Reynolds and Reynolds
Floorplanning Is Now a Cost Center
Protecting Your Profits as Interest Rates Climb
Jon Strawsburg, Vice President of Product Planning Reynolds and Reynolds
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Customer Relationship Management for Dealerships Is No Mickey Mouse Application800.767.7879 | [email protected] | www.reyrey.com
Floorplanning Is Now a Cost Center
Every day, the Great Recession and its seismic effects recede further into the rearview mirror, but an economy that’s on track for the longest expansion in U.S. history still presents its own
unique challenges to automotive retailers.1
Hard to believe? Consider that in the past 20 months, the Federal Reserve has increased its benchmark six times. Federal interest rates currently sit at 2.5 percent, and will likely remain steady through the end of the year.2
What this emerging reality means for dealers is an increasing cost of floorplan financing, which for the first time in nearly a decade has become an expense rather than a source of revenue.
How is this possible? First, let’s review what the status quo has been in the years since the 2008 recession: Manufacturers have rewarded larger inventories with substantial assistance payments, which helped the lot remain stocked and covered any accrued interest while dealers waited for deal funding to come through.
That was a viable approach in the years when interest rates were stagnant and near zero. Even as recently as 2016, the average dealer cleared just under $86,000 on floorplan revenue annually.3
However, those numbers have inverted. Rates have risen, but assistance payments have not. In 2017, floorplan rebate revenue plummeted 80 percent to just over $17,000, and that trend has continued.4
To put the issue in even starker terms, through May 2018, the average U.S. dealership paid $61 per new and used vehicle in floorplan expense, versus an income of $22 the year before.5 For the entire year of 2018, floorplan interest expense roughly quadrupled to just over $22,000.6 Finally, the Penske Automotive Group estimates that interest rate hikes have led to $8 million in additional interest costs, mostly driven by floorplan.7
For a better illustration on the individual dealership level, consider the following hypothetical: If you sold 700 units in 2017, the average of $22 additional revenue per deal means you netted $15,400 in extra money thanks to a combination of lower interest rates and manufacturer incentives. In 2018, for the same number of units sold, that became a loss of $42,700 because of the shift to an average cost of $61 per deal – thanks, once again, to rising interest rates that could continue to climb in 2019.
There are several ways dealers can react to this growing drag on profitability, but they largely fall under two approaches: cut back on investment, or find a way to speed up the funding process to mitigate the impact of accruing interest on each deal.
For the first time in nearly a decade, floorplan financing has become an expense rather than a source of revenue.
For the entire year of 2018, floorplan interest expense roughly quadrupled to just over $22,000.
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I want to dive into both of these approaches, starting with cost-cutting around the dealership, to see what makes the most sense for dealers looking to protect their profits today and going forward.
Cut Back on Needed Investments The first instinct of a dealer facing shrinking profit margins is to find ways to cut unnecessary costs and waste to produce a leaner, smoother-running dealership.
That’s a natural impulse, and an understandable one considering it’s easier to cut costs than to identify and cultivate new profit centers within an existing operation – especially when former sources of profit, such as floorplan, become sources of expense.
The problem is, as long as the economy continues to grow, it’s quite possible the Federal Reserve will continue to raise rates two to three times per year. Indeed, rates sat at just above five percent in late 2006, just as the possibility of impending economic collapse was beginning to take shape.8 If the current economic expansion continues into late 2020 or 2021, it’s entirely possible we’ll see those rates again.
That means the issue of floorplan expense could exceed what simpler cost-cutting measures are able to counteract. For example, one dealer group switched from stocking bottled water to offering paper cups at water fountains, which saves them about $6,000 annually.9 While commendable, that may not equate to the kinds of difficult and impactful cuts the situation demands if you’re going to rely on cost-cutting alone.
Consider that dealerships are constantly shelling out money to keep the business running: office supplies, employees, building updates, utilities, interest payments, etc. With rising interest rates you can’t control, there’s less money to leverage. What do you do when money gets tight?
For some dealers, the answer is to cut down on employees because it’s simply impossible to keep them all while still turning a profit – never an easy decision. Others may turn to cheaper vendor partners for needed dealership solutions, saving some money but sacrificing quality and performance in the process. Dealers might also delay dealership repairs or renovations, or simply carry fewer vehicles on the lot to mitigate the cost of holding inventory.
The obvious problem with all of these solutions, each of which requires pulling back from investments that are necessary to keep a dealership growing and profitable, is that their cumulative effect is self-destructive. In other words, they can save dealers money in the short and even mid-range time frame, but ultimately they help push your operation into a spiral that’s difficult, if not impossible, to recover from.
As long as the economy continues to grow, it’s quite possible the Federal Reserve will continue to raise rates two to three times per year.
What do you do when money gets tight?
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Why exactly is that the case? When money gets tight, it creates an uneasy tension in your store for both employees and customers. Employees may feel they need to jump ship before matters get worse, while customers might think your dealership isn’t delivering the state-of-the-art experience they expect in today’s age.
