John Stephens on Profit Margins and Customer Retention
Q. What lessons from the 2017 natural disasters should dealerships keep in mind for their reinsurance positions?
A. One of the biggest take-aways from 2017 is that when a dealer decides to take part in a reinsurance position, they are acting as an insurance provider. Yes, reinsurance is a wealth management tool, but the key word in reinsurance is “insurance”. With reinsurance, dealers are insuring that they will cover the risk of an adverse event. In the case of GAP, they are insuring against a total loss. Unlike service contracts, GAP losses are impacted by both single event losses, such as vehicle theft, and catastrophic losses, wherein one event i.e., “Harvey” results in a significant number of total losses. With reinsurance companies, there will always be claims and dealers need to be prepared to take losses, including catastrophic losses, based on the makeup of their portfolio.
As far as the immediate need of recouping losses from 2017 GAP claims, dealers need to take a long-term approach. If dealers try to recover the entire amount in 2018, the necessary price increase for product sales may price them out of the market. A better approach will be to plan to recover the amount lost over a span of three to five years, so as to stay competitive with product pricing. In addition, dealers need to re-evaluate how they buffer against future catastrophic events. The best way to do this is to understand your market and the likelihood of a catastrophic event, then price F&I products accordingly. For example, dealers operating in areas where hurricanes occur frequently should have higher F&I prices than those who operate in areas where there is little chance for a natural disaster.
Q. What is the “State of Compliance” and how will it impact retail automotive dealers?
A. 2018 is upon us and the automotive industry has some significant compliance wins in its belt. Now, for every new regulation the CFPB puts out, it must eliminate two. Because of this, we don’t expect to see many new regulations come out from the Bureau. In addition, the CFPB’s Arbitration Rule was struck down by Congress in the third quarter of 2017. With these wins for the industry, dealers can be tempted to relax their compliance initiatives. However, it’s important to remember that the FTC, which has direct jurisdiction over dealers, is still moving forward. In addition, the CFPB and consumer advocacy groups are still paying close attention to the industry.
Remember, there are multiple ways our industry is regulated. A great example of this is a couple of cases moving through lower courts now, such as Authenticom v. CDK and Reynolds and Reynolds. In this case, the debate is raging over who owns dealer data. If dealers win this case and assume complete ownership over their own data, their compliance policies for securing digital versions of non-public consumer data will come under greater scrutiny. In addition, we can expect regulators to evaluate how to use the data to ensure compliance with their other consumer protection initiatives. For this reason, dealers will need to continue to work the practices and policies they have put in place to ensure compliance both in their physical dealership and online.
Q. What is your outlook for sales volume in 2018?
A. Throughout 2017, dealers felt the pinch of a flat-unit-sale-year. Those challenges related to sales volume are extending into 2018. This comes as no surprise for those dealers who’ve been in the industry for a while. After eight years of sales growth and economic gains, we’ve been expecting a slow down. Today’s slow down comes with higher vehicle prices and deeper manufacturer incentives, resulting in thin front-end margins. But, as we all know, the retail automotive industry is extremely resourceful in navigating economic cycles. For example, many of our clients are encouraged by the back-end profitability growth they’ve been able to develop based upon process and training focus in the sale of F&I products. This helps them maximize profit per vehicle sold in F&I.
Q. What strategies will dealerships employ to achieve their profitability goals?
A. We can expect dealers to take a three-pronged approach to achieving their profitability goals for 2018.
- They will place a heavier emphasis on their service drive and customer retention, which will affect their product menu. Dealers will evaluate their product menu and F&I pay plans based on those products that encourage customers to return to them for service.
- Dealers will focus more of their training dollars on the service drive to better recognize opportunities for maintenance, enhance dealership communication, and sell less expensive consumer protection products from the service drive.
- More dealers will provide better transparency around the F&I process as a whole by providing information about the consumer protection products they offer online. The goal with this is to streamline the F&I process with more educated consumers, and generate more interest in the benefits provided by F&I products before consumers even enter the dealership to help increase PRU and penetration.
Q. What will pre-owned inventories look like in 2018?
A. Going into 2018, pre-owned inventories are right-sized. Dealers are not overstocked or understocked. For this reason, we’ll see dealers focus more on trade-in and off-lease vehicles than on vehicles at auction. We can also expect dealers to be much more circumspect on the vehicles they take in trade or at auction. Because pre-owned supply is right in line with demand, dealers are expected to utilize CPO programs and traffic-driving products to differentiate them in the market.
Q. How are dealers addressing the Millennial buyer?
A. As Millennial purchasing power continues to increase, dealers are evaluating how to best appeal to this consumer group. We’re already seeing dealers invest more in reaching consumers where they are, using their website and mobile apps to engage with consumers before, during and after the vehicle purchase. In addition, dealers are focusing on personalizing each visit during both sales and service. In 2018, we can expect dealers to train their staff on how to be more transparent. Consumers are contacting the dealership with more information than ever before, but they will still have questions. The key will be to answer those questions in a truthful, factual, and open manner in whatever means the consumer prefers, i.e. online, email, mobile apps, etc. This will help give consumers a sense of control in the vehicle buying process, while also making them feel valued.