Industry Trends for 2017

Last year will be remembered for political and social unrest at home and abroad, including a highly contentious presidential election cycle that ended with a highly divisive outcome. After two years of 17 million-unit sales, steady job growth, and an unabashedly pro-business president in the White House, F&I product providers should be optimistic.

But it is unclear how the Trump administration will affect the economy and the automotive market, and forecasters are warning that the pent-up demand from the Great Recession has been spent. To learn how executives and thought leaders in the P&A segment are feeling about the year ahead, we reached out with a series of questions designed to uncover their hopes and fears for 2017 as well as the stories they’ll be tracking for the next 12 months.

The Economy

Dylan Doran, owner of Western Fidelity Services, is cautiously optimistic. “Needless to say, speculation over the 2017 economy is a big question for all of us,” he said, noting that the automotive market in general “doesn’t always respond well to change.”

Doran said interest rates, in particular, will be a driving factor one way or the other. The past five years have seen incredibly low rates across the board, paired with fairly loose lending, which encouraged consumers to buy. Doran doesn’t see any major growth in the coming year, but he said a flat year wouldn’t necessarily be out of the question.

“We live in exciting times,” said Jim Maxim Jr., president of MaximTrak Technologies. Maxim sees movement in parts of the economy that have been stalled in the previous few years, which is encouraging, but he also worries that the growth might come with a shift to more overseas manufacturing. That would have an impact on the unemployment index and, in turn, put the squeeze on consumer spending. “Suffice it to say, we may see a transitional year where businesses must find their footing.”

Greg Petrowski, senior vice president of GPW and Associates Inc., agreed. Before the election, he noted, many economists were forecasting a slight slowdown in overall economic growth for 2017. Petrowski believes that, if the proposed tax cuts that Donald Trump is pushing for are enacted within the year, that could be a major boost. However, he noted, the automotive market might not benefit either way.

“We are more likely to see continued contraction in new-car sales as compared to 2016 as the growth cycle comes to an end,” Petrowski said, listing other factors — such as outstretched loan terms, rising interest rates and a weakening used car market — that will likely have a greater impact on the industry than any tax cuts.

For Glen Tuscan, president of Dealer Commitment Services Inc. and owner and CEO of Triple Protection Auto Care Inc. (Tripac), rising interest rates in the coming months are practically a given. He believes that will affect not just vehicle sales but F&I production as well.

“Slight increases will stimulate short-term sales growth,” Tuscan said. “But they may have negative long-term effects on the consumer.”

John Braganini, principal of Great Lakes Companies, agreed with Tuscan, saying that he foresees a “slight reduction” in GDP growth and new-car sales. He does note that the incoming president could have a major impact either way, however, so it is a matter of waiting to see which policies are enacted and how they ultimately play out.

David Trinder, CEO of F&I Administration Solutions, sees the coming years in a similar light.

“Trump’s election has put the stock market on a tear, and if he fulfills his promises of removing regulation and increasing US manufacturing jobs, some of that excitement may well be justified,” Trinder said. “It remains to be seen whether he can really deliver on these promises though, and while the coming year may well keep the momentum, future years could pay a high price. We are living in interesting times.”

“The automotive industry heads into 2017 with great momentum following a strong November. I expect to see continued tailwinds from low gas prices, strong employment, and less stringent lending guides,” said Kristen Gruber, president of Dealers Assurance Co. She does note that interest rates can have an impact on the market — as can the tapering off of the aforementioned pent-up demand — but she believes the industry has a very healthy outlook going into the next 12 months.

Jim Huntzinger, chief investment officer for BOK Financial, is another executive with high hopes for the coming year. He is looking for “unspectacular” gains in the U.S. gross domestic product (GDP) this year. He believes the incoming administration will help boost that growth with its implementation of the promised tax cuts and trade, regulatory and spending programs.

“The election of Donald Trump has improved both business and consumer confidence,” Huntzinger said. “This could lead to higher economic growth in 2017.” Even a renegotiation of the North American Free Trade Agreement would, Huntzinger believes, be a good thing, since he believes it could be to the benefit of the United States as well as Canada and Mexico.

“Hopefully, growth can be steady and faster-paced with the new administration — if Trump sticks to the policies he campaigned on, cutting taxes and softening regulation,” said Justin Jones, vice president of Coffeen Management Co.

Jones noted that he believes growth will happen at the same pace of the last few years: slow and steady. He does note, however, that the oil and gas markets, along with agriculture, could be the exception to that rule. States and regions that rely on those industries for jobs and buying power could quickly be filled with depressed markets, even in an upswing.

The Industry

Turning their attention to the automotive industry, our experts found a healthy mix of ongoing trends and new and upcoming developments.

