2015 Industry Trends

You don’t need rose-colored glasses for an optimistic outlook on the 2015 economic forecast; the US economy, particularly the automotive industry, is flourishing. After playing a leading role in the economy’s climb out of the great recession, the automotive industry’s outlook for the new year is promising. The price of petroleum fell from more than $100 a barrel in the summer of 2014 to less than $50 a barrel by the end of the year. Unemployment is down and many expect it to drop further still. According to Urban Science’s 2014 year end Automotive Franchise Activity Report (FAR), throughput, the average number of sales per dealership, reached a record high of 921 units based on vehicle sales of 16.5 million. And, according to the report, this marks the third consecutive year that the U.S. dealership network set a new throughput record.

2015 is expected to see the expansion of paperless dealership processes, as well as many advances in technology ­­– some of which are being driven by the increasing number of Millennials entering the marketplace. Private equity is alive and well and dealer acquisition is on the minds of many in the industry. Compliance has taken its place as a permanent fixture throughout the industry and is causing many companies and dealers to reexamine their business models. All of these issues are on the minds of the providers and administrators who shape and drive the industry.

P&A Magazine had the privilege to speak with some of these top executives about their expectations of the trends, products, processes and technology that will drive and define the 2015 marketplace. You might be surprised to hear what they have to say.

ECONOMY

Many of our executives have high hopes for earnings in 2015. With the price of gas and oil down and sales expected to be up, they say 2015 is a canvas that will be painted green with profits by the end of the year.

“Car sales are projected to be above 16 million and I see no reason to dispute that,” says Jim Smith, CEO, SouthwestRe, “The last ‘big’ year was in 2000 at 17 million . . . so we are nearly back to ‘the good times.’ I believe that all segments in our business have benefitted from the necessity of streamlining their operations during the bad times – at least the ones that are still here.”

With today’s lower fuel prices, Glen Tuscan, president, Dealer Commitment Services, expects the economy to steamroll ahead. “The drop in gas prices is like a tax break to the average consumer. There is extremely positive economic growth on the horizon. There is no question, fuel price relief is stimulating the economy.” And Tuscan doesn’t see a slowdown in sight. He predicts a year of solid growth for automotive in 2015.

“None of us have a crystal ball so while I feel, and see in our customers, a positive outlook for 2015, I always try not to be overly optimistic,” says David Trinder, CEO, F&I Administration Solutions, LLC. “This coming year is especially difficult to predict given the potential increase in interest rates, the price of oil, the CFPB and world politics, each of which could quickly change the landscape.”

Jim Maxim, Jr., president, MaximTrak, says the automotive industry is in the best shape that it has been in a very long time. “Lower oil prices, low-unemployment, easy access to financing and great new vehicle line-ups, especially from some of the domestic manufacturers that have recovered from the 2008 crash, all point toward a very strong 2015. With more car sales and more profitable dealers, the F&I business obviously will get a good bump in performance. The smart dealers will remember what they learned through the downturn and stay focused on optimal performance of F&I, but there will be those dealers that will need continual reminding of the profit center opportunities that the F&I department still represents.”

Mark Thorpe, president and CEO, The Impact Group, Inc., recalls the 2008 government rescue of GM and Chrysler. “There’s no doubt it saved the domestic auto industry and prevented a full blown economic depression in the US. Today’s sales and employment numbers reflect that, with 16.5 million units sold in 2014 and an unemployment rate of 5.8%. The surprise Saudi move not to decrease oil production has had the short term benefit of dramatically lowering oil prices to under $50 per barrel and it appears that for at least the next 12 months, that price may hold. Partially, as a result, the US dollar is at a nine year high. I’m concerned about this strategy’s long-term effect on the US, as it opens the door for the Saudis and OPEC to again dominate the extraction markets because of their extremely low cost structure. But domestically, the US stock market has been at some historic levels of late, the housing market is in full recovery, and consumer confidence is highest in seven years. By all accounts, this economy is growing and growing rapidly. I think 2015 has every chance of being a great year for the US – barring any major disturbance by Wall Street, Japan or by Greece’s threat of withdrawal from the EU. Taking all these factors into account, I’d be surprised if we didn’t see incremental growth in auto sales in 2015.”

Rising Interest Rates

While the continued steady growth of the economy is a positive, there is concern among some of our experts that the automobile industry will soon face something it has not seen in a number of years – increasing interest rates.

