Ally All Ears Podcast | How F&I is driving dealership profits

Matt Broome, senior director of product development at Ally Financial, discusses how inventory shortages are impacting F&I product sales and some tips for keeping sales going strong.

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Jackie Charniga: Hi, everyone. This is Jackie Charniga with Automotive News and welcome to the All Ears podcast. This podcast is sponsored by Ally Financial and is produced by the Automotive News Content Studio. In each episode, we delve into topics important to executives in automotive retailing. We tap Ally’s leaders to share their expertise and knowledge to help dealers and others successfully navigate transformational changes in the industry. Today we catch up with Matt Broome, senior director of product development at Ally Financial, to discuss how inventory shortages are impacting F&I product sales and some tips for keeping sales going strong. Hi Matt. Thank you so much for taking the time.

Matt Broome: Thanks Jackie. Pleasure to be here.

Jackie Charniga: Let’s get started.

Jackie Charniga: Inventories remain limited for many vehicles, with some OEMs asking consumers to preorder popular models which sell out before they get to the dealership. That means customers are generally paying premium prices for their new cars. How might that affect car buyers view of and interest in F&I products from vehicle service contracts to protection products, tire and wheel dent or paint. Tell us, what are you hearing from dealers?

Matt Broome: So, while traditionally, those are seen as headwinds from my role within the products world, I would say it only adds to the relevance of products. So, the trends that you are citing, if anything, are driving up the price of vehicles and making the automotive retail experience even more material for consumers, whether those are cash buyers or buyers that are financing an increased financed rate. As that happens, the idea of actually protecting that investment becomes all the more relevant, whether it’s through things like vehicle service contract, gap contracts or all the other ancillary products that we do have. The idea of what type of product you would select within that context is between the dealer and the consumer and should be based on the individual risk appetite. But I also think it’s important that while the automotive retail experience is becoming more expensive, driving the idea of needing protection products, it’s also important to focus on what that trend means in the long term. As we sit today in an environment with higher prices, eventually those things start to come down to earth a bit. And if you think about the impact that has on the consumer, it potentially reduces the equity that a consumer has in their vehicle so a year or two or even three down the road. What that means for the dealer is potentially an elongated trade cycle. And so, I think dealers need to start thinking about what it means if that consumer’s going to hold onto their vehicle longer, which, again, I think magnifies the importance of protection products. Historically, we’ve seen vehicle service contracts or any of the other type of answer contracts we have as being a great way to steer a consumer back to the dealership, whether it’s through things like deductibles or just routine service that has to be provided as part of pre-paid means product. Using protection products as a way to get integrated into the life cycle or the ownership cycle of the vehicle is a great way to capture incremental revenue and really drive sort of a relationship between the consumer and the dealer during that elongated trade cycle as well.

Jackie Charniga: And to contextualize that sort of sticker shock, the average price of a new vehicle has climbed above $48,000. And that often means that a buyer with a substantial down payment might be financing more than 80 percent of that vehicle cost. So, as we talk about the importance of F&I products when your vehicle is even more expensive, what are the potential issues dealership F&I departments could face in selling those products, especially gap?

Matt Broome: I think gap becomes an extremely relevant product in today’s environment. So as consumers have to spend more on their vehicle and are potentially stressing their economic circumstance through buying a product or buying a car with an increased LTV, they’re putting more money at risk. And so, gap becomes more important in terms of their overall financial context. From my standpoint, within the products world, it’s easy to point out the increased exposure that gap brings to us or to any insurer or potentially a dealer through increased prices. But also, the increase in LTVs and the increase in finance rate is only going to elongate and extend that gap exposure. Now the reason I bring that up is today a significant portion of our dealers participate in some form of financial structure. So, this, the transaction of a gap contract isn’t just independent between the dealer and Ally.

There is some sort of back end profit sharing or volume bonuses or sometimes even reinsurance. So I think it’s important for dealers to recognize that we’re in an environment where the gap product is extremely relevant and can be used as a really key portion of how a consumer protects that purchase, but also could have some downstream impacts just given those dynamics, the LTV, the finance rate and the vehicle purchase price on the actual exposure that flows into the reinsurance with the retro type structure. And so, I think it’s important for dealers to really recognize what premium is being charged to make sure that they’re working with providers that are charging appropriate amounts of premium. This is not an environment where the cheapest product is always going to win out because it could have some potential downstream impacts. Also, whereas service contracts or maintenance contracts, it’s a bit easier to control the overall performance upfront because we have a bit more at our disposal when it comes to pricing, things like deductible structures, time mileage structures, gap is a little bit more black and white. It’s a low frequency product, which means that our ability to control what the eventual loss performance is going to look like is limited, which makes pricing all the more important. It also means that working with a provider that has strong claims processes like subrogation processes is really important. And one other thing I’ll point out, just based on really the last question, we are starting to see states adopt the Gap Plus Product, which does provide an incentive. If there is a gap claim to go back to a selling dealer provides a cash benefit. If you go back to your selling dealer that you can put towards a vehicle as those get adopted, given some of the dynamics that we’re talking about, you can see the Gap Plus Product becoming all the more relevant and important to a dealer’s financial suite of products.

