Posted on 09 February 2017.
With a tumultuous 2016 in the books and a new year underway, it’s time for our annual look ahead at what industry experts believe 2017 has in store for your agency and the dealers you serve. Despite the lingering tensions generated by a divisive presidential campaign and widespread concern of a downturn in new-vehicle sales, the 19 industry executives and experts we spoke with put forth a generally positive outlook for the nation, the economy and the automotive industry.
Alan Miller, senior vice president of sales for CNA National, noted that, while the economy has grown slowly over the past few years, it has grown nonetheless, and he believes that trend will continue. He expects new-vehicle sales to match or slightly exceed 2016 levels and for year-over-year sales numbers to remain steady.
“The industry should enjoy slight gains in sales from 2016, buoyed by interest rates that will remain invitingly low, in addition to probable tax cuts that will allow consumers to have more discretionary spending,” agreed Bob Pruitt, president of Cal-Tex Protective Coatings Inc.
That said, our experts, across the board, all agreed that 2017 is difficult to predict at this point, since no one is entirely sure what President-elect Donald Trump will do once he takes office in late January.
“It’s going to be interesting to see what impact the new administration will have on the economy in 2017,” said Kelly Price, president of National Automotive Experts (NAE)/NWAN. “I believe we will see new-vehicle sales volume continue to slow down as the industry reaches a plateau. In the fourth quarter of 2016, we saw several manufacturers reforecast their late-2016 sales projections and slow manufacturing to reduce dealer inventory as a result of a decrease in consumer demand.”
“We just came off a contentious election, and we were all led to believe the election of Donald Trump would send the stock markets spiraling downward,” noted Dave Duncan, president of Safe-Guard Products International. “In fact, markets are up significantly since Election Day and looking like they may go even higher. Financial service stocks have been among the big winners, so those in the F&I space could benefit quite nicely from the election results. At least, that is what the markets are telling us.”
Jeremy Lindsey, COO of Alpha Warranty Services, agreed, noting that, if the gross domestic product remains steady, unemployment rates continue to fall and gas prices stay low, 2017 could be a solid year for agents and dealers.
“It feels like there are more variables this year than years past, in part because of the political climate,” Lindsey said. “As long as the economic outlook for 2017 remains positive, and President-elect Trump follows through with some of his policy objectives, I believe the economy as a whole and the auto industry will benefit.”
One executive who is incredibly bullish on the industry’s stock in a Trump administration is Larry Dorfman, chairman and CEO of Automobile Protection Corp., home of the EasyCare brand.
“I believe the initial impact of a fully Republican government will be a positive one and that the economy, overall, will do fine in 2017. Frankly, probably better than had Clinton won,” Dorfman said.
While the short-term gains for 2017 will be high, Dorfman added, they could come at the expense of long-term prosperity. That will depend in large part on the severity and reach of promised tax cuts. Depending on their impact on the national deficit, there could be long-lasting effects that won’t be felt for several years. It all hinges, Dorfman noted, on whether the money actually does “trickle down” like the incoming administration is claiming, or whether it “sticks to the top” like it has in the past.
Randy Crisorio, president and CEO of United Development Systems Inc. (UDS), agreed with Dorfman’s positive outlook, noting, “In my view, the economy next year will project growth amid renewed optimism for jobs and the psyche of millions of Americans. There have been so many positives laid out by the incoming administration that it’s difficult to recall them all.
“Tax relief, both individual and corporate, will deliver more spendable income for families to buy goods and services and will drive business expansion through job growth. Repatriation of corporate monies from other countries has the ability to infuse trillions of dollars into the American economy. When Americans have cash and confidence in our future, the lure of shiny new models of cars and light trucks will prevail.”
On the flip side of the coin, Robert Steenbergh, founder and CEO of U.S. Equity Advantage/AutoPayPlus, is a bit more hesitant about what impact the Trump Era will have on the economy in general, and the automotive market specifically. “I think the automotive industry will have a much more hesitant outlook based on fear of the change that Trump might bring,” he said.