Brian Reed, president and CEO, Intersection Technologies, says, “The Federal Reserve has indicated that it will start the process of raising rates in the second quarter of 2015. I don’t think that anyone foresees a dramatic jump in rates but any increase will result in higher interest rates to consumers who are buying cars and to dealers who are floor planning cars. Both of these factors could have a modest impact on dealers’ profits.”

Thomas Elliott, executive vice president, StoneEagle, expects continued improvement in the economy this year, but he also has some concern and foresees interest rates rising, “We expect interest rates to rise slightly in the second half of 2015, based on Fed signals. However, we do not expect any tightening of credit, and think lenders will continue demonstrating a strong interest in extending credit for auto loans.”

John Kerper, owner, Kerper and Bowron, LLC, brought up another concern. He says consumer credit could potentially impact the industry. “The one negative in recent data is the erosion in credit quality.”

TRENDS

From the Federal Reserve to regulators, technology and F&I, our experts will be monitoring a number of trends that could have significant impact in the automotive industry, particularly in F&I this year. They will be watching to see how these trends play out and their effect on the industry.

Financing

Already at a record high, the interest in leasing is projected to experience continued growth in 2015. And as the initial phase of leased and fleet vehicles return to the market, some anticipate used car prices could see a downturn.

Joel Kansanback, president, Automotive Development Group, LLC, is among those who will be watching for what he describes as the “dramatic increase of off lease vehicles” and their effect on used car prices. He also expects leasing to remain a popular option for consumers and it will be the catalyst for a growing number of products in the F&I office with specific appeal to those lease customers. “Within F&I I believe there is enough interest, attention and focus by the lenders on moving to flat fees from rate spread that we should see more lenders make more significant moves,” says Kansanback, “Once the next wave of lenders makes the move I would expect it to flip and in short order most lenders in our space will be paying some sort of flat fee system for loans.”

Dealer Acquisition/Private Equity

“With Berkshire Hathaway purchasing the Van Tuyl group late last year, it throws an interesting twist into the automotive consolidation movement,” says Jim Maxim, Jr., president, MaximTrak, “It will be interesting to watch and learn from Berkshire’s acquisition strategy and how they intend to go head-to-head with large automotive groups and the public retailers. It will also be interesting to watch the cross-selling opportunity and native product pull through that Berkshire has the capability to bring through it’s dealerships, such as retail financing and insurance offerings to consumers. All I know is that when the Oracle of Omaha is in a business . . . you’d better watch!”

Glen Tuscan, president, Dealer Commitment Services, says the frenzy of acquisition is one of the top trends he will be watching. He anticipates an increase in the acquisition trend of large companies buying up small family dealerships. “The big will keep getting bigger. It’s consolidating the market for independent agents and creating a red sea of opportunity for the agent base. Given what we have seen in 2014, I think it will be even more aggressive in 2015. I call it the ‘triple B effect’ – buy before Berkshire Hathaway! The acquisition of smaller dealerships is alive and well. The guys that are in the position to sell their dealerships are going to reap the benefits and rewards of their past.”

Regulators and Compliance

As the scope of regulators widens, the focus on compliance is expected to become more acute throughout the industry. Michael Tuno, president, World Class Dealer Services, says, “In F&I and sales, compliance will drive business practices to improve because of pressure from regulators and most importantly, the customers who don’t want to spend hours in the dealership. They are not interested in a nontransparent environment, and they are not just interested in cars, they are interested in the quality of the transaction and the technology that can help them navigate the whole transaction. This is going to impact F&I, which is still very traditional. The technology will push them to go digital and change processes even more than in 2014. There is a silver lining in compliance – It forces dealers to be more responsive to the customer in terms of keeping their information safeguarded, which speaks of technology – streamlining their processes which results in less time spent in the dealership.“

Mark Thorpe, president and CEO, The Impact Group, Inc., will be very interested to see the debate driven by the CFPB on the subject of disparate pricing, either for the cost of consumer financing or F&I products. “As the downward regulatory pressure increases, providers must respond with tools that will make it easy for the dealer to defend their staff’s actions. That’s something we’re actively working on.”

Trucks and SUVs

Some predict an expected decrease in small car sales as falling gas prices propel SUV and truck sales.

“I think trucks will have a great year,” says Lee Bowron, owner, Kerper and Bowron, LLC, “The savings on fuel and the introduction of new models may drive large truck demand significantly higher. Wholesale used car pricing has held firm for a number of years with used car prices only 4% below their all-time level. We think this year may be the year where used car prices begin to fall as increased late model supply from the last couple of years comes to the market. This could depress new car sales a bit and increase used car sales for dealerships as consumers will see the benefit of buying used.”

