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Polk in the News: Lease is More, Automotive News, 5/2/11

Monday, May 2, 2011

As dealerships fatten menus to entice lease customers, orders are up and so are profits

Source: Automotive News, Donna Harris, May 2, 2011

A lease customer used to bring little or no profit to the finance office.

Dealerships primarily sold extended service plans. And with the typical lease at 36 months, leased vehicles were under warranty throughout the contract.

But now leasing is on the rise, climbing to nearly 19 percent of overall vehicle transactions in 2010, up from 13 percent in 2009 during the economic crisis, according to R.L. Polk.

And many dealerships are making bigger profits on sales of protection products such as tire and wheel coverage and dent and ding repair. Some sell an average of one or more products per lease. Why the change?

"There are more products to offer than there were in the 1990s," says industry veteran Marv Eleazer, the finance director at Langdale Ford Co. in Valdosta, Ga. Eleazer leads an F&I managers' discussion group on Facebook.

"Menu sales presentations have gotten better," he says. "By that fact alone, people are buying more products on leases."

Insurance product sales for finance managers involved in the Facebook discussion group vary widely, from $300 to $1,400 per deal.

Generally, dealers gradually have become less dependent on service contracts for F&I income. CNW Research in Bandon, Ore., reports that service contracts' share of F&I profits has declined steadily to a low of 27.1 percent in 2010, from a high of 44.8 percent in 1990.

Tempting array

Dealerships are offering a broader assortment of protection products to lure lease customers, including

New opportunities

Mark Levy, finance director for Thompson Toyota in Edgewood, Md., has been in the auto retail business for 32 years, mostly in finance. For 12 years he ran an independent leasing company. "Traditionally, the back-end gross on a lease was virtually nonexistent," Levy says. "Now leasing creates opportunities. You just have to have the right products."

Levy says lease customers often choose the Lojack security system or Dent M.D., a dent repair service. A paint sealant and fabric care combo is also popular.

To present the products, Levy uses Zurich's electronic menu software, which allows him to customize menus to suit lease customers. Service contracts obviously are out.

While customers are still seated at the salesperson's desk, Levy introduces himself and conducts a 17-question survey to determine their driving habits and gauge their interest in various protection products.

His store averages 70 new and 15 used vehicles a month, and 12 percent of new vehicles delivered are lease deals, about double from a year ago.

At least 75 percent of those lease customers buy one or more protection products, and the profit on a lease transaction runs about $750 per car.

Boston consultant Demitrious Kourias says some dealers are bundling protecton products into attractive packages designed for the lease customer. For example, a package might contain tire-and-wheel coverage, dent removal, windshield protection and roadside assistance.
Many have developed a product menu aimed at lessees, says John Jameson, CEO of general agent Dealers Resources Inc. in suburban Detroit.

In Waupun, Wis., Craig Bunkoske, business manager of Homan Auto Sales Inc., has seen lease penetration climb to 10 percent from zero over the past six months. He's making $1,200 to $1,500 per lease, $700 of the gross from product sales.

"We have decided to set up a customized menu for our lease customers," says Bunkoske, whose company operates a Chevrolet-Buick store and a Chrysler-Dodge-Jeep store that together sell 125 new and used units per month.

The menu will include maintenance plans, paint sealant, fabric care, windshield protection, wear and tear coverage, lost key replacement and tire replacement. Prices range from $195 for key replacement to $795 for interior and exterior protection.

The pitch

And the sales pitch? The products protect customers from paying hefty wear and tear charges when the lease expires.

"Usually, a customer who has leased before has experienced this firsthand," Bunkoske says. New lease customers "have heard the horror stories, or we can give examples."

A similar approach has helped publicly held Sonic Automotive Inc. boost product sales to lease customers.

In 2006, Sonic, the nation's third-largest dealership group, introduced electronic menus for all customers, including a menu targeting lessees. The lease menus offer fewer products, typically tire and wheel coverage, lease wear and tear, anti-theft and paint protection.

"We saw product sales increase for all customers," says Richard O'Connor, Sonic's vice president of F&I.

Sonic currently averages one product sale per lease customer, compared with more than 1.35 products per finance customer, O'Connor says.

Lease product sales are lower because adding products has a sharper impact on monthly payments, he says. The cost is spread over a shorter period. Leases tend to be 24 to 36 months, well below the 60 to 72 months typical of a finance contract, O'Connor says.

Hennessy Automobile Cos. finance exec Joel McGlamry says it's not as important to have a lease product menu as it is to cater to each customer's individual needs.

McGlamry, vice president of finance operations at the Atlanta-based dealership group, says a quarter of his customers lease. The group's 11 stores of mostly high-line brands sells 15,000 new and used units a year. "There are no canned word tracks and one-size-fits-all closes," McGlamry says. "The F&I manager must ask the right questions, listen to the answers and tailor the presentation on the fly."

The custom approach is snagging up to $1,400 per lease, $400 in product sales, he says.

