Is It Worth It?

As is the case with most Zingers I write they are usually a result of issues I come across in my travels, or emails and phone calls from dealers and managers with specific questions.

I was contacted recently by a general manager whose dealer was putting pressure on him because the average F&I gross was falling.

Here’s the specific question as it was presented to me:

“Great article this past week and as always very true. Here’s my question. We have been selling more and more inexpensive cars (many that have over 100,000 miles) and the volume definitely has increased and our turn is much better, but that being said our backend averages have dropped.

We are selling fewer products because the cheap cars are not eligible for product. My owner is putting tremendous pressure to keep backend averages up, but due to us pushing prices down and selling these older cars our averages are falling. Basically the numbers are telling me we are doing a poor job in used car F&I. Your thoughts?”

You have to believe the dealer likes the volume that these lower price cars are bringing to the table, but he also wants the higher F&I income. I get it, I really do.

However, it’s possible the dealer is missing the big picture or he is doing what dealers sometimes do; he’s working the management team. Been there and done that and there’s nothing wrong with it unless it totally screws up the heads of the members of the management team. It may also be he’s trying to create an environment of “If you think you can, you can.”

The first thing that has to be realized is achieving high gross profit and doing volume is a contradiction. It goes against Tommy’s laws of nature.

I’m not saying it can’t be done but I will say it’s very unusual, and there has to be a very special set of circumstances for it to happen with consistency. If it’s going to happen in today’s market it’s because the dealership has amazing talent or they exist in a very unique market.

There is no question F&I is going to take a hit when selling cheaper cars. What has to be determined is, are you better off selling them, with a smaller F&I average or not selling them at all and pulling your F&I average up. Hello?

Suppose the dealer puts so much heat on the F&I averages that the GM throws in the towel on the less expensive units and goes back to retailing more expensive cars and a better F&I average. Is the dealership really better off?

Here are 10 key questions that need to be answered:

1. What about all the parts and service gross that would have been generated on the less expensive cars going through service and reconditioning?

2. What about the fact that you could have put more money in some trades because you intend to retail them vs. wholesaling them? How many more car deals do you end up making because you have a better plan?

3. Does the increase in volume from the less expensive units impact the attitude of the sales staff and their ability to earn additional income? Isn’t it true the best time to sell a car is when you just sold a car?

4. What’s the benefit of having someone driving a car, any car, high dollar, low dollar, that they purchased from you?

5. Is there a chance you just sold a car to someone who might never have set foot in your store because you had a vehicle at a price point they could afford to pay?

6. Is it possible that this new customer has a friend or relative who might one day come back and buy something because of the way this new customer was treated during the buying experience?

7. Are the odds in your favor that they may come back for an oil change or other service?

8. Does doing business generate business?

9. What’s the “Return on Investment” on selling these less expensive cars? Relative to the amount of money tied up aren’t they a far better investment than what you would make with a $25,000 car? How many times in a year can you turn over a $7,000 to $10,000 investment vs. a $25,000 investment?

10. Doesn’t it make sense, that if you can sell more cars with less money tied up that it’s a good thing? There really isn’t much of a downside to increasing volume and decreasing investment.

To keep the accountability up on F&I it might be a good idea to keep two logs; one with the more expensive cars that you hold to your normal F&I standard and another for the less expensive cars. You have to decide how that gets broken down.

Let me remind you that what’s really important is how much total gross you are generating. I always say, “You cannot spend average gross profit. You can only spend total gross profit.” That’s all I’m gonna say, Tommy Gibbs