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“It’s In there”

Some time ago there was a popular commercial on TV advertising a well known brand of canned spaghetti sauce. In the commercial, the husband discovers that his wife has been using this sauce instead of making a homemade variety. Shocked at this revelation, he asks if this canned sauce has all of the special ingredients that made her sauce taste so good. His wife assures him “It’s in there” and with that the husband seems satisfied. At the other end of the culinary-disclosure spectrum is my wife. She’s a label reader. You probably know one too. She reads food labels to determine what, exactly, is “in there”. More often than not, reading the label usually discloses all types of stuff that I for one would rather not know about. But, in the interest of my good health, my wife dutifully points them out to me. Perhaps for our own good we need more label readers. But what does reading labels on food cans have to do with the car business?

Everything- after all, they are generally the same!

Recently I was doing an aftermarket analysis for a dealer that I have known for some time. When I asked about some of the products he was selling in F&I, specifically about the cost breakdown, he was genuinely dumbfounded. He indicated to me that, in his 35 years in the business, nobody had asked him how that “dealer cost” number was arrived at in F&I. In my experience, few dealers really have any idea how the money they send in for various F&I products is divvied up once it leaves their dealership.

This is the era of “Full Disclosure.” Look around your store- there are countless federal, state and local statues that require dealers to disclose one thing after another. In the name of consumer protection, everything about the sales transaction is transparent in a dealership. Regulation Z (Truth in Lending) requires disclosures about the cost of credit, Regulation M (Truth in Leasing) requires disclosures about leasing, the FTC Used Car Rule requires disclosure concerning the warranty on a specific vehicle, the Payment Packing resolution requires dealers to disclose the true cost of the vehicle. The list goes on and on. As a result, our industry has helped to develop more knowledgeable, informed consumers. Unfortunately, many vendors selling products to dealerships (to be sold to car buyers) have yet to catch up with the “Full Disclosure” movement. Let’s take a look at one example.

If asked, could you determine with any certainty what percentage of the “net dealer cost” for the vehicle service contract being sold in your F&I department actually goes to pay claims for that contract? Probably not. And you are absolutely not alone. Most dealers I speak with have no idea. But what difference does it really make how the money is broken out? Well, it could make all of the difference in the world, for a couple of reasons.

Looking at service contracts specifically, the “net dealer cost” is made up of a few individual pieces: Administrative fees (used by the administrator to pay their costs), insurance costs (used by the insurance company to pay for the cost to insure the contract), commissions (usually payable to an outside vendor or agent) and finally reserves (used to pay the claims for the contract holder under the terms of the agreement). Sometimes various pieces are combined together, but generally the breakout looks something like this:

Administrative (Admin) Fees + Commissions + Reserves = Net Dealer Cost (NDC)

Looks pretty simple, and really, it is. The problems arise when one or more of these pieces is disproportionate to the others. Example: Within the last few years, a well known service contract company suddenly went out of business, leaving hundreds of dealers holding the bag for millions of dollars in customer claims. Those of us in the industry knew this company was destined to fail because the administrative fees and commissions being paid as part of the NDC were significantly higher than the amount of money set aside to actually pay claims! Lots of people were making lots of money from the sale of these service contracts with little regard to the contract holder. Clearly, a high percentage of the money sent to the administrator for a service contract should go to pay future customer claims.

In a not-so-egregious example, I recently reviewed an aftermarket program for a dealer and discovered that the administrator and outside vendor representing the service contract company were making almost twice the profit per service contract sold as the dealership. This dealer commented to me that he felt that the profit percentages were backwards since his store was doing the selling. I couldn’t agree with him more.

Whether its spaghetti sauce, hotdogs or fees paid to vendors, it’s always prudent to know what’s included in the selling price, what’s “in there”. When administrative costs and commissions are excessive, a significant amount of your F&I profit potential is in jeopardy. Additionally, if those fees and commissions represent the majority of the NDC, they can do more than erode your F&I profit- they can jeopardize your entire operation. So, I would recommend reading the labels on the F&I products that you sell to determine what is really “in there”. Do some digging to find out who is making what off of your transactions.

On second thought, you may want to pass on reading the hotdog labels…just a thought.

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