Automotive
Trends Report

Dealership Performance and Profitability Trends

How F&I PVR and Front PVR are Impacting Dealership Profitability

Our Take: Inventory has vastly improved, and we are continuing to experience the shift from a seller’s to a buyer’s market. Quarter one results show that in true dealership fashion, managers and teams are adapting to the changing conditions and have a positive outlook on the year ahead.

F&I PVR

Product Income Versus Finance Reserve

Business Managers continue to capture F&I profitability, but are slowly changing how. In the last four months alone, we've seen product income make up about 3% more of F&I PVR as compared to finance income. We see this as a positive trend for two reasons:

• Product income better supports the customer lifecycle by helping to bring customers back to the dealership through the service department.
• Finance reserve can be risky to rely on as income, because when a customer pays off a loan early, the dealership gets charged back by the lender.

PERCENTAGE OF F&I PVR 72-MONTH TERM

Incentives and Process Improvement Benefits Front PVR

Front PVR has begun to level out when compared to last year’s decline from March onwards. However, this metric is still performing far better than in 2019. The leveling off we're beginning to see likely stems from an increase in incentives and improved sales processes.

JM&A Group Tip: If inventory levels continue to rise, that will put significant pressure on Front PVR, which could result in declines throughout this year. In preparation, it’s important to focus on your processes and sales techniques as competition will get tougher with more options available on dealership lots.

FRONT PVR

Vehicle Service Contracts Continue to Be a Value-Add

Year-over-year results demonstrate how VSC penetration levels are improving after a slight decline in the back half of last year. With growth in Q1, is it safe to say we’re seeing signs of normalization taking place?

VSC

Our Take: We are keeping an eye on VSC sales compared to 2023 and 2019. Concerns regarding affordability remain. Interest rates are still high, car insurance premiums continue to rise, and many customers are working on a tight budget. From an F&I perspective, a service contract can have dual benefits: the value that service contracts create for the customer and the opportunity for finance managers to drive PVR.

PPD Levels Emerge From a 2023 Decline

Similar to VSC levels, PPD has emerged from a downward trend for much of the latter half of 2023 to now almost matching the number of products per deal in March 2023. This is also following a similar line to PVR. Put simply, dealers are selling more products to make more money, showcasing their constant agility in an evolving market.

Our Take: As this first quarter trends in a more positive direction, we anticipate this number to keep going up if dealers continue tailoring their sales process to meet customer needs.

“Record high interest rates are a top concern for dealers and consumers. The industry is focusing on a customer-centric approach and reserve is lessening over time. A focus on product is timely so car buyers with affordability concerns can plan for a more fixed cost to own their vehicle, granting stability in a time of economic uncertainty.” - Caroline Urrutia, Sr. Advisor of Retail Strategy at JM&A Group

PPD

Buyer Adoption of GAP Increases with Affordability Concerns

Another positive Q1 trend can be seen in GAP levels with three consecutive months of increased penetration. When inventory was low, many consumers paid over MSRP for their vehicles, creating an environment for negative equity when they trade in their vehicles. Now, record amounts of negative equity affect the industry, reaching an average of $6,064 in Q4 2023.

JM&A Group Tip: It is far easier to explain to a customer today why they should consider GAP products compared with two years ago when people had large amounts of equity because used car values were so high. To help ease affordability concerns, consider evaluating your team’s process for approaching GAP sales and make sure their techniques are effective, helpful and encouraging for consumers.

GAP

Economic Factors Shaping Vehicle Sales and Valuations

High New and Used Interest Rates Still Present

Average interest rates remain high and have continued to trend upward for used vehicles in Q1. Dealers can help customers find cost savings through OEM incentivized rates on new and CPO vehicles and leverage relationships with lenders to help offer competitive interest rates.

Our Take: If interest rates remain high, customers will need help considering all their options for a vehicle purchase. Dealerships should be prepared to assist customers in finding the right vehicle and deal type for them, as well as present appropriate options to protect their investment.