“I see slowing sales, lease incentives, and longer loan terms,” Braganini said. “In F&I, I see an increased focus on compliance and more effective sales processes.”

Rick Roesel, director of F&I operations for Brown and Brown of Kentucky Inc., doesn’t necessarily see a change in the current leasing rates, but he does anticipate that “even the most stubborn finance managers will come to realize you can’t give leases a free pass when it comes to income development.” He sees more F&I product providers starting to offer programs specifically geared toward lessees, which in turn will put pressure on F&I managers to sharpen their skills in that area.

However, Brent Griggs, president and CEO of Portfolio, believes leasing could start to see a decline from the historically high levels it has been at for the past 12 to 18 months. For the F&I space in particular, he said, this will be a good thing.

“This will have a positive impact on the sale of many F&I products, enhancing F&I income for the dealership,” Griggs said, predicting there will be a shift away from simply selling on price. He believes dealers and F&I managers will begin to focus on creating quality experiences that encourage customers to want to do business with them. “I feel strongly that agents can play a critical role in helping our dealer partners maximize efficiency in their stores by emphasizing training.”

“Consumers continue to push for greater speed and transparency,” agreed Joel Kansanback, president of Automotive Development Group. He sees both dealers and manufacturers embracing the one-person, one-process approach, having salespeople trained to do both their own jobs and F&I, so consumers have a seamless experience from the time they walk in the door until they drive off the lot with their brand-new car or truck.

“It will be interesting to see if this accelerates and becomes an actual trend or if, in the face of slower sales, dealers will slow down their desire to take on such a risky proposition,” Kansanback added.

“More and more dealers are moving the F&I process further upstream from the F&I office,” said Brian Reed, president and CEO of F&I Express. This is largely in response to demand from car buyers, he added, noting they are educating themselves about every component of the sales and F&I process before they set foot in the dealership, and they expect to be rewarded with a speedy transaction.

Doran agreed, adding that, if car buyers are going online, dealers need to continue to meet them there before and after the sale, promoting a more seamless online-to-instore experience. In this scenario, he added, the best deal might not always win. “I see dealers working very hard to give the customer a quality experience so the transaction is not just about the lowest price.”

Petrowski said GAP coverage is an F&I product worth watching carefully over the next 12 months. “Recent loss trends for GAP indicate continued deterioration of underwriting results,” he said, predicting an increase in premium rates in 2017.

Gruber said she will be tracking the factors driving those GAP losses, including used-car values and loan-to-value ratios. “I think we’ll continue to see declines in used-car values as the supply of off-lease vehicles increases, putting additional pressure on GAP loss ratios that are already on the rise due to increased repair costs and higher rates of total losses.”

Gruber added that she is already seeing more negative equity being rolled into new-car loans, which impacts LTVs even further. That trend has been gaining steam, and Gruber doesn’t believe it will reverse anytime soon — and certainly not as soon as this year.

Michael Tuno, president of World Class Dealer Services Inc., noted that, for F&I, new and emerging technologies always bear scrutiny. He believes an increasingly connected world will continue to put pressure on dealers and F&I providers to provide faster, better, cheaper and more convenient processes.

“Menu selling will continue to evolve to remain a ‘customized’ menu process designed specifically for each customer’s own driving needs,” Tuno said.

Jones said one of the major trends that all F&I providers, as well as dealers and agents, need to pay close attention to is the increased emphasis on profits in the F&I department. As the pressure on front-end gross continues to increase, he predicted, manufacturers will continue to produce more vehicles than general demand can support.

“We will see dealers try to generate more income to support their day-to-day operations from the F&I department,” Jones said.

F&I Products

So what products, in particular, should dealers, agents, and providers being paying close attention to in 2017, especially given the increasing importance they will likely play in the overall financial health of the dealership?

Considering the prominence of leasing, Doran said products designed for those customers will continue to be a major influence on the F&I industry. He predicted that solid gains in appearance protection and bundled products will continue into the next year.

“Our dealers are having success with listing them in their menus as a bundle with the ability to offer them a la carte,” Doran said, adding he is seeing greater success among F&I producers who use custom-tailored lease presentations than those who try to make the finance menu do double duty. In particular, he sees continuing growth for windshield protection, paintless dent removal and tire-and-wheel protection products in 2017.

Tuno agreed that leasing is going to continue to drive sales in the F&I office, noting that, while the numbers of new leases might fluctuate, leasing is still a major part in solving the affordability factor for consumers.

“We believe VSCs — especially for certified pre-owned units — and GAP will continue to be strong sellers,” said Griggs, who also sees maintenance contracts continuing to do well in the coming months.

