F&I Products Leading the Way

What a year 2021 was. Every month the expectation was that business will decrease because of the inventory crisis that we’ve been in for the last 22 months.

But even with this doom and gloom outlook, dealers have grown their product sales and profit month after month, Spencer Wanderon, vice president of sales at National Auto Care, noted in the session titled, “F&I Product Update for the New Year," during a panel discussion at the December 2021 Industry Summit Experience.

He added, “We should ask our dealers, ‘What product isn’t working?’ Because you have been selling everything.”

Wanderon followed these comments with an admission—the inventory crunch has ushered in a few changes. “Dealers have had to shift their sales mentality to the vehicles they can get their hands on,” he says. “In most cases, they end up selling higher mileage units, which limits service contract options.”

Dealers now seek higher mileage unit service contracts, or “any miles, any service” contracts. These agreements give “dealers the same ammunition that they’ve had in the past and are used to supplying,” he says.

These products open vehicle eligibility for service contracts and increase the availability of higher terms than before. “For example, our new car program caps at 150,000 miles. But with our ‘any mile, any year’ option, you can sell 48/48 exclusionary, standalone coverage and get full coverage on an exclusionary level for 48/48. With a new car vehicle service contract, you are looking at a 12/12, 24/24 max,” he says.

National Auto Care created its “any miles, any service” product for independent dealers. But Wanderon says it has “helped fill the void and allows our dealers to offer exclusionary level service contracts to get the product sale and get customers to return for service.”

New Products in 2022

Dealers will see a host of new products in 2022, reports Paul McCarthy, senior vice president of sales for AUL Corp.

“We will see products that address the changing landscape of what we sell and who we sell it to. And with increased levels of technology on vehicles, products that address these tech items also will be of great importance in 2022,” he says.

McCarthy predicts products that cover electric vehicles’ (EVs) service, batteries and technology will emerge. “Electric vehicle customers want to feel different and have policies tailored to EVs,” he says. “That’s going to be a key component for next year.”

Wanderon foresees a fun ride once the EV rollercoaster starts to snowball. “EVs currently represent 5% of the market share, which makes up 2% of our service contract sales,” he says. “But everyone is getting ready for this. Service contracts for EVs will be vital to offer. Every company will offer their variation of the service contract for EVs within the next 12 months.” 

People also adjusted their driving habits over the last 20 months. McCarthy predicts that will affect the products consumers want. “Many people still work from home and will continue to work from home,” he says. “Policies that focus more on the miles customers drive, without a time component, will be important in 2022.”

Wanderon agreed, saying, “Unlimited time products have been a hotcake for us over the last year.”

How High Prices Affect F&I

F&I needs also will change as vehicle prices for new and used vehicles hit record levels. Gerred Lunnon, vice president of sales for RoadVantage, says high vehicle prices, specially among used vehicles, presents a huge opportunity.

When consumers buy used vehicles, they now combine wear-and-tear coverage with ancillary products. “We are seeing customers add in short-term service contracts for wearable items. Now they get VSC coverage and wear-and-tear protection that covers batteries, belts, hoses, brakes, and things like that,” he says. 

Dealers also can protect customers from negative equity, adds Wanderon. 

He explains, “Prices of used vehicles will not stay where they are. Customers will not pay $10,000, $20,000, or even $30,000 over sticker price in the long-term. This makes vehicle depreciation programs necessary. Negative equity is going to peek its ugly head out the window. This will leave a solid number of customers in a bad position.”

Dealers can assist with depreciation programs that cover accidents, total losses, or trade ins. “Most of us offer all three types of programs,” he says. “These programs are a must in my eyes. To give customers peace of mind today and when they come back in.”

Alan Pouyat, regional vice president for Portfolio Reinsurance, says dealers also need to offer these programs for new cars. “How many dealers are selling new cars at or over sticker price?” he asks. “We are going to see the same scenario with new cars.”

Certified Pre-Owned Programs 

As more car buyers turn to used vehicles because of tightened new vehicle inventories, they also look for certified pre-owned (CPO) programs. Dealers can benefit from starting their own CPO programs, Pouyat stresses.

Factory CPOs tie dealers to one brand. But internal programs let dealers certify all brands on their used car lots. Dealers also benefit from additional gross, faster turn, and more advances from lenders. “A lot of lenders will advance more on certified used vehicles than noncertified vehicles,” Pouyat says. “When dealers do their own certified programs, they control the reconditioning process. The factory has specific recon protocols for dealers to follow. When you do your own, you set the protocols for how you will recon vehicles, the parts you use, etc.”