Luring lease customers

The automakers' captive finance companies are the nation's largest vehicle lessors, and Toyota Financial Services is the biggest of them all, reports Experian Automotive.

Toyota Financial has promoted leases aggressively for the past few years and has tweaked its product lineup, adding an expanded maintenance plan in February.

Later this year it will roll out wear and tear coverage protecting lessees against hefty charges for wear and tear at the end of the lease.

The new maintenance plan has had "an excellent response" from dealers and customers, says Mike Scully, national products manager for Toyota Financial.

Lessors typically roll the cost of guaranteed asset protection, or GAP, into leases. But Toyota Financial leaves off GAP so that dealers can sell it separately.

Toyota and Lexus dealers are seeing brisk sales on GAP, which covers the balance of the auto loan if the vehicle is totaled or stolen. Toyota Financial's GAP sales for Lexus and Toyota have increased 25 percent in its last fiscal year, Scully says.

Other captives are sweetening product offers with incentives. Mark Powell is a financial service consultant for publicly held Penske Automotive Group's Mercedes-Benz and Audi stores in Chandler, Ariz. Penske is the nation's second-largest auto retailer based on new-vehicle retail sales.

Powell says Mercedes-Benz Financial allows dealerships to residualize the cost of its Star Service Maintenance Plan, which means the plan is treated like an add-on such as a sunroof.

The vehicle's residual value is its estimated worth at the end of the lease. If the residual value is 50 percent of sticker price, the customer would pay the equivalent of $400 for an $800 plan.
VW Credit Inc. adds 1 percentage point to the residual value if an Audi lease customer buys a maintenance plan. On a $50,000 car that would be $500.

Powell says leasing accounts for at least half of the sales at Penske's Mercedes and Audi stores in Chandler, Ariz. And 90 percent of customers purchase maintenance plans.

With lease promotions, product incentives and new product offerings, Powell and others like him say the lease is no longer a losing proposition for the finance office.

Products, sales pitch must be tailored to lessee's needs

Tom Wilson, F&I director, Riverside Auto Group Escanaba, Mich.
Quote: "I designed several presentations for leases and trained my staff to offer several different scenarios for lessees. I'm in business to make a profit, and I'm more than happy to make a profit on a lease as much as on a retail purchase."

Strategy: Use electronic menu targeting lease customers; regularly update product offerings. Train finance managers to close lease customers. Have salespeople help set up the deal with a demo of exterior protection products.

Results: 7 stores gross an average of $700 to $1,500 per lease. Finance managers sell an average 2 products per lease.

Best sellers: Paint, fabric and windshield protection, tire and wheel coverage

Closers: To plug tire and wheel plans: "Municipalities are too strapped to invest in roads. The cost of tires is going up. We just had a customer with a 2-week-old Lincoln hit a pothole. The rim alone was $754." To plug protection plans: Use the owner's manual to show what the warranty doesn't cover -- damage from bird droppings, tree sap and pollution, for example.

Richard O'Connor, Vice president, F&I, Sonic Automotive Inc. Charlotte, N.C.
Quote: "The lease menu helps because these products make sense for a short-term contract. The lease menu has yielded more success because the customers see value in the products offered."
Strategy: Began using an electronic menu in 2006, including customized lease product menu. Lease menu is shorter than finance menu.

Results: Sonic averages 1 product per lease.

Best sellers: Tire protection, lease wear and tear, anti-theft and paint protection

Closer: "This product takes away the risk and gives you peace of mind."

Brian Walter, Floor manager, Kia, Lee Johnson Chevrolet-Mazda-Kia, Kirkland, Wash.
Quote: "We won't see a serious dip in profit because of leases. Leasing gets the customer back every three years. If you have a great attitude, there's plenty of profit available."

Strategy: Sell the lease as another form of finance, promoting today's ultralow lease rates and manufacturer's incentives on leases. Ask customers whether they intend to buy the car at the end of the lease, and if so, sell the benefits of a service contract.

Results: About 15% of customers buy their vehicle when the lease expires. Half those customers purchase a service contract. The dealership averages $800 on a service contract sale per lease.
Best sellers: Maintenance and wear plans, excess wear and tear coverage.

Closer: "Do you intend to buy the vehicle at the end of the lease? If so, it would make sense to buy a service contract now. It'll likely cost more when the lease expires. Prices usually go up."

Mark Levy, Finance director, Thompson Toyota, Edgewood, Md.
Quote: "Over the last couple of years Toyota has pushed leasing, and you have to change to meet customers' needs."

Strategy: Ask the customer 17 questions to determine driving habits and product needs. Perform the survey when the customer is still seated at the salesperson's desk. That's their comfort zone. Use the information to customize an electronic menu.

Results: Three-quarters of lease customers buy at least 1 product.

Best sellers: Paint and fabric protection, dent and ding repair, windshield protection, Lojack security system, GAP (which is excluded from Toyota leases).

Closer: "It only takes one accident. A customer just had a loss on a GAP agreement that was over $22,000. For $14 a month, you don't have to worry about it."

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