Trinder added that he has discussed with providers some interesting products that are slotted to reach dealers in 2017. “Administrators are looking for ways to fill gaps that the traditional products are not filling particularly well. At the same time, the commitment to the traditional products continues.”

Maxim pointed out that, in combination with the trend toward extended ownership cycles, the value of VSC plans will only continue to increase. Consumers who plan to keep their vehicles longer should be more inclined to purchase products designed to protect their investment and keep it working in top condition for as long as they own it.

Prepaid maintenance, in particular, will likely see an increased push in the F&I office, Roesel said. “Factories are beating dealers over the head over customer retention, and a competitively priced maintenance program that makes sense for the customer is a great way to do it.”

“In addition to the traditional VSC and GAP offering, I believe that combo products will continue to gain traction,” noted Kansanback. He said the practice of offering bundles has reached a point where they are broadly accepted by both F&I managers and consumers alike. He believes they demonstrate value and consumers appreciate the ability to customize them to suit their individual needs.

Gruber agreed, adding, “I think we will continue to see increasing penetrations of service contracts and GAP, driven by higher repair costs and the inability of many customers to budget for repair or replacement.” Those rising costs are driven, in part, by the increasing amount of technology in new vehicles, which drives up the price of repairs when there is a problem. To counter that, Gruber believes more of those high-tech electronic parts will be covered in the VSCs on both new and used cars, making them more attractive to consumers.

F&I Technology

Speaking of technology, our experts predict more of the same kind of gradual acceptance that the industry has experienced over the past several years, rather than anything earth-shattering.

“Tablet sales presentations and the initial efforts to move F&I online will be present,” said Braganini. He pointed out that one area that could see noticeable changes is in how product providers and dealers deal with an increasing demand for more information about the products before a consumer gets into the finance office.

“I think we’re going to see more salespeople using tablets throughout the sales process, beginning with the presentation of vehicle information and F&I product benefits all the way through loan closing. And the next step after that will be for customers to buy a car without leaving their home,” Gruber said.

Gruber sees tools evolving to make this kind of process not just possible, but also comfortable and natural to consumers. Such a sales process will require a heavy emphasis on transparency from dealers when it comes to F&I pricing, she added, but that technology-savvy consumers who are used to purchasing everything else online will continue to press for the changes — whether or not dealers and providers are inclined to deliver them.

Jones agreed that, while there might not be any new technologies that shake up the entire industry, the rate of adoption will likely pick up steam in 2017. He points out that millennials’ share of the market is still growing, and those customers grew up in the Digital Age, when all information, about all products, was at the tip of their fingers in an instant.

That generation is also becoming a larger part of the workforce — including in dealerships, where they are driving the push for adoption of technologies that make the sales process faster and more consumer-friendly. As more of them join the sales and F&I teams, Jones said, the resistance to using the internet to sell F&I products will likely start to break down.

“This trend should continue throughout 2017 and beyond as more and more Generation X and millennials enter the car-buying market,” Petrowski said. He sees advances in F&I sales tools as playing a major role in the evolution of the industry, including increasingly intuitive and user-friendly menus, digital presentation tools and econtracting platforms.

“The front end will seamlessly link with the back end, and the winners will be those who can distil the complex to simple, yet sophisticated customer experiences,” Maxim said, predicting the push toward a fluid, seamless process will be followed by a push for more customer intelligence and predictive technology. He believes these types of technologies, in particular, will be useful for dealers who want to create competitive advantages by providing a buying experience that is custom-tailored to every individual consumer, no matter where and when they want to purchase.

For F&I, in particular, Maxim added, this kind of information-driven process — in the form of everything from tablets to virtual and augmented reality — could have a massive impact. “The buying process will become a fluid workflow, while the back end will incorporate new data variables to let the customer have a clearer picture of the impact of coverage choices.”

Doran also believes that data is going to be a focal point in the automotive industry in 2017 and beyond.

“Artificial intelligence that uses metrics from big data that helps customize and streamline your presentation to the individual buyer sitting in front of you,” Doran said.

It might be hard to imagine, Doran added, but it’s all part of the ongoing evolution of F&I: Trainers and top producers all agree that every product should be offered to every customer. Highly personalized and customized bundles driven by AI data might actually prove to be more effective once the technology has evolved enough to deliver them.

Reed concurred, noting that the greatest changes the F&I office will see in 2017 are more likely to happen outside the box. He believes putting more information about products online will generate more interest and, ultimately, lead to more sales to better-informed car buyers who fully grasp the value of their F&I managers’ offerings.

Rules and Regulations

During his campaign, Donald Trump promised that no regulation would be held sacred if he were elected. We asked our experts whether they believe regulators have anything to fear from the Trump administration.

