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August 13, 2007 – Why back-end profits should come to the forefront

August 13, 2007
Filed under Columns

If you ever wanted a valid, provable reason to stop treating back-end profits like an afterthought, then you’ve stopped at the right time and at the right place.
Right time because new unit sales for major manufacturers are down, and notably for many of you that rely heavily on traditional ATV sales to boost your bottom line.
Right place because I have data that proves back-end F&I profits are a dividing line between the dealer that sells $1 million-$3 million annually and the dealer that takes in $5 million-$10 million.
Consider this about the store that makes $1 million-$3 million per year in sales:

  • 88 percent of these dealers do not have a full-time F&I person, perhaps leaving F&I duties to their sales staff or sales manager;
  • Thus, nearly 80 percent of the time that dealer does not count F&I as a contributor to their overall revenue;
  • Also, not surprisingly, only 7 percent of these dealers say that F&I sales account for 10 percent or more of their total revenue.
    On the other hand, here is something you should know about the dealership that is generating three to five times more in sales annually than the previously mentioned dealer:

  • For 53 percent of these dealers, they have at least one full-time F&I person;
  • Almost double the number of dealers in this annual sales category ($5 million-$10 million) count F&I as a legitimate addition to their bottom line in comparison to their $1 million-$3 million counterparts;
  • And finally, nearly one-fourth of these dealers say F&I sales account for at least 10 percent of their total sales.
    All of that data comes from Powersports Business’ National Dealer Survey, the results of which you’ll see next month in our annual Market Data Book and Suppliers Listing. And although there is obviously more than F&I practices that separate the dealers who are making $1 million-$3 million from their counterparts who are making up to five times that much, there is also an obvious link.
    The data confirms it: The dealer who is paying attention to back-end profits is probably making more annually than their counterpart who isn’t.
    And yet many, if not most, dealers are, at best, under staffing that area of their business and, at worse, still dismissing F&I as a legitimate and rewarding profit center.
    That figures to change, especially as new unit sales slow. And we’ve already seen evidence of that in a more recent Powersports Business survey, which asked dealers what they would concentrate on to increase sales for the remainder of 2007. One of the two most popular answers was F&I. (Increasing service department revenue was the other.)
    Still, the industry has a long way to go. A really long way to go. The national survey that will appear in the upcoming Market Data Book shows less than 5 percent of dealers’ revenue comes from F&I. That figure astounded some executives in the powersports F&I field.
    The reason it’s so shocking is that many auto dealerships make between $1,000-$1,500 per vehicle sold on F&I alone.
    To have an idea of just how much impact F&I profits can have, check out two real-case scenarios the national survey identified: a Tennessee dealer who averages selling 1,500 new units annually and a Colorado dealer who sells 200 units. Both dealers said their individual stores make from $1 million-$3 million per year. But to make things simple, let’s say both dealerships sell $1 million annually.
    The Colorado dealer reports the following: For its annual revenue, 40 percent comes from new unit sales, 30 percent from the service department, 20 percent from the parts department and 10 percent from F&I.
    The Tennessee dealer is much different and really more of the norm for that sales volume: 60 percent of sales is generated from new unit sales, 10 percent from used sales, 20 percent from service and 10 percent from parts.
    No income is generated through F&I.
    Some simple math tells us the Colorado dealer is generating about $100,000 from F&I, or about $500 per vehicle. Take that per vehicle revenue and attach it to the Tennessee dealer and they immediately have $750,000 more in sales per year. Even if you throw in six-figure salary for a F&I professional and the necessary expenses, the Tennessee dealer still has to be looking at a 15-20 percent rise in revenue … without selling one additional vehicle.
    Staggering.
    Of course, we know doing a few quick calculations is far easier than starting an F&I department, or enhancing the fledgling one you have. So check out the Sept. 3 Powersports Business’ Focus section for best practices and some ideas and innovations in F&I.
    Perhaps then we can start to change the prevailing notion in the industry about F&I sales. The national survey showed only 3 percent of dealers thought F&I was the fastest-growing revenue source in their dealership.
    Staggering. psb
    Neil Pascale is editor of Powersports Business. He can be reached at npascale@ehlertpublishing.com.

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