THE F&I OFFICE

Processes

The biggest dealer objections about electronically prepared contracts, according to Brian Reed, president and CEO, Intersection Technologies, are about the amount of time the process requires; they say it’s too slow, but Reed insists that this is not true. “The speed of the technology today can result in a process that not only delivers to the F&I manager a completed contract, on the right form, with the right rates, and with that product registered with the provider – but does it as fast or faster than the use of old fashioned pre-printed five-ply forms.”

Glen Tuscan, president, Dealer Commitment Services, expects to see more interactive presentations to consumers in 2015. “There is no question that it is here, it is alive and well. I think 2014 was an incubation year for a different way of delivering through the menu, but 2015 is definitely going to see more interactive presentations of products to consumers. Not only at the dealership, but also before they get there. Dealers are asking me and other agents for different ways of delivering F&I products to the consumer because consumers are demanding change to the F&I process. Consumers are demanding a different experience with more involvement in the process in F&I and dealers are reacting to it.”

Many of our experts brought up the need to streamline the sales process starting at the front door of the dealership through to the back end of the transaction in the business office. Michael Tuno, president, World Class Dealer Services, anticipates that a 60-minute transaction will drive the industry. “Realigning dealer processes to run concurrently rather than in a linear fashion will have to happen. You can set the stage by exposing customers to products they will see in F&I earlier in the process through the use of technology, kiosks, etc.”

Lee Bowron, Kerper and Bowron, LLC expects for electronic contracting and anything that eliminates the use of paper to remain in the forefront of the industry’s focus this year. In the future, he anticipates seeing more products that are not tied to the financing of the vehicle. “These types of offerings would be beneficial to consumers who pay cash or lease.”

“I have been shopping for a new vehicle these past two months, and it has been an eye opener,” says David Trinder, CEO F&I Administration Solutions, LLC. “We can give all the technology we want to a dealership but if the dealer is not willing to change with the times, the technology will not deliver any benefit. The process in the dealership around the vehicle sale and within the F&I office needs to become far more interactive and the customer needs to be given far more recognition that they are informed about the transaction before electronic signature and other processes will enhance the sales process. Agents still have a significant role to play to get dealers into the 21^st century.”

While he expects to see the demand for shorter transaction times and a better customer experience in F&I to become more prevalent, Mark Thorpe, president and CEO, The Impact Group, Inc., says he is not convinced that using tablets for menu presentations will fulfill the consumer demand for a more interactive, technology-laden process. “I think the answer is in leveraging all the available technology to change the dynamic between the customer and the business manager so that the customer no longer sees the manager as a sales threat, but as more of a guide or navigator in a customer-driven process. I do think that mobile technology can play a role in solving some of the industry’s systemic challenges between F&I and the sales department, but in the end, the ability to simplify the process for the customer is critical.”

Hot Products

Our experts agree that the VSC will continue to be a staple product. Steve Burke, CEO, Portfolio General Management Group, Inc., says, “It has gained wide consumer acceptance as a smart hedge against future repair costs. GAP should be in second place because it covers the consumer’s asset to debt risk much as the VSC covers breakdowns. Both bring valuable predictability to the consumer’s financial life.”

Some predict full service providers will take the lead in 2015. John Braganini, principal, Great Lakes Companies, expects to see dealers migrate away from product based F&I solutions and instead, turn to full development providers to meet their needs.

Steve Burke, CEO, Portfolio General Management Group, Inc., predicts loyalty products, such as maintenance plans will be number three in popularity. “These products have the added value of strengthening the dealership’s brand and traffic. Rounding out the top four would probably be bundled protection products. The value of covering the little annoyances like dents, dings, windshields, interior surfaces and the like is well known by most customers who have owned a car or truck before.”

Glen Tuscan, president, Dealer Commitment Services, is also a firm believer that prepaid maintenance products will experience steady growth and be in demand in 2015. “Maintenance is a terrific product that captures the customer for the dealership. It’s always one of best products we can offer. It doesn’t directly deliver per vehicle revenue, but it provides for solid growth for the dealer. It should be as important as VSCs.”

Some, however, predict the biggest growth in F&I products will come from bundled and appearance care products. “We believe that combo products and appearance products will continue to expand, especially as F&I producers are looking for ways to reduce their reliance upon finance reserves,” notes Thomas Elliott, executive vice president, StoneEagle.