Steenbergh pointed out that, in past elections, donations to Republican candidates outpaced those to Democratic candidates across the entire automotive market by a fairly wide margin. Yet, he noted, “Donald Trump reportedly collected the smallest amount of auto industry contributions of any GOP presidential candidate in two decades.” That leads him to believe there are a lot of people who are leery of what 2017 will have in store for the industry, with a “wait-and-see” attitude prevailing.
Thomas Elliott, president of StoneEagle, agreed — with a caveat. He noted that he believes we will enjoy a short-term boost to the economy in 2017, with the automotive market, in particular, benefiting. However, he noted, “Economic forecasts that I have read seem to lean strongly toward a slight decrease of around 2% for new cars, with a total target of around 17.1 million units.”
Speaking before the Federal Reserve Board announced a 0.25% short-term interest-rate hike on Dec. 14, Tony Wanderon, CEO of National Auto Care, said an increase was overdue. But he believes the fate of the auto retail market in 2017 would depend on several additional factors.
“With the new administration, I can see some pretty substantial tariffs being put in place on imports but to what extent, only time will tell,” Wanderon said, noting that the Fed is not the only influencer. “Lending has been crazy with advances reaching over 150% of MSRP and terms rising to up to 96 months, thus all of those customers are out of the market for years. In addition, all the pent-up demand is gone, so now we will be in our normal cyclical downturn.”
Presidential elections notwithstanding, there are a few trends our experts are paying close attention to as we move into 2017. Each has the potential to impact the automotive market as a whole — and the F&I segment in particular — in a variety of ways.
Brent Griggs, president and CEO of Portfolio, noted that one trend he is anticipating in the coming year is a cooling of the historically high leasing levels the market has been experiencing. This, in turn, will benefit the F&I market, opening up more opportunities for sales than many dealerships are achieving in today’s lease-heavy atmosphere.
On the flip side, however, Griggs also expects fleet sales to remain strong, which has the effect of reducing F&I opportunities. Finally, he noted, “We expect continued high profitability for auto dealers in general and a continuation of the consolidation that has begun, though at a lower pace due to high valuation expectations of sellers.”
Another executive who is carefully monitoring the leasing situation is Michael Feely, executive vice president of sales for ECP Inc. He noted, “The biggest trend we will be watching in 2017 is the effect of 3.5 million off-lease vehicles flooding the automotive market. This will significantly increase pre-driven inventories, thus creating a greater price-competitive market. This increase in pre-driven inventories may result in decreased profitability.”
“We will be watching regulatory activity, interest rates, availability of credit, and lease penetrations. All of these factors will play a part in the strength and profitability of F&I,” agreed John Luckett, senior vice president of sales and marketing for Resource Automotive/The Warranty Group.
John Pappanastos, president and CEO of EFG Companies, listed four trends that he believes will have a major impact on the market in the coming year: a tightening of consumer credit, manufacturer bonuses, regulatory reform and dealership consolidation.
Regarding consumer credit, “according to J.D. Power, the percentage of car loans with negative equity rolled in has reached a 10-year high, exceeding 31%, and the average amount of negative equity is over $4,800 per loan,” Pappanastos said. He believes this tightening of credit will be a positive thing for the industry in the long-term, especially in F&I. He noted that skyrocketing loss ratios are the stuff of nightmares for administrators.
Using GAP as an example, Pappanastos added, “The increasing severity of GAP claims is attributable to the fact that the higher levels of negative equity is being absorbed in consumer auto debt by extending loan terms. We’ve noticed that GAP claim frequency curves are matching the curves that we saw in 2008–’09, before the Great Recession. I’m not suggesting at all that we’ll see another recession. The credit crisis that led us into the Great Recession was related to mortgages, not auto lending. I’m just saying that GAP loss ratios is a trend that we are watching very closely.”
Matt Croak, president of Wise F&I, agreed that GAP is a good indicator of the market as a whole.
