportunity from the growing used-car market, digital technology is today’s better mousetrap.
Jim Maxim Jr. is the president of MaximTrak, a RouteOne company, and chief digital officer of RouteOne Holdings. He is a pioneer of the electronic F&I menu process.