“Leasing continues to do well, so there continues to be more focus on products that work well for leasing,” says Joel Kansanback, president, Automotive Development Group, LLC. “Specifically, I would say combo products and hybrid service contracts that cover additional items besides traditional mechanical failures will be popular. The new entry that I believe will do well is the shortfall product that acts like GAP for cash deals and also is very compelling for lease deals. When customers experience a total loss they have an opportunity to recapture much of their financial loss using shortfall. It’s priced right and it solves a real problem. Once agents and dealers get comfortable with it, I expect it to do well.”

“VSCs and GAP remain the mainstay products, but we have seen significant growth in appearance protection, prepaid maintenance and bundled products. With the high penetration of leasing, as well as the growing awareness that prepaid maintenance is a great product to keep the customer coming back to the dealership, we see no reason why these trends will not continue,” remarks David Trinder, CEO, F&I Administration Solutions, LLC.

In addition to traditional products, such as service contracts and GAP, John Kerper, owner, Kerper and Bowron, LLC, will be looking at the new products being developed to be big sellers. “Many of these products are loyalty products which give a financial benefit to the customer when they return for a repeat purchase. Theses products can also provide assurances to a customer that their vehicle will not depreciate beyond a specific level. Sometimes, these products are added to all the vehicles sold in a dealership automatically. These types of programs often have the best spread of risk and provide the most benefit to the dealership as they directly increase sales.”

Michael Tuno, president, World Class Dealer Services expects to see more competitive pricing among products associated with leasing, such as excessive wear and tear products. “I think VSC and GAP will stay strong. Loan terms are longer than ever and are now the norm; customers still need protection beyond the manufacturer’s warranty.” He also expects to see more hybrid or composite products. “They are cheaper to buy and represent more value to the customer and it’s the TPAs way of menu selling. They are easier to sell because you only have to present one document instead of four.”

TECHONOLGY AND MILLENNIALS

Technology

John Braganini, principal, Great Lakes Companies, says electronic rating and electronic contracting with DMS integration will become the standard for premiere providers this year. Some wholeheartedly agree, while others expect a slower transition into fully paperless processes.

David Trinder, CEO F&I Administration Solutions, LLC says that the most of his +40 customers are getting close to 100% of contracts electronically. “Our admin system’s connectivity coupled with developments in the many menu systems, DMS systems and most importantly, the improving technical capability of dealerships have all meant that it is not unreasonable for a TPA to expect 100% of their deals to come in electronically. The next phase is the electronic signature and while we are seeing a heightened interest in it, we feel that it is unlikely that 2015 will be the breakout year.”

Thomas Elliott says StoneEagle will be closely monitoring electronic contracting and electronic signature. “We have seen a significant push from both agents and providers to increase electronic contracting, and we expect this trend to continue to be driven forward by millennial consumers.”

“The Internet and technology will continue to evolve and change the buying and selling landscape,” notes Jim Smith, CEO, SouthwestRe, “This will especially impact the F&I department as the average customer becomes more knowledgeable. This makes it that much more important for F&I to ‘stay up with the times.’ The days of customers reviewing brochures are being replaced by customers researching products online. As the world shrinks, consumers will expect things much faster, therefore it is up to the providers to be able to satisfy these demands. The Internet and technology offer the most efficient means to do so.”

Jim Maxim, Jr., president, MaximTrak, describes 2015 as a “pivotal year” for digitization and the elimination of paper in the sales processes. “The paperless process finally has serious momentum and everyone is focusing their attention on driving it. One of our captive clients has been able to convert 60% of its F&I business into electronic rating and contracting via the menu platform so the growth and benefits are starting to be realized.“

“We’ve seen what happens to a business when their confidential, private information gets hacked,” says Michael Tuno, president, World Class Dealer Services, “they end up in a class action for not safeguarding that information. This certainly speaks to establishing best practices in a business. Technology starts to become an important means to keep paper off the dealership floor. But it also opens up Pandora’s box – especially with mobile technology that is not safeguarded. Eventually, someone is going to figure out how easy it is to go into a dealership and steal all the information they can.”

Brian Reed, president and CEO, Intersection Technologies, predicts, the F&I office is on its way to becoming electronic processing based. “The current use of old technology, such as the impact printers designed in 1963, will become obsolete – just not in 2015, but soon. The market is changing to electronic processing of all F&I products with dealer groups, progressive agents, and F&I product providers pushing electronic processing. Everyone knows it will happen but are not sure when it will happen. The following factors will continue to advance the change curve forward to a greater number of dealers processing their business electronically.”

