Customer Pay vs. Warranty Work

Notable, high-volume recalls will generate a substantial amount of profitable warranty work through the fourth quarter and into 2025, according to some of the nation’s largest new-vehicle retailers, in their financial reports for the third quarter.

“The aftersales profitability that are generated from stop-sales and recalls are massive,” says Bryan DeBoer, CEO of Lithia & Driveway Motors. “It’s a positive thing for new-car dealers, primarily because it’s the catalyst to aftersales growth.”

Lithia, based in Medford, OR, reports $871.6 million in revenue for its service, body and parts category in the third quarter, up 5.1% vs. the third quarter of 2023. Year to date, that revenue is about $2.4 billion, up 2.4%.

As the new-car retail industry continues to rebound from the pandemic and the prolonged shortage of new vehicles, warranty work has tended to lag, while the more profitable customer-pay category of service work has come back more strongly.

Warranty Work Catches Up

The increase in customer-pay vs. warranty could be the result of dealer groups leaning harder into upselling higher-margin customer-pay business during the recovery vs. lower-margin warranty work, where retailers often complain about OEM reimbursement rates.

Retailers also report many customers are hanging onto their older, out-of-warranty vehicles longer, to avoid high transaction prices and high interest rates. That would result in a higher mix of customer-pay vs. warranty work, too.

Adam Chamberlain, Lithia chief operating officer, says warranty work is up 15% vs. the same quarter a year ago, while customer-pay is up 3.6%.

Lithia isn’t saying which stop-sell orders or recalls are generating the increase in warranty work, beyond attributing them to a Korean brand and a Japanese brand.  

 Big Trucks, Big Recalls

But DeBoer could be talking about recent service actions impacting the Kia Telluride and the Toyota Tundra. Karl Brauer, executive analyst, iSeeCars, tells WardsAuto that’s plausible, although he can’t say for sure.

Toyota is conducting a safety recall involving a total of 102,000 conventional gasoline-only Toyota Tundra and Lexus LX models because of “a possibility that certain machining debris may not have been cleared from the engine when it was produced.”

An announcement from Toyota Motor North America says, “For all involved vehicles, Toyota and Lexus dealers will replace the engine with a new one at no cost to customers.”

Meanwhile, Kia America issued what NHTSA calls a “park outside” recall for 462,869 Telluride SUVs, model years from 2020 to 2024, “because of a risk of fire while parked or driving.”

Luxury Brands, Too

Sonic Automotive reports third-quarter revenue of $458.8 million in its parts, service and collision repair category for its franchised, new-car segment, as opposed to its EchoPark used-only channel.

That’s an increase of 6.6% vs. the third quarter of 2023. Year-to-date revenue in the segment is $1.33 billion, up 4.2%.

A major recall for BMW of North America affects a big part of its lineup due to problems with its Integrated Brake System, which can result in a loss of power assistance and increased stopping distances.

According to NHTSA, this recall originally affected about 80,000 vehicles in the U.S. market, which was later amended to include 12,000 more.

 Fixed Ops “Fantastic”

Jeff Dyke, president of Sonic Automotive, Charlotte, NC, says the recall contributes to what should be “a really good BMW quarter” in the fourth quarter, between the warranty work and pent-up demand for vehicles once they get fixed.

He tells WardsAuto he agrees with the premise that warranty work is a tailwind for the fourth quarter, right into 2025.

“The fixed operations business is just fantastic. And of course, warranty will probably grow, in all that with BMW. But customer-pay is there, too,” Dyke says. “And so, ’25 should be fantastic.
The fourth quarter is going to be great from a fixed ops perspective, and we’ll see how things go from there.”