In December of 2003, Sonic Automotive's Jeffrey Rachor was dressing to attend a Christmas party when he overhead a national TV news show airing a scandalous story. He was mortified.
Using a hidden camera, Dateline NBC exposed shady finance and insurance doings at certain Sonic dealerships. It was the latest — and most public — in a rash of F&I woes plaguing the Sonic dealership chain.
Rachor collected himself, and attended the holiday party with his wife. They soon learned other partygoers saw the TV news program.
“It was embarrassing and depressing,” says Rachor, then executive vice president, now president of Sonic. “It sure didn't put us in the holiday spirit.”
But it put Sonic brass in a mind to put out the F&I fires once and for all, and to prevent further eruptions from scorching the reputation of the 150-store publicly owned megadealer.
So Sonic took strong, far-reaching actions, learning from “painful lessons,” says Rachor.
“The first thing we did was acknowledge we had a problem,” he says. “There is a lot of denial in the industry.”
Sonic then formed a task force. It was given two assignments. One: investigate unethical and illegal F&I practices. Two: establish from-the-mountaintop rules of compliance.
“You can't afford to choose between compliance and non-compliance,” Rachor tells an F&I Management and Technology conference in Las Vegas. “No dealership in America can afford to choose.”
The cost of non-compliance can be staggering.
“You could lose your dealership, which happened in Arizona in 2001,” says Rachor. “You could face criminal charges, which has happened to many, including a Charlotte (NC) dealership owner and 30 employees.
“You can face civil charges (which happened to Sonic and other dealership chains who have settled various consumer suits).
“And your reputation can be ruined.”
Rachor believes in running profitable F&I offices. “But I'm passionate about doing it right.”
Last year, Sonic garnered $225 million in F&I revenues, 3% of overall company income yet 17% of gross profits, “which we couldn't operate without,” says Rachor.
It comes with risks. “F&I easily is the biggest legal risk for a dealership,” says Rachor. “Second place isn't even close.”
He adds, “We're committed to driving performance, but also to managing the risks of the F&I office.” He calls it a delicate balance.
Sonic now has strict compliance requirements for its 300 F&I managers. Standards of practice center on the following:
- Communications. “Top management must constantly communicate expectations,” says Rachor. “And you can't expect them to do it right if you are doing it wrong. Everyone, including me, signs a code of ethics that is framed and posted at each store.”
- Process controls. Those include thorough background checks of prospective employees, mandatory use of F&I menus, interest rate and profit caps, standardized pay plans and a hot line for anonymously reporting F&I irregularities.
- Training. Quarterly sessions and classes at Sonic University stress profitability and taking the high road.
- Audits. “We inspect what we expect,” says Rachor. In addition to conducting internal audits, Sonic employs “mystery shoppers” and requires general managers to randomly and daily check the contents of deal jackets.
One of the biggest changes since beefing up standards “is the awareness of our associates that auditing and mystery shopping help foster the taking of the high road,” Rachor says diplomatically.
That means people are on their best behavior when they think they are being watched.
Sonic F&I managers are compensated with a pay plan that emphasizes sales over profit, and ties in to customer satisfaction, “a good indicator of transparency” in F&I presentations to customers, says Rachor.
Overachievers with excessive F&I performance levels get audited, says Rachor.
Several F&I employees have left Sonic since the company instituted its strict standards.
Some left on their own. They were “bad apples” who knew it was time to go, says Rachor. Some were fired under Sonic's zero-tolerance policy.
Tougher standards have solved many of Sonic's problems, but not all. Criminal charges centering on F&I violations recently were filed against six former staffers of Santa Monica (CA) Honda, a Sonic store.
Nonetheless, authorities are impressed with Sonic's efforts to clean up F&I operations. “I'm amazed and pleased to see the steps Sonic is taking,” says Jeff McGrath, a Los Angeles deputy district attorney. “Hopefully, it will make a difference.”