DALLAS — Barring any significant economic fluctuations, EFG Companies expects 2018 sales volume to be roughly the same as 2017. That’s just one of five 2018 predictions the company issued this week.
The predictions, which are based on thousands of conversations the company had with dealer principals and finance sources, reflect another year of cautiousness, officials said.
“2017 has been an eventful year. We’ve seen three rate increases so far from the Federal Reserve. The CFPB’s influence has been curtailed by Congress and the current administration,” said EFG Companies CEO and President John Pappanastos. “While new unit sales have flattened, the effects of the hurricanes in Southeast Texas, Florida, and Puerto Rico — and the California wildfires — loom large.
“The challenges and opportunity ahead will largely revolve around customer retention, building up the service bay, and leveraging changing consumer trends to foster market differentiation.”
Utilizing its 40-year history in the F&I industry, EFG Companies offered the following predictions for 2018:
Prediction No. 1: Marginal uptick in unit sales, strained profit margins, and increased focus on customer retention.
Manufacturers learned a big lesson in 2017: Today’s consumers want SUVs and CUVs. As manufacturers update their vehicle lineup, we should see slightly more new unit sales in 2018 than we did in 2017, but not significantly. That means the trend of rising vehicle prices will only continue. Combined with manufacturer incentives, dealer front-end margins will continue to be strained. As such, dealers will increase their focus on their F&I operations from both an upfront profit and a customer retention standpoint.
Expect dealers to retool their product menus and F&I pay plans based on products that encourage consumers to return for service. In addition, dealers will put an even greater emphasis on their service drive to better utilize their time with the customer and enhance their ongoing communication. In this same vein of consumer communication, we’re seeing more dealers becoming open to listing F&I product benefits online as a way to speed up the F&I process, increase consumer interest in available benefits, and increase product penetration rates.
Prediction No. 2: Acquisitions and engagement will be the name of the game for agents
Going into a second year of relatively flat unit sales, agents are already becoming much more engaged with dealerships on a day-to-day basis, and are focusing more of their efforts on increasing their dealership client base. In their acquisitions efforts, agents will be much more circumspect and selective when it comes to approaching dealers.
That means there will be an increased competition among agents for those higher-volume dealerships, which will force agents to differentiate themselves based on more than just products. Strategic agents will take a more engaged approach to both servicing and acquiring clients, identifying needs, providing training, product menu updates, pay plan guidance, recruiting support, pre-owned inventory analysis, and even providing compliance services. This holistic approach will separate the high performing agents from their peers.
Prediction No. 3: Growth potential for lenders who leverage today’s economic and consumer trends.
Even with rising delinquencies and flat vehicle sales, economic indicators continue to be strong. As more consumers delayed making their next vehicle purchase in 2017, the pent-up demand will begin to unfurl in 2018, especially as SUVs hit the market.
With this in mind, there is growth potential for the auto lending environment in 2018. To get in front of more consumers, we’ll see lenders increasing their direct-to-consumer auto lending marketing spend. They’ll also shore up their dealership relationships by buying more aggressively when possible, scheduling ongoing in-dealership meetings at least once a week, and reviewing profit metrics with dealership leadership once a quarter. In addition, lenders will evaluate other solutions to both protect their loan portfolios and enhance their market differentiation for consumer protection products.
Prediction No. 4: Growth Challenges for Continue for Powersports Dealers
The powersports industry saw similar challenges as the automotive industry in 2017. Unit volume did not hit projections and we’re seeing more dealers sell inventory at or below costs just to keep it moving. To recoup this lost profit margin in 2018, dealers will be evaluating how to drive as much traffic their way as possible, and how to increase customer retention. We will see more powersports dealers use F&I products to meet both goals.
Those dealers will focus their product menus and pay plans around products that differentiate them in their given market and encourage repeat business in the service bay. In addition, consumer demand for pre-owned inventory will continue to be higher than demand for new, as consumers are still wary of an uncertain economy. For this reason, dealers will utilize strategic CPO programs to differentiate themselves and increase their back-end profit.
Prediction No. 5: More proactive reinsurance positions ahead.
Hurricanes Harvey, Irma, and Maria, along with the California fires, have taken a toll on dealer reinsurance positions. Right now, dealers are still working to understand how much these catastrophic events undermined their positions. In 2018, they will need to apply the lessons learned from 2017 to rebuild and better insulate their positions for the future.
One of the biggest takeaways from 2017 is that when a dealer decides to take part in a reinsurance position, they are acting as an insurance provider. Yes, reinsurance is a wealth management tool, but the key word in reinsurance is “insurance.” With reinsurance, dealers are insuring that they will cover the risk of an adverse event. In the case of GAP, they are insuring against a total loss.
Unlike service contracts, GAP losses are impacted by both single event losses, such as vehicle theft, and catastrophic losses, wherein one event results in a significant number of total losses. With reinsurance companies, there will always be claims and dealers need to be prepared to take losses, including catastrophic losses, based on the makeup of their portfolio. As far as the immediate need for recouping losses from 2017 GAP claims, dealers need to take a long-term approach.
If dealers try to recover the entire amount in 2018, the necessary price increase for product sales may price them out of the market. A better approach will be to plan to recover the amount lost over a span of three to five years, so as to stay competitive with product pricing. In addition, dealers need to re-evaluate how they buffer against future catastrophic events. The best way to do this is to understand your market and the likelihood of a catastrophic event, then price F&I products accordingly. For example, dealers operating in areas where hurricanes occur frequently should have higher F&I prices than those who operate in areas where there is little chance for a natural disaster.