“There is a host of areas in which I would expect regulations to be dropped or lessened or a hold put on pending rules,” Huntzinger said. “The changes will most likely cover all government agencies. The challenge is knowing which rules can be changed quickly and which will have to go through the legislative process.”

“With the new Trump administration, the general outlook is to reduce the amount of regulation going forward to a more business-friendly approach to government oversight. It is still unclear as to how that might develop,” said attorney and CPA David Kaseff, COO of MarksNelson LLC.

Attorney Aaron Lunt, who serves as assistant general counsel and head of regulatory affairs for The Warranty Group/Virginia Surety Company, agreed, noting that he believes the incoming administration, paired with a Republican-led Congress, will foster a pro-business environment with fewer regulations.

“One key area where I expect change is in the CFPB, as President Trump and Congressional Republicans have a strong appetite to revisit the Dodd-Frank act and curb regulatory overreach,” Lunt said. “If Dodd-Frank is revisited in whole or part, this creates an industry opportunity to influence change.”

Roesel agreed that, working together, the White House and Congress will take some of the bite out of the Consumer Financial Protection Bureau. He listed be the agency’s ability to subjectively sue lenders at their discretion as a possible target.

“The election of Donald Trump shall have a positive impact on our industry as it relates to compliance and regulatory issues,” Tuscan said, adding that, while he hopes that Trump remains true to his campaign promises to reduce regulations and make “the self-governed CFPB obsolete and a shell of its former self,” he is not concerned such actions would put car buyers at risk. He believes state attorneys general and insurance commissioners, along with upstanding lending institutions, will step up to protect consumers from unscrupulous practices.

“If Trump follows through on his campaign promises, I expect to see attempts to repeal Dodd-Frank and change the structure of the CFPB, effectively eroding its power,” Gruber said. She said it would be difficult to completely eliminate the CFPB altogether, but that it could conceivably be modified by Congress to replace the independent funding by the Federal Reserve. That would convert the CFPB into a Congressional commission with additional layers of oversight, including a system of checks and balances.

Another way Gruber noted the agency could be altered is by changing the single-director leadership structure to a bipartisan, five-person committee. Either of those changes in structure could result in a significant reduction in its ability to regulate the automotive industry.

“While it may not be practical for Trump to immediately disassemble the CFPB, he does have the power and authority to quickly reduce enforcement actions,” Kansanback said. “I do expect that Donald Trump as president will be pro-business and will ultimately have a positive effect on the auto industry.”

However, cautions Maxim, “If there is one thing we can predict about Trump, it is that he is unpredictable.” He believes dealers and providers should continue to push to digitize their processes and create more nimble, transparent adjustments on a state-by-state basis, regardless of what the president does — or doesn’t do — to change the regulatory landscape.

The Big Picture

For the most part, our experts are optimistic about 2017. They see strong sales and positive developments on the horizon, in the automotive industry and beyond.

“In summary, times have been good!” said Doran. But no one has a crystal ball, he added, and there are a lot of factors at play that could have a major impact one way or the other on both an industrywide basis, as well as a dealership-by-dealership basis. “Now it’s time to reinvest in your staff to ensure they are prepared to meet these or any of the enviable challenges of auto retailing.”

Agency consolidation is a trend worth monitoring, Kansanback noted, because it could portend a major shift in the way dealers — particularly the largest dealer groups — select F&I products.

“No agencies are landing deals with the publics, and most agencies aren’t equipped to deal with the needs of a 20-store group,” Kansanback said. “I think we all have to get real with where our agencies fit in the landscape of the future.”

As Tuno pointed out, the domestic automotive industry doesn’t exist in a vacuum, and the people who make their living in it are affected by forces outside of our control and beyond our borders.

“The world economic outlook will continue to impact the North American automotive marketplace in terms of the ability of manufacturers to sell overseas and their dependence on the North American market to remain profitable due to the reduced health of the global economy,” Tuno said.

Tuno also noted that the traditional model of selling one vehicle for use by one or two drivers might need to start to give way to approaches that allow multiple drivers to share a vehicle, particularly in the densest urban areas. Car-sharing, Tuno said, could provide a possible way to capture revenue from a market that has yet to express an overwhelming desire to own (or finance) their own vehicle.

One thing is for sure: The industry is changing. It is evolving as new technologies, new regulations (or the reduction of current regulations), and new ways of interacting and selling all continue to put pressure on dealers, agents and providers alike.

In conclusion, Kansanback said, whatever advancements are made in the F&I office should be positive, because they will be driven by the car buyers the industry was built to serve.

“Processes and technology developments should mostly revolve around helping the dealers support serving an increasingly sophisticated consumer who wants more information and wants their information earlier in the process.”