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Business rewards can follow if F&I and service work as partners

About five years ago, when the Consumer Financial Protection Bureau and Justice Department began cracking down on auto lenders for potentially discriminatory practices connected to dealer reserve, Johnson Automotive's Greg Kostern feared lenders might quit paying dealers a reserve altogether, ending a lucrative source of revenue for the company's finance and insurance departments.

To help offset that possibility, and to retain customers, the company upped its focus on F&I product sales and made them a larger part of employee pay.

Over the last several years, many dealerships have begun to prioritize F&I product sales over reserve — the percentage-point spread lenders pay dealerships as a retail margin on loans they arrange for vehicle buyers.

According to one estimate, F&I product sales now make up 70 percent of F&I department revenue at large dealership groups vs. 40 percent about 20 years ago. One side benefit of the shift has been a boost in service business.

At Johnson Automotive, warranty work, covered by products such as tire-and-wheel protection, prepaid maintenance and extended service contracts, for example, has risen at least 35 percent in the last five years because of rising F&I product sales, said Kostern, business operations director for the Raleigh, N.C., group.

"It's been proved time and time again: The more products that have been sold, the more claims, the more opportunities that get brought back to the service department," he said. "The more touch points we can have, the better."

Walters

Busier, more profitable

Service departments certainly have become busier since the shift, said Ash Bauer, executive vice president of the Warranty Group's Resource Automotive division in Chicago.

"The good [service departments] are more profitable" because of an increase in business and "with the training they have done. If they give a great guest experience to the customer who didn't buy from [that dealership], chances are [the customer is] probably going to go back there," he said.

Allen Tate, managing partner at Mid County Chrysler-Dodge-Jeep-Ram-Fiat in Port Arthur, Texas, said more customers are purchasing prepaid maintenance, tire-and-wheel protection and service contracts and visiting the store's service department for maintenance and repairs. Because many prepaid maintenance plans can be used only at the selling dealership, Tate said, "If the customer services with me, then they are much more likely to make future purchases from me and refer friends and family members to me as well."

Friendship Family of Dealerships in Bristol, Tenn., began shifting its mix more toward F&I product sales about four years ago, said Dustin Walters, operating partner for the group.

"When you see the writing on the wall with the reserve and how banks are pulling away from [percentage point] spreads," you have to identify profit centers, he said.

Before the change, the dealership group's product-to-reserve ratio was about 50-50, he said. Now, he aims for 75 percent product and 25 percent reserve. And the change has paid off for service volume.

"Last year, the service departments had record years in gross and repair orders," Walters said. "It's subtle, and it's a gradual thing. But there is definitely retention there, and it's got to be because of the F&I products sold."

Sensible 'for everybody'

Dealerships should continue to be paid for arranging the loan, said John Tabar, trainer for United Development Systems, of Clearwater, Fla., but "Products make more sense for everybody."

Most F&I product sales build retention because they include services from the dealership. Dealerships should aim for a mix of 60 to 70 percent product sales and 30 to 40 percent reserve, Tabar said.

Today, progressive dealers are measuring 70 percent F&I income from product sales and 30 percent from reserve, said Matt Woods, director of field operations for the F&I company Service Group in Austin, Texas. About two decades ago, the average was closer to 40 to 60 percent, he said. Dealers began shifting to F&I product sales in the late 2000s. "Finance reserve is not a product a customer sees a benefit from. Everything else that they offer is," Woods said.

Service Group has been urging dealerships to prioritize product sales over reserve for nearly a decade, Woods said.

As federal scrutiny of dealer reserve ramped up — the CFPB said dealerships' ability to vary the amount of reserve they took on loans resulted in minorities being charged higher interest rates than other borrowers — "We recognized we had to outrun the regulators' race," Woods said. "We needed to help our dealers be in a better, more defensible position. That's why we have always referenced a low-cost, high-penetration product."

F&I products give customers a better bang for their buck than reserve does, he added.

Many service advisers hope customers have an F&I product when they come to the service drive so that customer retention and satisfaction improves, Woods said. When service advisers quote customers a rate they deem too high, they'll shop other repair outlets for a better deal. But when the service is covered under an F&I product, customers are glad they invested in that product, Woods said.

"If we can help the customer spend less money out of pocket but have the repair covered, they will have a better feeling about the dealership," Woods said. "They are going to more readily buy another car from the dealership. A lot of this is human psychology, not just repairs. It's the science of customer satisfaction."