Jackie Charniga: And that idea really mirrors what you said earlier about F&I product sales, ultimately driving customers back to the dealership. So, we all know that F&I is a key profit center for dealerships, but what are some tips you might have for dealers who want to make sure their F&I department is running on all cylinders at this time?

Matt Broome: So, the two previous questions really highlighted the importance of F&I products in today’s environment. Really, what I want to focus on now is just how important the actual process is in terms of communicating that value to consumers. I think we can both agree that there is significant value in having protection products in today’s current environment, but consumers need to understand that. So, it’s not often that consumers buy a vehicle and so they’re not exposed continuously to the idea of protection products. They have to sort of relearn each time they go into a dealership. And so, it’s important for dealers to make sure that the F&I product presentation is integrated into the entirety of the process and trying to move away from just this circumstance where the first time the consumer hears about F&I products is in the F&I box. I think it’s important for the entire process to tied together. So, the sales manager, which is having conversations with the consumer to help select the vehicle, should start asking what are the potential uses of the vehicle? How many miles expect to drive in a given year? How do they use the vehicle, whether it’s just commuting to and from work or potentially become part of their actual business? Are they going to work out of that vehicle? All those questions can be turned over to the F&I manager to make the product presentation all the more relevant. It also helps deal with what I would think is we can all agree, sort of a compressed amount of time that we have in the F&I box today. Consumers want to have transactions happen a bit quicker. And so, as we tie the F&I process broader within that sales process, it makes the life of the F&I manager all the easier. With that being said, though, I think the conventional wisdom still stands true. One of the best ways to really promote a strong process is to have a menu presentation and to actually go through the menu and provide offers to consumers on different products that they can select. Again, it’s not a common product that consumers are buying, but the automotive process is not done frequently by consumers.

And so, making sure that we do drive sort of that discipline within a dealership is important to making sure that consumers execute on contracts. The other thing I’ll mention is we’re working in an environment where consumers are becoming more digital and the way we define digital is different between every dealer. Some dealers are finding ways to execute a contract, or an actual vehicle purchase online, whereas folks are, in some instances, are just using digital context as a way to steer customers into their dealership. I think it’s really important for dealers to understand exactly how they’re consumers at their particular dealership are interacting with types of digital means and understanding where products could potentially rest within that process. So, a good example, we’ve seen dealers who are arranging the purchase of vehicles online using the delivery process of the vehicle if it’s at the dealership or even driving to the home as a way to introduce F&I products. So, it’s not just, they didn’t select and F&I product at the point where they’re selecting the vehicle but also taking it to delivery as well. I think that added rep and the added opportunity to introduce products is important. And as we deal with more of a digital consumers who again doesn’t have as much of a background in F&I products, making sure that we’re finding the right time to introduce the product is really, really important. The other thing I’ll just mention on the digital side of things, just something we’ve learned is simplicity matters. You don’t want to throw out six products. I think we need to be a bit more targeted and a bit simpler in terms of how we select them, because we’ve seen consumers just get confused in that process. And so, keeping it simple and a bit more targeted and what would be the most relevant product for that consumer is really important in that context.

Jackie Charniga: And finally, I think our listeners would love to hear some areas that dealerships could look at or possibly fine tune in response to everything that’s going on in the marketplace from rising interest rates, higher vehicle prices, and as you mentioned earlier, a shift to more digital transactions.

Matt Broome: I think it all ties together and really understanding what that entirety of that customer journey ends up looking like. So, taking a healthy look at when a consumer does elect to buy a vehicle online, what does the delivery actually look like? Do we expect the consumer to come in and test drive the vehicle that they selected online, or are they just walking off the lot with the vehicle? Because I think the way that transaction happens will dictate how F&I products should be presented to maximize their potential benefit, both to the dealer and to the consumer. Also making sure, again, that everything is tied together. We want to create a seamless of a process for the consumer when they go into the dealership. Consumers, they’re doing more research online so they’re coming in with a bit more of an expectation that’s sort of baked in terms of what they’re going to eventually purchase. Recognizing that there’s an expectation for a more seamless sort of quicker process means we need to be more efficient with how we deal with that consumer, making sure that the sales manager is asking questions ahead of time to start to understand where products could potentially fit and becomes really, really important because the F&I manager is not going to have just 20 minutes to do a full interview. We need to make sure we’re asking some of those questions ahead of time. And then going back to a previous point, when it comes to this elongated trade cycle, making sure that the service department is running on all cylinders is super important because consumers do maintain or hold their vehicle longer, only to service it more. And so, we want to make sure that consumers are steering back to their selling dealer to make sure that the dealership is capturing that potential opportunity for revenue, but also strengthening the relationship that they have with that consumer and promoting routine return consumers going forward.

Jackie Charniga: Alright. And that’s it for this episode of the All Ears podcast. A big thank you to Matt for providing those insights. On behalf of Ally and the Automotive News Content Studio. Thanks for listening.

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