Ultimately, floorplanning expenses trigger a domino effect, impacting every area of the dealership. What’s becoming increasingly clear is that simply cutting back on costs, whether they’re minor or major, won’t provide a lasting solution on its own.
Instead, dealers need to innovate. The dealers who will overcome this emerging paradigm are the ones who find ways to attack the underlying issue – interest costs accrued on vehicles already off the lot – head-on.
Fund Deals at the Speed of Digital Currently, it takes anywhere from several days to a couple of weeks to fully process an automotive contract.10 That adds up to a significant interest expense and some of the existing solutions, such as paying for an overnight delivery service, represent their own recurring expense.
Not to mention the length of this process means if an error (such as a missing signature) forces a customer to come back to resign something, their experience takes a nosedive. Even on a good day, half the time your customers spend at your dealership is devoted to negotiating or doing paperwork, resulting in a 49 percent satisfaction rate for how long the purchase process takes.11 Driving customer satisfaction index (CSI) scores lower hardly seems like the answer to protecting dealership profitability.
A better approach would be to leverage technology that can revolutionize how you process an automotive contract, cutting your contracts in transit (CIT) time to a day or two – and sometimes to hours.
By drastically cutting down CIT days, you could mitigate the expense of climbing interest rates, freeing up money for investing in the business, and retaining your highest performing employees.
The technology that can deliver this kind of transformation is electronic contracting. A digital solution for automotive contracting transforms lengthy paper contracts into a series of electronic forms that can be sent and received instantaneously, improving:
• Speed. Cut down CIT time to a day or two – or even a matter of hours.
• Compliance. Automatically alert your F&I staff if a signature has been missed before closing the deal.
Floorplanning expenses trigger a domino effect, impacting every area of the dealership.
By cutting down CIT days, you could free up money for investing in the dealership and retaining your highest performing employees.
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• Customer Experience. Streamline the F&I process, prioritizing your customers’ time and experience. They aren’t inconvenienced by having to return to the dealership because of a missed signature or other form error.
• Lender Satisfaction. Deliver clean forms expediently and conveniently. You’ll build a good working relationship with lenders, securing your funding in the future and helping you present the most competitive offers to close deals.
Digitization seems like such an obvious step forward for automotive contracting that it begs the question: “Why hasn’t this solution already been widely adopted?” You most likely know the answer: For years, strict regulatory oversight has made digitizing any part of the vehicle sale, especially what goes on in the F&I office, a tricky proposition. How do you ensure font sizes are large enough to meet regulations? How do you handle directional language in contracts like “directly above” or “adjacent to”?
It’s for this reason I specifically advocate for electronic contracting enabled through a tool that already makes compliance a top priority, removing the risk for you from the outset. One example would be an interactive tabletop device used to present finance and insurance options in the F&I office, producing a compliant, completed car deal in a secure digital file.
Simply put, instead of 39 feet of physical forms,12 you can send one clean, accurate, digital package to your lender.
Regardless of the specific solution you choose, secure compliance for the digital deal first and then introduce digitized transit into the funding process. This protects your F&I profits even in the face of economic headwinds.
Protecting Your Profits
Whether we’re mired in a recession or seeing new records for continuous economic expansion, it almost seems unfair that every scenario gives dealers a unique challenge that threatens sustainable profitability. But, no one ever said automotive retailing is for the faint of heart.
Tough challenges demand smart ideas to solve them, and few things have served dealers as reliably through the years as technological innovation. The same holds true today.
In the face of climbing interest rates stifling your profitability, how you respond to the problem of an outdated and expensive model of automotive contracting is critical.
For years, strict regulatory oversight has made digitizing any part of the vehicle sale, especially what goes on in the F&I office, a tricky proposition.
Tough challenges demand smart ideas to solve them, and few things have served dealers as reliably through the years as technological innovation.
800.767.7879 | [email protected] | www.reyrey.com© 2019 The Reynolds and Reynolds Company. All rights reserved. 4/19
It may go against every instinct to invest more when money is getting tighter, but recent history has proven that the dealer who’s always looking ahead is the dealer best prepared for the challenges we can’t even see yet.
Visit www.reyrey.com/whitepapers to read more about how the automotive industry is changing.
1 The Washington Post 2, 3, 4, 5, 7, 9, 10, 12 Automotive News 6 NADA 8 The Balance 11 F&I and Showroom
Jon Strawsburg is vice president of Product Planning for Reynolds and Reynolds. Named to this position in January 2007, Strawsburg is responsible for overseeing all product planning for Reynolds Retail Management System, including all F&I applications, eContracting, and the Reynolds docuPAD® system. Prior to his Product Planning role, he was vice president of Fixed Operations for Reynolds. He began his career with Reynolds as a technical specialist. From there, he was promoted into a number of leadership positions covering Marketing, OEM Sales, and Product Management. He holds a bachelor’s degree from Wake Forest University.