“GAP loss experience is being impacted by a changing external environment including lower gas prices leading to more miles driven, an increase in collision frequency, rapid advancements in technology driving up repair costs, and loosening of credit guidelines,” Croak said. “Unfortunately, these external conditions, among others, are contributing negatively to the loss performance of GAP.” To offset those losses, he noted, companies are being forced to build additional financial reserves, which then impacts every other product down the line.
The second trend Pappanastos is carefully monitoring is manufacturer bonuses. They have gotten so rich, he says, that in some cases, dealers are starting to forgo front-end margins in pursuit of the bonus check. Dealers across the board need to be careful, however, since he noted that it will be difficult to instill operating discipline once those incentives dry up.
Pappanastos said he expects that, for the incoming administration, regulatory reform is absolutely top-of-mind, and he expects some shakeups around the auto finance space. As for dealership consolidation, he expects the trend to continue, if not accelerate, in 2017.
“We expect to begin seeing an acceleration in public company consolidation. And we expect them to be targeting eight- to 12-store groups,” Pappanastos said.
Consolidation is among the big trends that Jim Smith, CEO of SouthwestRe, will be monitoring in 2017 as well.
“Factors I believe influencing this are economies of scale, the availability of money and the potential for capital gains tax decreases,” Smith said. “These factors will not only influence the consolidation of the automotive industry, but also F&I providers.”
Another trend executives such as Garret Lacour, CEO of RoadVantage, are paying close attention to is the price of oil. He believes any pain at the gas pump could have a significant impact on not only what models car buyers pursue but whether they choose to purchase at all.
“If fuel prices continue to stay in check, we will continue to see growth in the truck and SUV side of the business. However, OPEC’s December agreement cutting oil production could impact that,” Lacour said.
Lacour also believes F&I will play a larger role in profitability in 2017. “The public companies will continue to report an increase in F&I income, which will raise the bar further for finance departments to generate a larger percentage of front-end profit for dealers. This income will not come from finance reserve margins or even higher VSC penetration, but from vehicle protection products that offer the consumer a clear value proposition.”
Technology, as always, also has a part to play in the year ahead. Some executives, like Jimmy Atkinson, COO of AUL Corp., believes the proliferation of new technology aimed at the sales and F&I departments could be coming to a head.
“It seems we may be reaching a point where technology innovates the F&I office in a disruptive way,” Atkinson said. “We have seen automation of our processes like the menu, but there seems to be a drive to full transparency and web-driven process that includes F&I.”
That, in turn, could force F&I managers to start developing a different skillset and drastically alter the process they use today. Ultimately, however, Atkinson sees this as a good thing. He believes consumers will be more interested in purchasing more F&I products once they feel the process is more transparent and the value of those products is made more clear.
And the push toward technology extends beyond the F&I office, according to Patrick Brown, president and CEO of IAS. He noted that the increasingly complex technologies in the cars themselves will lead to more F&I offerings either coming to market to address those specific needs, or current products evolving to better cover those systems.
“VSC programs that integrate the addition of in-vehicle technology, powertrain, and safety systems will become staples in F&I,” Brown said.
Trying to predict which F&I products will get hot and stay hot — and which will cool off — has become an annual tradition for agents and providers. Our executives have a few in mind that they believe will be crucial to success in 2017.
At the heart of F&I is the desire to protect consumers from unexpected problems, as well as build their loyalty and give them a reason to come back to the dealership, Pappanastos explained.
“Another overarching objective of dealers is to build relationships with customers over the life of their vehicle ownership,” he said. “So I think you’ll see more emphasis on F&I products that drive customers back to the store’s service drive. These would include loyalty programs and discounted prepaid maintenance programs.”
Pappanastos went on to point out that F&I product sales generate around 40% of the average dealership’s gross margin, so the value of these products and their ability to bring people back in the door can’t be overstated. Luckett said vehicle service contracts will continue to be the “bell cow” for agents and F&I producers, and Atkinson agreed.
“I see the staples getting stronger with VSC in the lead,” Atkinson said. “We’ve seen high penetration rates, and dealers recognize it touches all the key profit centers in the dealership — service, parts and rental, as well as profits in F&I for sales and customer retention. Bringing that retail customer back to the selling dealership is paramount, and VSCs do that.”