“I think interactive presentations to customers will be more common, both in the dealership and online. It’s expected of the younger segment of customers, and that has the potential to speed up the entire F&I closing process,” says Steve Burke, CEO, Portfolio General Management Group, Inc.

Millennials

Millennial shoppers and employees are definitely making their mark in automotive. As the largest generation in the US, Millennials represent around one third of the entire US population. They are the first generation that had access to the Internet in their earliest years of life and are the most culturally diverse and educated generation in history. With their tech-savvy research skills, the generation that didn’t know life before the Internet is causing the automotive industry to rethink and revamp the buying and selling process. Described as impatient, well educated, and technical, Millennials are a leading factor in the push for increased technology and the use of social media when it comes to car sales.

“A couple of things here. First they hate the traditional sales approach so if you can’t freshen up your approach to F&I presentations you aren’t going to do well,” says Joel Kansanback, president, Automotive Development Group, LLC, “Maybe most importantly is the dealers’ need to have an F&I process devoted to customers originating in the business development center (BDC) and provide enough advance information that customers don’t feel like you are springing an offering on them at the last minute. Millennial shoppers want lots of information and they want it early so we need to revisit dealer websites and perfect the pre-menu process.”

David Trinder, CEO, F&I Administration Solutions, LLC, feels that dealerships are still way behind when it comes to adapting to the expectations of informed customers. “I have visited numerous dealerships of late, and I found that I always knew more about the car than the sales person. Even (on occasion) with something as simple as the different engine sizes that are available with a certain model. If the sales people are so ill-informed about the vehicle themselves, imagine how frustrated a Millennial will feel when they visit a dealership and find they know more about F&I products than the F&I manager. I believe that changing the approach and attitude in sales and F&I is as important right now as implementing new technology. One will not succeed without the other.”

Michael Tuno, president, World Class Dealer Services, is raising a Millennial. “Like most Millennials, my 15 year old daughter loves technology and doesn’t care as much about cars.” He says the need for social connectedness that used to require a car, now can be satisfied, at least in part, through social media and smart phones.

“Technology and connectivity are big with Millennials – they tend to look for functionality over brand loyalty. There is a danger in that they may lack the ‘pride of ownership’ of previous generations. For example, in urban areas, they may increasingly utilize transportation services such as Uber as viable replacements for car ownership,” says John Kerper, owner, Kerper and Bowron, LLC.

“I read a recent study on how the Millennials are changing the buying habits of the Baby Boomers and that all age groups are becoming more technologically aware,” says Jim Smith, CEO, SouthwestRe, “Therefore, it is not just the Millennials’ buying habits, but society’s buying habits that are evolving.”

“Millennials are loyal to a process, not to a vehicle,” says Glen Tuscan, president, Dealer Commitment Services, “They are technology crazy, not car crazy. They are going to demand a different way of buying a vehicle. I think a better customer experience and new buying process will capture them.”

Aside from their adeptness with technology their impatience with lengthy transactions, Mark Thorpe, president and CEO, The Impact Group, Inc., doesn’t see a huge difference in the demands of the Millennial over other demographics. “In the end, every customer demographic needs good information to make good decisions. How that information is made available remains the challenge for every user and every provider. In that regard, our mission is to continue to develop interactive tools that make the business manager’s job easier - where the client can with confidence determine their own degree of risk exposure when evaluating a particular F&I product without the business manager having to do all the heavy lifting.”

IN SUMMARY

Steve Burke, CEO, Portfolio General Management Group, Inc., says the ultimate key to success is getting more from each customer relationship. “This means developing the store’s brand beyond the franchise marks. Though sales, parts and service, and online marketing all play a role in strengthening the brand, I believe much of the strategy [in 2015] will be centered in F&I and the products that keep customers coming back. Strong dealers know that quality and value in every interaction is the foundation of maintaining long-term customer relationships.”

Joel Kansanback, president, Automotive Development Group, LLC, says being a car dealer is more complex than ever. “The more equipped we are as agents to help dealers navigate this complex landscape the more we will succeed. Dealers are looking for people to turn to for help. It’s just not practical for them to be experts at everything.”

The bottom line seems to be all about creating that positive customer experience. The technology, compliance issues, process and everything else involved all pave the road to the sale. The better that road is paved, the better the ride for the customer; and we all know the bottom line starts with providing what customers need and want in a way that appeals to them. Satisfied customers are what successful businesses are built on.