NEW AND USED AVERAGE INTEREST RATES FOR 72-MONTH TERM

Used Car Sales Increase in Q1

Though the percentage of used car sales dipped in March compared to earlier this year, they are still selling through above rates we saw last year. As new vehicle inventory and incentives rebound, we can expect to see growth in this segment. 

NEW AND USED DEAL PERCENT

Our Take: More older model year vehicles are being financed, and having the right product mix that benefits the buyer can go a long way. With fewer lease returns coming back into the market, this year may bring continued variability in used car prices and availability, but new car inventory levels are strong and will help bolster overall sales. 

Lower Lease Returns Will Impact Used Car Values

In March, we saw the highest percentage of lease deals since July 2021. This rise had a significant impact on finance deals at the end of last year and is making its mark on cash deals in early 2024. Leases are becoming more attractive, and we expect them to be an increasing percentage of deals, whether that’s from manufacturer offers or federal government tax credits on EVs. 

FINANCE TYPE DEAL PERCENT

Our Take: We expect a drop in lease returns in the latter half of the year as we approach the third anniversary of inventory shortages. With less newer model used cars on the market, this could drive up used car values as demand overtakes supply. 

“With high interest rates remaining and lease programs improving, cash or lease deals are expected to take a bigger slice of the deal mix. Business Managers who approach these as opportunities the same way they do finance deals are more likely to maximize every transaction. Now is the time to hone skills and processes that help drive performance across all deal types.” - Caroline Urrutia, Sr. Advisor of Retail Strategy at JM&A Group 

Manheim Used Vehicle Index

There has been a significant drop in the Manheim Used Vehicle Value Index year over year, with this quarter ending over 30 points lower, making this an important sector to watch. Some are projecting this could continue to decline, but if all the anticipated "missing" lease returns impact the market, we’re betting that supply issues will cause used vehicle prices to increase.

MANHEIM USED VEHICLE VALUE INDEX

Seasonally Adjusted Annualized Rate (SAAR)

As we follow the SAAR, all signs point to inventory returning, and there is a lot of pent-up demand from consumers for cars. With plenty of people in the market to buy them, this will be a great environment for dealers if they can maximize every transaction and opportunity. 

SAAR

Tips For Success:
Some factors may remain outside of your control – such as federal interest rates or customers holding on to their vehicles longer. Continue finding ways to enhance every area of your dealership, including: 

• Review your CSI (Customer Satisfaction Index) scores again. Compare your scores over time, paying attention to what your customers are saying.
• Focus on developing your technology and processes. Make sure you’re making the most of your dealership's website, including user-friendly experiences and ensuring your online and in-store processes align.

Automotive Industry Trends and Updates 

Decline in Electric Vehicles Sales Forecasted   

Shifting consumer demand and challenges with charging infrastructure are contributing to a decline in EV sales, which is reflected in sales forecasts. But even though sales may decrease this year, EVs are here to stay.

These vehicles are still an expensive asset, meaning there is a clear interest and demand to protect them with F&I products. This presents an opportunity for sales personnel to help customers determine what vehicle best supports their current and future lifestyle, understand potential costs down the road and how vehicle service contracts specially made for electric vehicles can help ease some of their hesitations.

FTC CARS Rule Remains on Hold   

The Federal Trade Commission has paused the effective date of its Combatting Auto Retail Scams (CARS) Rule, leaving dealers wondering where they stand and how the final rule will be written. Though the pause has caused relief for some dealers, it is important to remain informed on how this may impact your dealership’s business and all compliance best practices.

Finding Pathways to Dealership Profitability

As we close the first quarter and look to the remainder of the year, there are several key trends that prevail. Consumers are still navigating a tough economic environment with high interest rates, increasing car insurance premiums and high vehicle costs. Though manufacturer incentives are increasing, many consumers are looking for budget-friendly options and additional ways to navigate affordability challenges. 

This is an opportunity for your dealership to encourage customers by prioritizing transparency in the sales process, taking the time to listen to their unique needs and showcasing products like GAP and VSC that will best fit their next purchase.