Crisorio agreed, adding, “Mechanical service contracts will remain the core F&I product next year. We will continue to see modified plans being developed that are more targeted to high-tech electronics and more retail merchandising plans will be offered such as limited warranty powertrain coverage.”
On the heels of VSCs — and perhaps exceeding them in importance, depending on whom you ask — is GAP coverage.
Noting that “All the products are important, depending on the situation,” Duncan said, “On retail deals, GAP and VSC are a must for all kinds of good reasons. When a navigation head unit can cost $4,000, leaving the store without a VSC makes little sense. As for GAP, why would anyone take the chance of having a $5,000 or $10,000 claim when an extra $10 per month eliminates that risk?”
“GAP should continue to be a high-penetration product,” said Wanderon. “With terms, interest rates and negative equity going up and payments and resale values going down, there is not a better product in the market today.” He went on to offer a caveat, however, noting, “The only thing that every dealer should know is that the pricing will be going up. Over my 25 years in the GAP business, I have never seen claims this high.”
Another category that could see continued penetration in the coming year are bundles that make it easy for consumers to opt for a package deal offering a wide range of protections.
“We see the 2016 trend continuing into 2017 for robust, bundled products that include tire-and-wheel, dent-and-ding, windshield repair, interior/exterior coverage and key replacement,” said Lacour. The reasons for the popularity of the bundle, he explained, are that it is a much easier sell for F&I managers. And for consumers, they have a much higher value proposition, covering a much broader range of parts and functions their factory warranty isn’t likely to address.
Smith agreed with the dominance of the bundle, noting, “Bundled products gained in popularity at the F&I desk in 2016, and I think that will continue in 2017. I also believe that the utilization of loyalty programs (and products) designed to differentiate dealers from each other will continue to increase.”
Finally, products that provide protection against the elements will remain a top seller, said Pruitt. “The average age of vehicle ownership remains above 10 years. Products and services that help maintain the vehicle and its appearance — environmental protection products, paintless dent repair, prepaid maintenance programs and tire-and-wheel programs will increasingly continue to be popular aftermarket additions.”
Rules & Regulations
What will Donald Trump, who promised sweeping regulatory reforms throughout the campaign, do once he takes office? We asked our executives to hone in on this topic and give us their take on what changes to the regulatory landscape they see coming in the next 12 months.
“Among other things, President-elect Trump has been straightforward about his desire to reduce regulations to help spur growth,” Brown said. “In fact, he campaigned on the promise to remove two regulations for each new one that is passed. This should help businesses in multiple industries including the automotive and finance industries, and the economy as a whole.”
“Regulations that currently affect the industry — from the Consumer Financial Protection Bureau to Obamacare to overtime pay rules — are likely to lessen their grip and financial drain on the dealers and providers in the industry,” said Pruitt. He went on to point out that the stock markets, across the board, have seen gains since Donald Trump’s election, but, he added, “It will be interesting to see that when his economic policies are ultimately announced and begin to be implemented whether Wall Street is as bullish as it has already shown to be.”
However, cautioned Steenbergh, don’t expect massive changes overnight. “I do not believe that President-elect Trump can simply repeal the Dodd-Frank Act and abolish the CFPB in one fell swoop. Nor do I believe it’s necessary. The recent Wells Fargo scandal illustrates that some level of consumer protection is needed.”
For Lacour, it comes down to, again, taking a wait-and-see approach. “We can only speculate at this point, but if Trump’s team follows through on their pledge to eliminate or at least curtail Dodd-Frank, we expect to see some major changes with the CFPB. At the very least, the new administration will change the CFPB’s executive structure, thereby limiting its power and reach in regard to automotive finance regulations.”
That being said, Lacour added, he doesn’t believe all regulations will disappear — and he agreed that some are needed to protect the public from unscrupulous lenders — but on the whole, he noted, there is good reason for dealers to be upbeat about where things are headed on the regulatory front.
