Expect F&I Adjustments

Obviously I attend the NADA Convention each year in hopes of adding members to our 20 Groups and acquiring additional business for NCM. But as it turns out, that is only a side benefit.

The real value I receive is from speaking with dealers and their managers to find out what's on their minds and to renew relationships.

I, too, share the positive attitude of most of the convention attendees.

Economic factors are positive, it's an election year, incentives remain high, and the used-vehicle market appears to be firming up again. In my opinion, we will see a 16.8 million-17 million unit new-vehicle market or, essentially, 2003 all over again. If you spotted deficient areas in your operation during 2003, you now have a chance to correct those.

There was much conversation and concern at the convention about dealerships' finance and insurance operations, both from a compliance standpoint and because some TV news shows and politicians have picked F&I income as an area of focus.

As we know, there is so much competitive pressure on front-end margins, any thought of eroding F&I income could potentially devastate dealerships' variable operations.

Just how important is F&I income to our operations and what percentage of our total variable gross comes from the F&I department? I reviewed 2002-2003 client information to answer that.

The following, by segment, is the average NCM client's net F&I pre-compensation, as a percentage of the total gross of the new- and used-vehicle departments:

Note our dependence on F&I as an income source has increased in the new-vehicle department and is higher for import's used-vehicle department than its new-vehicle department. The question then becomes clear: As an industry, what steps must we take to reduce our large dependence on F&I?

First, it is essential we find a way to stop the margin erosion. We must ensure we are working each deal to maximize our front-end gross profit.

Then, we must explore all gross profit options available from the seemingly “unlimited” aftermarket industry.

I strongly support menu selling in the F&I transactions. Not only does this reduce a dependence on reserve for gross, it allows us the opportunity to sell more products. Not only is the rate stigma eliminated, our chances for chargebacks are reduced.

If we can't increase our front-end gross profit, the only remaining option is to reduce our cost/overhead, where we can become profitable on the gross profit we are able to obtain.

I don't want to suggest the sky is falling on F&I. But the increased focus by the media and state legislatures will force change as it relates to reserve. We have already seen this with many lenders capping the rate spread. I applaud the dealers who've taken action in their dealerships to limit the financing rate spread and focus on selling product and aftermarket.

I received a call this week from a great dealer. We discussed the issues I'm raising here. As we ended the conversation, he reminded me how adaptive and innovative our industry is.

“When we've hit a bump in the road, we've always been able to correct our course and continue on,” he told me.

So it is and will be with F&I.

Hopefully the real benefit of this adjustment to our business will be our front-end gross profit.

Good selling!

Tony Noland ([email protected]) is the president and CEO of NCM Associates Inc.