Opportunity will knock in the second half of 2022, but industry leaders still recommend those in retail automotive and F&I proceed with caution. - IMAGE: Getty Images

Opportunity will knock in the second half of 2022, but industry leaders still recommend those in retail automotive and F&I proceed with caution.

IMAGE: Getty Images

Opportunity will knock in the second half of the year, but those in the retail automotive, powersports and F&I industries should proceed with caution. 

Market volatility, continued supply chain and product inventory issues, and challenges to consumer financial strength pose significant risk. Leaders recommend dealer principals, agents and lenders approach the rest of the year with a focus on implementing customer-first sales methods, optimizing inventory with value-driven products and implementing training to ensure employee effectiveness and regulatory compliance.

As executive vice president of EFG’s Dealer Services division, Scott Kaskocsak spends his days providing strategic leadership in automotive retailing to EFG partners. When he ponders what’s next in 2022, he’s quick to say, “We don’t have a crystal ball, but I believe supply chain issues will remain a wildcard for the rest of 2022 and without supply, vehicle inventories will not bounce back either.”

“Dealers are swimming upstream as they try to secure inventory,” he says, noting his team focuses on helping dealerships with their omni-channel approach, securing pre-owned inventory, certified protection programs and education around protection options. 

As senior vice president of the company’s Agency Services division, Adam Ouart oversees EFG dealer development through a distribution network of top-tier agents. He too cites supply chain and vehicle availability as key issues for the rest of the year. 

“Used vehicles will continue to scoop up market share because that’s what is available,” he says. “Our agents need to do more to help dealers compete. We need to help our dealers capture more market share. A lot of our agents and dealers leverage our market differentiating programs, such as our lifetime powertrain program and maintenance plans, to grab market share and keep customers in the dealership.”

Now factor in a hot buy-sell market. Smaller agencies and dealerships are being snapped up by larger retail groups. “It’s become more critical for dealerships and agencies to set themselves apart to maintain a competitive advantage,” he says. “F&I programs have become more attractive because if customers have to pay a premium for a vehicle, they want to keep it maintained.” 

Eric Fifield, chief revenue officer at EFG Companies, echoed these sentiments in a press release about the company’s predictions for the second half of 2022. 

“While there are many factors at play, smart business owners will stay strategically focused on those tasks which align with the needs of consumers while advancing their businesses in post-COVID sales models,” he says. “The new normal is now. Consumers have shown how they want to do business. Regardless of how economic factors play out, there are many opportunities for revenue over the rest of 2022.”

All three professionals stress successful dealers will look for ways to provide added value into automotive and powersports purchases.

Know the Risks

Skyrocketing inflation, the possibility of a recession, higher gas prices, added regulatory oversight, tightened inventory and ongoing supply issues combine into a perfect storm of risk for automotive retail.

“If inflation continues and gas prices keep rising, the money in consumer wallets may go down and cause demand to cool. But I don’t see used car prices crashing. It will be a gradual decline,” Kaskocsak says.

“Dealerships also have a bulls-eye on their back with compliance, especially in a market where prices are hitting record highs,” says Ouart. 

“Regulators understand dealers are making better margins than ever before,” Ouart continues. “We are helping our dealers remain compliant. Dealers must make sure they do not pick up predatory behaviors and dot all their “Is” and cross all their “Ts”. Because in an environment where demand is high and supply is low, people can take shortcuts. They need to stick with a solid process and make sure they remain compliant.”

Eventually, the market will correct itself, and when it does, Ouart predicts the government will review regulatory practices. “Dealers must be able to show they have done what it takes to take good care of their customers,” he says. 

F&I companies are not immune to these concerns, he adds. “As an administrator, we face compliance at multiple levels,” he says. “We are exposed to layers of regulation from the lender to the dealer, the customer to the government. It behooves all of us to manage compliance well. Because as soon as inventory and demand hits normal levels, regulators will tighten the screws on the dealership process and how they treat their customers.”

The best defense is a good offense, he adds. Dealers and agencies can take steps now to improve compliance. NADA provides a laundry list of things to do to remain compliant. Administrators also can help educate dealers on compliance, code of ethics, and other steps to put them in an advantageous position long term.

GAP Concerns

The industry is abuzz over inflated vehicle costs. The average transaction price for a new vehicle hit $45,844 in June, according to J.D. Power. Now, many experts speculate GAP coverage may not fully cover the value of a vehicle involved in an accident or when it’s sold.

“Dealers fear if there is a severe price correction, people will end up being upside down in their loans,” Kaskocsak says. “But we have found the government stimulus packages allowed many consumers to put more money down when they purchased a vehicle.”

Pre-owned vehicle values also skyrocketed. So, though consumers paid more for a new vehicle, they also “got record amounts for their trades,” he says. 

In the end, Kaskocsak says “loan-to-value ratios changed little. We see a gradual decline in vehicle prices, but the correction won’t be so drastic that it affects GAP reserves negatively.” 

Keep the Focus and Add the Right Mix of Offerings

Many people have waited to buy a vehicle. Prices or interest rates must fall before those people purchase one. This has put a lot of emphasis on dealership service offerings.

Service is a key area for dealers to differentiate themselves, says Kaskocsak. “Go back to the Great Recession. Those dealers with a great service process were the ones who survived,” he says. “With everything happening today, service and sales must be excellent.”

Dealers currently rake in great returns. “But there is a tendency to take shortcuts when things are great and profits are up,” Kaskocsak says. “Dealers need a very disciplined process that takes customers through a walk-around, understands their needs, and answers their questions.”

Dealerships also must offer great programs that protect customers and save them money the longer they own their vehicles. Ouart references how Tiger Woods hired a swing coach to help him retool his swing. Even though he was a great golfer, he still saw a need for a swing coach. Dealerships and their employees need similar coaching—even at the top of their game.

“These coaches must make sure they follow disciplined processes whether in service or in F&I sales,” he says. “When the storm is over, dealers must make sure this disciplined process remains and they are not skipping steps.”

Dig Into Digital

Digital processes entered the ring during the pandemic and consumers are not willing to let them go. Here, compliance is at risk; compliance needs for a digital process differ from an in-person one.

“Without customers sitting in front of you, it becomes more difficult to verify customers are who they say they are,” Ouart says. “We’re going to see a growth in identity theft because it’s harder to verify who you are working with.”  

Dealers also must embrace giving customers more information about F&I products on their websites. “I believe we’re going to sell a lot of F&I products digitally,” he says. “Customers need access to that information. There are only a handful of dealers that can currently complete an F&I transaction and vehicle sale completely online.” 

Every dealership needs a cradle-to-grave process for online sales while remaining nimble enough to complete a sale however a customer wants. “A customer may agree to a sales price online, submit a loan application, etc., but then complete the rest of the purchase in person,” Kaskocsak says. “We want our dealers to pick up where the customer left off.” 

On the F&I side, dealers must make sure they inform customers about every product in all sales channels. “This gives everyone an opportunity to take advantage of all products and services available,” Ouart says. 

As dealers go deeper into the digital world, compliance also must include cybersecurity protections. Dealers must implement Internet security protocols to protect consumer data and privacy. This includes having an IT manager on site to manage data breaches, a protected and secure website, continuous audits and more.

“This is a critical concern for dealerships as data breaches have gone up dramatically in recent years,” says Ellen E. McGee, the company’s brand communications manager. 

The industry may stay in a state of change for a while. But dealerships and agencies can ride the waves of change if they are always seeking ways to provide added value.

Ronnie Wendt is an editor at F&I and Showroom.

Originally posted on Auto Dealer Today