Among others, Lindsey, in particular, stressed that the industry needs to stay vigilant, since no one really knows what Donald Trump will actually do once he takes office, and it seems likely that he will ignore or recant on some — or even all — of the promises he made.
“With every unexpected cabinet appointment, this question seems very difficult to answer, because unexpected appointments may translate into unexpected policies,” Lindsey said. “As much as I’d like to see changes to the Dodd-Frank Act, I believe a repeal is unlikely because it would require new federal laws that would be difficult to pass. [The North American Free Trade Agreement] will be an interesting topic, as Mr. Trump made his disdain for that trade agreement quite apparent on the campaign trail. If the president-elect creates significant reform on trade deals, that could affect the automakers’ ability to make profitable vehicles abroad.”
Duncan made clear that, at the end of the day, it shouldn’t make much difference what regulations are — or aren’t — passed or repealed.
“The future of the CFPB remains to be seen. In truth, it should not make any difference,” he said. “We all know right from wrong anyway. We don’t need 4,500 lawyers in Washington to explain this to us. Be transparent, offer comprehensive products with a clear consumer value, and allow the customer to make their own choices. It really is as simple as that.”
Part of the issue with the CFPB is that in November, as Smith noted, there was a court ruling that will likely have more impact than Donald Trump will, at least in the short term.
“The CFPB just lost a landmark court case (PHH v. CFPB) that will significantly impact their previously increasing involvement in all lending areas,” Smith said. “Let’s hope this bodes well for the F&I industry, but as I said last year, the people in this industry still need to be diligent in their manner of operations.”
Pappanastos agreed, noting that it is more likely that the issues surrounding the CFPB will be felt in 2018 and beyond, rather than in the next 12 months. He doesn’t believe it is as high a priority as some in the industry might hope, but there are other factors at play as well. “The CFPB is appealing the ruling, which could elongate the final decision into 2018. The bigger, more likely possibility for 2017 is the ratification of the Reforming CFPB Indirect Auto Financing Guidance Act. This act passed in the House with a bipartisan vote of 332-92. Considering the widespread approval of this act, it is highly likely to be ratified in the coming year, especially with a Republican-held Senate.”
“Ultimately, only time will tell as it relates to the regulatory and compliance landscape,” Croak said. “At the federal level, a Republican administration working with a Republican majority in both houses of Congress could achieve some success as it relates to mitigating the effects of Dodd-Frank and the CFPB on our industry.” In particular, he pointed to Senate Bill 2663 (and the related House version, H.R. 1737), as well as H.R. 1486, another bill in the House of Representatives, which now have a significantly better chance of being passed. Both could have a positive impact on the automotive industry.
“We continue to be bullish on the U.S. economy, especially with a Republican majority in Congress to support Mr. Trump’s efforts to shore up America’s infrastructure,” Griggs concluded.
A Closer Look at Technology
A slew of new websites, mobile apps and platforms designed to inject Silicon Valley into the sale and finance of new and used vehicles is a sure sign that technology will play a major role in how dealers move units — and F&I products — in 2017. Our executives took a moment to dive deeper into how they see technology impacting the industry in the coming months.
It is important to note that not all the executives saw technology as taking any huge steps forward in 2017. Griggs, for instance, sees the march forward as continuing, but at the same pace it has been for the last few years. He noted that he has seen “Nothing dramatic, just the continued move to electronic processing that is now becoming the industry standard and adoption of tablets to support and sometimes replace the numerous F&I menus that exist.”
“I don’t anticipate any drastic changes overnight as many developments and changes are proofs of concept that take time to validate. I believe that we will see more dealerships testing the idea of reshaping the F&I process,” Lindsey said, noting that, in general, predictions around technology, for good or ill, tend to be the least consistent, and the least reliable.
Many of the executives, however, do see major changes on the horizon.
“Technology will continue to evolve, and I think we will see more providers offering online platforms for vehicle sales from start to finish, including F&I,” predicted Miller. He believes the usage of tablets will grow as dealers attempt to make the purchasing process more consumer-friendly, and he expects the push toward making more F&I product information available online to accelerate in 2017.
