Car shoppers headed to a dealership are in store for a hard sell on something other than a vehicle.
As dealers’ profit margins on new-car sales shrink, they are relying more on selling extended warranties, paint-protection plans and other add-on services pushed by salespeople in the finance office.
Dealers also earn a markup for arranging car loans, a piece of the business that is becoming a more reliable income generator as salespeople find it more difficult to upsell buyers on a car’s price. Most shoppers today do research online and walk into a dealership firm on a price, auto retailers say.
“Where dealers really keep their head up is boosting interest rates from the bank and throwing in products like extended warranties,” said Earl Stewart, owner of Earl Stewart Toyota in North Palm Beach, Fla.
Dealerships made an average of $908 per new vehicle last year on their finance and insurance business, far more than the $420 they earned off the actual vehicle sale, according to research firm J.D. Power. More car buyers also are plunking down for such extras, which have mixed reviews from dealers and customers. Last year, 46% of new-car buyers purchased an extended warranty from the dealer, for example, up from 40% in 2013, according to the National Automobile Dealers Association.
Auto makers have reduced dealers’ cut of new-vehicle sales, partly because the internet has made car prices more transparent and given customers the ability to shop around, analysts say. Dealerships earned an average profit margin on new-vehicle sales of 1.2% last year, down from 2.1% in 2014, according to J.D. Power.
Fruitful Finance
A growing portion of dealers’ profits is coming from financing and add-ons.
Average dealer profit from a new vehicle sale
Financing and add-on income per vehicle
Vehicle gross
$1,500
1,000
500
0
’18
’14
’17
’13
’04
2003
’05
’06
’07
’08
’09
’10
’11
’15
’12
’16
Average transaction price
Profit as a percentage of a car’s sales price
$30,000
3
%
Finance and add-ons
20,000
2
10,000
1
Vehicle sale
0
0
’18
’15
2014
’17
’16
’16
’17
’15
’18
Average dealer profit from a new vehicle sale
Financing and add-on income per vehicle
Vehicle gross
$1,500
1,000
500
0
’10
’09
’08
’12
’07
’06
’05
’11
’18
’17
’16
’15
’14
’13
2003
’04
Average transaction price
Profit as a percentage of sales price
$30,000
3
%
Finance and add-ons
20,000
2
10,000
1
Vehicle sale
0
0
’15
’16
’17
2014
’18
’18
’17
’16
2014
’15
Average dealer profit from a new vehicle sale
Financing and add-on income per vehicle
Vehicle gross
$1,500
1,000
500
0
’15
’11
’05
’06
’10
’07
’08
2003
’04
’14
’18
’17
’09
’16
’13
’12
Average transaction price
Profit as a percentage of a car’s sales price
$30,000
%
3
Finance and add-ons
20,000
2
10,000
1
Vehicle sale
0
0
’16
2014
’15
’18
’17
’16
’17
’18
2014
’15
Average dealer profit from a new vehicle sale
Vehicle gross
Financing and add-on
income per vehicle
$1,500
1,000
500
0
’13
’11
’09
’07
’05
2003
’15
’17
Source: J.D. Power
That has left dealers leaning more heavily on the finance office, typically the last stop in the car-buying process. After selecting a car and agreeing on a price, customers are sent there to arrange financing—and to consider a menu of extended-warranty options and other extras.
The high-pressure sales tactics often used in the finance office have long been a source of anxiety for consumers, analysts say. Privately, some dealers call the finance office “the box,” a reference to the holding cell to which movie star Paul Newman was sent in the 1967 movie “Cool Hand Luke.”
Nearly 84% of new-vehicle buyers last year arranged financing through a dealership, according to J.D. Power. Although buyers can obtain outside financing, most choose to have it arranged through the dealership, which can solicit banks for the best deal or line up a promotional rate through the manufacturer.
The store typically gets a certain percentage of the interest rate or a flat rate, ranging from a few hundred to a few thousand dollars based on the amount financed, dealers say.
After working out their financing, customers typically are pitched add-ons such as insurance for dings and dents, which might cost a few hundred dollars. Coverage for wheel or tire damage usually ranges from $500 to $1,000, dealers say.
Brenda Christensen is considering buying her next car online after a frustrating dealership visit. She showed up at a Kia store in Melbourne, Fla., with a preapproval letter from her lender for a Sedona minivan, only to have the general manager pressure her to get financing through the dealership.
After the manager finally relented, Ms. Christensen, 56, was stuck in the finance office for hours, she said.
“They delayed the paperwork and tried to push a lifetime transmission warranty. I was just like, ‘No, no, no,’” said Ms. Christensen, owner of a public relations firm in Cape Coral, Fla. “I think they finally understood after a couple of hours that I wasn’t going to budge.”
Publicly traded dealership groups are trying to grow their finance-office revenue by selling more services. AutoNation Inc., the nation’s largest dealership group, introduced a line of extended-warranty products in 2015, including a plan that repairs or replaces damaged wheels or tires.
AutoNation Chairman Mike Jackson said the emphasis on finance and insurance products has boosted earnings, calling the effort a remarkable success during a recent investor call. Last year, for each vehicle it sold, AutoNation earned $1,803 from the services pitched in the finance office on a same-store basis, up from $1,414 in 2014.
Dealers and analysts are divided on whether the add-on warranties and protection plans are worth the money for consumers.
Some say extended coverage makes sense because owners hold on to their cars longer—the average age of a vehicle on the road today is around 11 years, according to research firm IHS Markit . Others say that cars sold today don’t require much maintenance and that many of the products cost more than they are worth.
Brian Allan, a former general manager at a dealership and now an adviser to dealer groups, said the process of being passed along to the finance manager turns off a lot of customers, who might not want to return.
Mr. Allan advises dealers to do away with the finance office, and instead have the sales person discuss the options and price them out at the beginning of the sales process.
“Dealers will still get more sales,” he said, “because it’s happening in a nonthreatening environment.”
Write to Adrienne Roberts at Adrienne.Roberts@wsj.com
https://www.wsj.com/articles/add-on-services-emerge-as-car-dealers-profit-generator-11554634800
2019-04-07 11:00:00Z
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