Dealers' add-on sales come under pressure

There are plenty of opportunities in the industry, albeit with lower profit per unit than many dealers would desire. Alongside the staples of service plans and paint protection, focus could shift to lifestyle accessories, vehicle tracking devices and digital radio conversion kits on used cars.

Adrian Foster, managing director of consultancy Adroit Automotive, said there is still a future for regulated insurance add-ons, but profits will be on a different scale to those previously enjoyed: “It is inevitable that GAP will become much cheaper to consumers than it is currently. That means dealers will have to find products that balance that, maybe that pay out smaller claims but more often, such as cosmetic warranty or tyre and alloy wheel cover.

“Dealers will have to go down the road of offering four or five lower cost products and getting the customer to buy two or three rather than their current strategy of offering three and the customer might buy one.”

How the internet will shrink dealer margins on add-ons

Foster said dealerships’ and sales executives’ remuneration from insurance add-ons is a problem for the FCA. He believes it is likely in future that any customer will have to be told what is being earned from the F&I sale, similar to requirements already in place for financial advisers, in order to comply with the FCA’s focus on ‘treating customers fairly’. A danger for dealers could be that once consumers get used to having this knowledge, they may ask questions about any other add-ons they are being sold.

Another consultant said possibly the biggest driver of change in the franchised dealer’s portfolio of add-ons will be consumer use of the internet. With the continued growth in mobile internet, consumers will become better positioned than ever to compare the value of a particular add-on product presented within the showroom against rival propositions. The result, he suggested, is that dealer margins will have to narrow in order to be able to remain attractive. “Paint protection may be the safe bet for the next two or three years, but I’m sure those dealers who are buying paint protection for £70-£80 and selling it to their customers for £500-plus and bundling it all under a finance agreement will come under pressure,” the consultant said.

He believes the online shopping challenge can be met by showroom staff who are truly knowledgeable about their add-on products and have digital tools, such as tablet-based presentations or videos, to help them demonstrate the value.

The crucial point is that salespeople must take a consultative approach to determine what the customer needs and are able to provide the right product, competitively priced and conveniently available while the customer is in the showroom.

Isn’t one solution for manufacturers to put more profit back into the new car for their dealers? That could ease the need to up-sell. Foster suggested that although the FCA doesn’t yet understand the intricacies of motor retail operations and is not concerned whether dealers make a profit, it will learn fast. The substitution of significant profit from regulated products for that missing from the car sale may not be welcomed.

The uncomfortable alternative, of course, is for dealer groups to lower their profit expectations.

Finance and insurance

Author: Tim Rose

Editor

tim.rose@bauermedia.co.uk

01733468266

As editor, Tim is responsible for the media content, planning and production of AM's multiple channels (AM print and digital magazines, website, social media and contributing to our events planning). He interviews and writes about as many franchised dealer groups and UK divisions of motor manufacturers as possible, to explore the issues facing UK motor retail and understand what solutions dealers and suppliers are using to overcome these.

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gezza06 - 07/10/2014 13:51

Difficult to make money on new cars whilst the manufacturers continue to push up registration targets for dealers who need to hit them to get back-end bonuses. More and more people will buy products on-line, for instance GAP is available for circa £100 whereas at a dealership you can pay £499 or more and unless the profit is good, dealerships won't bother selling it.
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max - 07/10/2014 17:01

Some good thought provoking opinions here, but is the motor industry listening? Look at the numerous AM articles on this and similar FCA subjects….. is the engagement out there? As the FCA and other regulators ‘shine light’ on all ‘add-ons’ the days of making excessive profit from them will soon disappear. Oddly enough, v few seem to think that it matters now, to what they set retail insurance premiums at today. Even if the process is ICOBs compliant, and many clearly, are not. It won’t take much for the FCA to make more of the competition / value for money issue, it has already highlighted, before claims management companies (and customers) start looking at these recent, but historic sales, as mis sold, on a ‘fairness’ ticket. Paperwork or not, poor value is subjective, and you should know where the FCA and FOS will go with this. For non regulated products – the time is coming where similar or worse mark ups, especially where rolled up into finance are going to come under scrutiny. When is a fair deal for the customer, and fair profit for the dealer going to meet a natural and proper balance? Maybe when the TCF ethos really means what it says and is truly adopted? If you told the customer (which you may have to soon) that you are making xxx profit, do you think they’d buy? Do you think that they would believe it had that value? Do you think that the dealer 'slice of the premium pie' was justified for the work involved? Or do you think they’d meet you half way? Customers know all retailers have to make profits, so is half of todays profit still workable for all?
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