Andrew Calderon is featured in a March 2016 Autonews.com article regarding the effects of leasing on Automotive Dealerships, and how to make the most of it!
To keep F&I profits intact as leasing rises, some F&I managers sell protection products on vehicle parts the manufacturer's warranty doesn't cover. Those products include
• Maintenance plans for oil changes and tire rotations
• Paint protection against environmental damage, dents and dings
• Interior protection against rips and stains
• Tire-and-wheel protection
March 14, 2016 - 12:01 am ETMore consumers are leasing vehicles, and that could mean a drain on profits in F&I offices. But it doesn't have to be that way.
"Leasing can have either a negative or a positive impact on F&I profitability depending on the approach a dealer takes," said Marie Knight, vice president of strategic relationships at F&I product provider Zurich North America. "The important thing is to offer products that are tailored to lease customers."
Take Toyota of Butte in Montana. More than a third of the dealership's finance deals are leases, yet its F&I profit is rising. "Leasing is a huge benefit to F&I," said Andrew Calderon, finance manager. "It just depends on how you look at it."
Calderon: "A huge benefit"
If the customer buys the vehicle at lease end via a new loan, "that's my biggest payer of any customer who walks through the door," he said.
For dealers, taking a positive, long-term approach to lease customers may become vital. Edmunds.com analysts estimate leasing will climb 1 percentage point to account for 30 percent of U.S. new-car sales this year, compared with 22 percent five years ago.
To make money on lease deals, "the F&I manager has to take the time to explain what the manufacturer's warranty does and doesn't cover," Knight said. "There are products that address every one of those areas that could be offered to lease customers."
Lease deals could dent F&I profits because for most F&I managers, the two best-selling add-ons, extended service contracts and guaranteed asset protection (GAP), are typically off the table, says Dave Duncan, president of Safe-Guard Products International in Atlanta.
A leased vehicle is often protected by the manufacturer's warranty for the life of lease, so the customer rarely sees value in buying an extended service contract, which has a wide profit margin. And nearly all manufacturers include GAP as part of the lease, Duncan said.
J.D. Power data released in November show that just 18 percent of premium customers buy an extended warranty when it's offered compared with 30 percent of nonpremium customers. That broad disparity most likely is because "leasing is more common among premium customers than nonpremium," J.D. Power's report said.
Still, leasing is rising across all makes. As a percentage of new-vehicle financing, leasing reached an all-time high of 34 percent in the fourth quarter last year; in the fourth quarter of 2011, it was 23 percent, according to Experian Automotive's "State of the Automotive Finance Market Fourth Quarter 2015" report.
So far, as leasing has grown, F&I managers have kept profits intact, likely helped by robust growth in new-car sales industrywide.
Last year through November, F&I product sales accounted for about 16 percent of a new-vehicle sales department's gross profit, up 2 percent vs. the first 11 months of 2010, says Steven Szakaly, chief economist for the National Automobile Dealers Association. Financing profits represented 23 percent of new-vehicle gross profit through November last year vs. 18 percent in the 2010 period.
U.S. light-vehicle sales rose 51 percent from 2010 to 2015, according to the Automotive News Data Center.
"Leasing has been climbing in this [five-year] time period, and while it has moved the needle a little bit, it hasn't moved it much in terms of [F&I product sales] and financing profits," Szakaly said.
"That 10 percent rise in lease penetration per year over three years [could have cost dealers] a $100 to $250 per-car loss in F&I profits."
president, Safe-Guard Products InternationalBut if car sales slow and leasing continues to grow, F&I managers ill-prepared to make the most of lease deals could see F&I profitability decline, said Safe-Guard's Duncan.
Duncan said his company began getting more requests for training to sell F&I products to lease customers about three years ago, as the lease penetration rate was rising about 10 percent year over year at the average mass-market dealership.
"That 10 percent rise in lease penetration per year over three years" could have cost dealers "a $100 to $250 per-car loss in F&I profits" over that time frame, Duncan said.
A new mindset
The ones who win are those who change their mindset about lease customers and change the mix of products presented to them, he said.
At Toyota of Butte, leasing accounts for about 35 percent of financed deals, up from 20 percent two years ago. In the past two years, the store's average F&I revenue per vehicle retailed has increased from $800 to $1,200.
F&I Manager Calderon faithfully follows "the 300 percent rule" to ensure success: "Offer 100 percent of products, 100 percent of the time to 100 percent of customers."
For example, if a customer on a three-year lease plans to drive 15,000 miles a year, he or she may be receptive to an extended service contract because Toyota's warranty covers just 3 years/36,000 miles. A service contract wrapped around the manufacturer's warranty in this case would cost about $1,000. "They see the value of it, and I'll take a discount to sell it," he said.
Calderon's best-selling product to lease customers is excess wear and use protection, which costs about $800. Around 95 percent of lease customers buy it.
Many F&I products allow dealerships a substantial retail margin, Duncan said. One high-profit product designed for lease customers is Safe-Guard's Precision Care. It covers belts, hoses, lightbulbs, wiper blades and one set of brake pads. Precision Care costs dealers $300 to $450 but retails for $699. About a quarter of U.S. dealers offer it. Said Duncan: "As leasing grows, more [dealers] are wanting it."
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