Certification programs also provide dealers with a competitive advantage. “They either have an advantage over dealers in their market or they compete with dealers that already offer certified programs,” Pouyat says. “If they are a Ford dealer with a Honda on their lot, the customer might say ‘I’m looking at a certified Honda down the street.’ If they have their own certification program, they can compete with that dealer down the street.”

Wanderon stresses CPOs set dealerships apart. “Anything that sets you apart from the competition is vital,” he says. “Whether that’s a CPO or a multitude of ancillary products, a prepaid maintenance product, you need something to offer that makes your dealership stand out and helps you upsell more business.”

CPO increased in importance in 2021 and that will continue in 2022, adds McCarthy. “A CPO program helps dealers set themselves apart. There is a perception of increased value and increased confidence to the consumer,” he says. “They know the vehicle has been through a rigorous inspection process and that affords the F&I community to sell products that sit on top of the underlying powertrain coverage. When dealerships have internal CPO programs, they can mirror or better the manufacturer’s coverage across inventory, not just what is on the franchise sign. These products will be important moving forward. They lead to consumer confidence, something that’s needed when prices are at an all-time high.”

CPO programs also will increase in importance as heightened demand for vehicles cools, adds McCarthy. Right now, whoever has the car attracts the customer. “In normal times, you need to separate yourself from the competition because price alone won’t do that. Inventory won’t do it. You have to give a reason for customers to do business with you versus somebody else,” he says. 

Why Dealers Only Use Factory CPOs

There are many reasons that dealerships only implement OEM CPO programs, McCarthy notes. “It starts with pressure from the factory,” he says. “The factory pushes the factory program. It’s very profitable for the factory and they tie incentives to these programs. Also, the factory programs work.”

Dealers also don’t tackle CPOs for the other brands because they are comfortable with the brand they sell, adds Wanderon. “While we can’t match factory bonuses, we can offer profit sharing and products that are stronger than the manufacturers. But it’s hard to break away from your comfort zone,” he says. “But we have found breaking away from your comfort zone makes the most dollars.”

Dealers can and should create their own certification programs, adds Pouyat. The common certification program on the market is a seven year/100 powertrain, and that’s from the original in-service date of the vehicle. “The real exposure when you self-insure or reinsure is two years, 40,000 miles. Most makes today have a five-year, 60,000-mile powertrain,” he says. “So, if you install a program equal to most factory programs, which is a seven year/100, your exposure is two years, powertrain only. Many people trade out or hit the mileage before that.”

On a reinsurance program, there are no claims until the five-year, 60,000-mile program expires. “Then it’s powertrain only in most cases,” Pouyat says. 

Wanderon adds, “The more products and reserves we can get into the reinsurance company, the more access to cash you will have. You have access to your unearned reserves. Not only do certified products earn out quickly, but you’ve got the option to tap unearned reserve quicker.”

Add in Digital Retailing

Digital retailing grew in popularity during the pandemic, and Lunnon says he expects that to continue in 2022. Customers like being able to calculate payments online and know what they want before they come into the store, he says.

“We have customers who have done the process from A-to-Z online,” Lunnon says. “Having transparency sells people. It shortens menu presentation times, too.”

Stores are embracing digital retailing and are adding document specialists who input all the documents. Salespeople in these stores now only explain the F&I products. “F&I products are shooting through the roof, and I believe it’s because they are doing a better job of product presentation,” he says. 

Wanderon adds “transparency is the key to digital success” and suggests dealers assess their website to see how transparent they are.

McCarthy reports one of the most neglected areas of dealership websites is the F&I landing page. “Many of these pages are just payment calculators and credit applications,” he says. “Finance departments should add product content. Cox found 65% of customers who learn about these products online before completing a transaction purchase F&I products, whether VSC, gap or ancillary products.”

Product videos work best to convey information, he adds. Most F&I providers have video they will share with dealerships. “The big lesson from the pandemic is that increased transparency leads to increased profit,” he says. “When we make more information available, it increases profitability as customers become more aware of the benefits of these products.”

2022 presents plenty of opportunity for dealerships and providers who offer the right selection of F&I products. A focus on EVs, any mile, any year programs, vehicle depreciation options, CPO programs are all part of a successful F&I menu for 2022.

Ronnie Wendt is an editor at Providers & Administrators magazine.