Price agreed, noting that research proves consumers across the board are unhappy with the retail automotive buying experience today, and the industry needs to do a better job of finding ways to make that process easier and more enjoyable.
“We have already seen the buying trends of the millennial generation impact retail consumer transactions,” Price said. “I believe we will see their behaviors and buying trends begin to impact transactions in the finance office. Millennials have an unbelievable amount of information at their fingertips. The industry will need to adapt to effectively engage these buyers. Integrating finance products into consumers’ mobile technology will be critical.”
Croak sees it as being a combination of the two views, with technology continuing to evolve — whether the industry likes it or not — but he doesn’t anticipate a seismic shift.
“Enhanced technology integration is leading to greater adoption of electronic contracting, rating, remittance and cancelations of contracts. Deeper integration between providers and lenders may lead to more efficient cancelation processing and quicker refunds for the consumer,” Croak said. “These processes will continue to refine, becoming more seamless to the dealer and the consumer.”
Elliot was also quick to point out that the push for better technologies — and better integration of the technology we have — isn’t coming from car buyers alone. “We are seeing a major push from OEMs, major automotive groups, product providers and new sales channels in trying to determine how to best connect with the internet consumer,” he said.
Elliot went on to predict, “I fully expect to see a massive shift in the use of analytics along with educational and informational tools by all of these parties in an effort to connect with the direct consumer. Information and the education and awareness of the protection products is critical in the evolution of the processes and technology.”
Putting It in Perspective
Ultimately, what the executives agreed on was that the automotive market is changing on all fronts, new technologies, new (or repealed) regulations, and changing product lines all contribute to a vibrant and dynamic market that never stops or stands still.
And those changes should inspire more enthusiasm than fear among agents, said Pappanastos. “This may sound a bit cliché, but I believe the changes transforming the auto industry create as many opportunities as they do risks, and we’re excited about the future.”
“Dealers and consumers will continue to push for value in the products and services they are offered,” said Miller. “Dealers want to deliver an enhanced buying experience along with a superior product experience. Because of this, any company associated with the dealer market will need to operate in an environment of continuous improvement in their products, services and representation to keep pace.”
For Smith, while the surprising election of Donald Trump increases the odds of major change — both good and bad — it just means businesses in all segments of the automotive market will need to stay nimble. “From a strict business standpoint, there will probably be opportunities, but we all need to be as flexible as possible in adapting to, taking advantage of, and even surviving these changes.”
“The more things change, the more they stay the same,” said Atkinson. He pointed out that good companies with good business plans and excellent customer service will continue to thrive, no matter what changes the country, the economy, or the automotive industry might face.
To that end, said Dorfman, even agents and product providers need to look beyond the F&I space. “The entire market is changing, and it is evident that focusing only on F&I will limit the ability of any agent or company to deliver an overall positive impact and experience to a dealer,” he said. As F&I becomes an earlier part of the car buying process, and as more information moves online, he added, intensive training will need to happen to ensure the entire dealership is on the same page.
“Focusing solely on the F&I office will be a thing of the past. Helping dealers hold front-end gross in a margin-crushed environment, improving the customer experience, and retaining customers through to the next purchase will be keys to the success of agents and administrators going forward,” Dorfman said.
“What’s the old saying? ‘There’s price, quality and service — pick any two you like, but you can’t have all three,’” said Steenbergh. “Bigger always leads when it comes to price because of buying power. But I believe the majority of customers will always be willing to pay for quality and service, especially if they like and trust the dealer they’re buying from.” He agreed that everyone — from F&I to service — in a dealership will need to learn to engage with consumers through the entire lifecycle of the vehicle, not just at the initial point of sale.
One thing is certain: The next 12 months won’t be “business as usual,” but will likely have a variety of twists and turns that no one — not even our expert panel — can predict. It is an exciting time to be in the automotive space, with many challenges to be overcome, but many more opportunities to be found.
As Price put it, “Buckle up, because 2017 is almost here, and it’s going to be a fun ride!”