The script was written: The record 3.6 million off-lease vehicles set to return to the market this year was supposed to set off the long-awaited collapse in used-vehicle pricing. Prices have softened, but not to the levels or pace most market insiders predicted heading into 2017.
And instead of lease returns, bloated new-vehicle inventories have been the story. And vehicle OEMs are keeping their foot down on the incentive peddle to keep those vehicles moving off dealer lots. The more they do, the more dealers will be pressured to decrease pricing on used units.
The cycle could play right into the hands of F&I product providers like GWC Warranty, which specializes in service contracts for high-mileage vehicles. F&I and Showroom caught up with Mike Melby, the firm’s vice president of strategy and business development, on the sidelines of the National Automobile Dealers Association’s annual convention in January to get his thoughts on the pre-owned market and the opportunities and challenges facing franchised dealers playing in the high-mileage space.
F&I: We have been waiting for a major correction to hit used-car values since 2014. Is this finally the year?
Melby: Used-car prices have been on a slight decline over the last year or so, which is really good for us. Our sweet spot is five- to seven-year-old vehicles with 50,000 to 125,000 miles. We do business with thousands of independent dealerships, and if prices get too high, they can’t make a whole lot of money. And I’m sure you’ve seen that the average age of the vehicles continues to rise.
F&I: Right. It’s up to, I think, 11.4 years.
Melby: Which to me is hard to believe, right? When you drive around, how many vehicles do you see that are more than 12 years old? Not many. But that’s the number that’s out there. So we currently have coverage for up to 15 model years, and we’re considering extending that to 20 years.
F&I: Do franchised dealers see the value of a high-mileage service contract?
Melby: Absolutely. With the margin compression on the new side, dealers who have been holding on to those high-mileage trade-ins view them as a critical piece of overall profitability. And as I talk to more and more franchised dealers, it’s clear they realize that having a quality vehicle service contract available is essential, especially on those vehicles with 125,000, 150,000 and more miles. Let’s face it, if you’re buying a 125,000-mile vehicle, there’s a fair chance that you’re subprime and may not be able to afford a $4,000 transmission replacement.
F&I: And it keeps them attached to the service department.
Melby: It does, and it improves CSI. You know, a lot of dealers mistakenly think, “Well, that’s just a subprime guy buying a $10,000 vehicle.” Well, he has the same voice as the person buying that $80,000 Suburban. If he’s not happy, he’s going to be on social media and he’s going to give the dealer a bad rating. With a quality service contract in place, a dealer can turn that negative experience into a positive experience.
F&I: Talk about the union between GWC and EasyCare.
Melby: That transaction occurred in February 2013. EasyCare focuses on franchised dealers, new and lower mileage units — typically under 80,000 or so miles. GWC specializes in the higher mileage units in franchised dealerships and all mile ranges in the independent space. The merger made a lot of sense. Together we cover the entire market and we can leverage our individual strengths to deliver more to customers and dealers across the spectrum.
F&I: What sort of internal gains have you realized since the transaction?
Melby: There have been some great synergies on the sales and administrative side, and they have a lot of great resources that we’re now leveraging. It’s still evolving, but we’ve created a lot of synergies and efficiencies, which was the whole idea behind bringing the two companies together.
F&I: EasyCare also owns CoVideo, which specializes in an email video technology dealerships can use to engage offsite and online shoppers and buyers.
Melby: Yeah, that’s exciting to us. And something that we’re working on constantly is how to better leverage all these great tools that EasyCare has. Now that we’re working together, we can fully leverage each other’s strengths.
F&I: And it’s not that GWC doesn’t have a great reputation, but when you’re calling on franchised dealers, they’re likely to be familiar with the EasyCare brand, correct?
Melby: You read my mind. It gives us some additional credibility in the franchise space. A significant part of our business now comes from franchised dealers, but we’re still trying to develop more awareness in that space. We’ve had a great reception from the EasyCare agency base and that group is very established in the franchised dealer business.
When you look at the combined story of EasyCare and GWC and see that we’ve paid out a combined $3.5 billion in claims and partnered with thousands of dealers over the last three decades, it’s powerful. And as we continue to build our reputation in the franchise space, it creates a ton of opportunity.
F&I: Aside from CSI and customer loyalty, why else should a franchised dealer want to complement those high-mileage trade-ins they’re keeping with a service contract?
Melby: F&I is about production. If I’m a dealer and we’re retailing high-mileage vehicles, but we don’t have a reasonably-priced high-mileage service contract, everybody in F&I runs from those deals. Why? They can’t make any money on that deal, and it usually counts against their pay plan.
I truly believe there’s a huge need out there. Most franchised dealers are reinsured and these are vehicles you don’t necessarily want in your reinsurance, because the losses can be stout and adversely impact the performance of your entire book of business. The providers who focus more on new vehicles may have coverage for these higher mileage vehicles, but it can be astronomically expensive.
The customer is more likely to purchase a more price-competitive service contract for that 150,000-mile vehicle. Perhaps more importantly, they can get it financed.
F&I: How do you make the price competitive? Are there certain vehicles or parts you won’t cover?
Melby: We have 21 years of underwriting data, so we know how all these vehicles are going to perform.
F&I: What’s your outlook for the high-mileage segment this year?
Melby: I think it’s exciting. Lower prices give independent dealers more opportunities to buy vehicles at reasonable prices. If they’re buying them, they are selling them, and that creates more opportunities to sell service contracts. We have been waiting for the market to turn for the independent dealers and it feels like we’re going to start getting some tailwind in 2017 and beyond.
F&I: There has been some pullback by finance sources operating in the subprime space. What’s your take on that segment of auto finance?
Melby: You know, I don’t think the finance side is that gloomy. Delinquency seems to be treading water, so I don’t see a major pullback in financing. We’re not near the kind of hysteria we had back in 2008.
F&I: What’s your take on the tablet-assisted process?
Melby: We actually have an iPad app dealers can use to complete the entire transaction, which is really neat. But it’s a process that dealers have to get comfortable with. I’m guessing you’re asking because transaction times seem to be in the spotlight of late.
F&I: That’s where I was headed. We’ve seen a lot of studies in recent years that point to time spent in the dealership being a major source of customer dissatisfaction.
Melby: Well, if you’re a car buyer and someone asks, “Hey, do you think that took too long?” you’re not going to say you wish you could have been there a couple more hours, right?
F&I: Right. I think all consumers want is to feel like their moving through the process, and not just sitting there waiting.
Melby: Exactly, and tablets may help customers feel more involved in the process. But it’s really about setting expectations. “Greg, we’re going to spend about 20 minutes in the finance office. By that time, your car will be detailed and ready to go, and you’ll be out of here by 4:30. Is that acceptable?” I think if you had that, people wouldn’t care. But if you’re just sitting here and you don’t hear from anybody for an hour, and your kid starts crying, that’s when they get frustrated.