The writing is on the wall. Some manufacturers are deciding to keep more profit while others are cutting warranties — all while new players are entering the automotive service space. Trends are pointing towards the fact that dealership service departments are going to become more important to dealership profitability, but at the same time will be faced with new challenges in maintaining revenue.
Let’s examine some recent events:
GM Cuts Warranties
GM announced in March, 2015, that it plans to dramatically cut warranty coverage on Chevrolet and GMC vehicles. Why? Because it does not think their customers care. This move brings new challenges to dealerships while also presenting some new opportunities.
Service departments can typically rely on customers returning for vehicle service while under warranty. It’s only once these vehicles are out of warranty that statistics show the highest level of defection to independents. Of course, this is exactly when the customer becomes the most profitable to dealers, as customers pay ROs. The period of time when dealers are servicing cars under warranty can be considered a sort of courtship for a long-term relationship. As this time is decreased, dealerships will have to work faster to establish a solid relationship with their customers. Those GM dealers that have done a good job building value, and that have provided great customer experiences, will have a greater chance to retain a customer than any dealerships that haven’t. And, by doing so, will be able to capture more customer pay business sooner than ever before.
Warranty cuts also provide an excellent opportunity in F&I. Millennials have already shown that they find value in pre-paid maintenance programs through fixed service costs wrapped into their payments, and the security that brings. As warranties shorten, dealers should find it easier to convince customers about the value extended warranties bring. Consumers are keeping their vehicles longer than ever before. If that 4-year, 50,000 mile GM warranty changes to 2-3 years, consumers will be more interested in hearing about and purchasing these plans.
Amazon Introduces Home Services
At the end of March, Amazon launched “Amazon Home Services.” Among the services being offered is auto mechanics. In a nutshell, Amazon will have listings for services at flat rates from many home service professionals, including plumbers, electricians, painters, etc. Consumers will have the ability to go onto Amazon’s website, find services they need and view listings of contractors in their area, along with their flat rates. It will also include reviews solely from consumers who have used the services.
Transparency has rapidly become the new buzzword in our industry and websites have capitalized on the consumer’s desire for information. Consumers have never been more knowledgeable and empowered than they are today. That being said, this transparency has typically been reserved for the front-end of the dealership, not service. That’s slowly changing, however.
Dealership service departments are approached by their customers with coupons or pricing from their competition and independents all of the time. In fact, many dealerships already have price matching policies when it comes to franchise competition. Now, however, dealerships may see consumers coming in price matching their labor rates through the Amazon app on their phones. Without the knowledge and training on how to overcome these situations, service advisors may find customers leaving for cheaper pastures.
In reality, this concept is still unproven, as there are a lot of questions that need to be answered before getting worried. We don’t yet know what kind of home services a mechanic will be able to provide on a flat rate, aside from basic maintenance, tire repairs, or other immediate needs. However, all things have to start someplace and there’s no doubt that Amazon is relentless, well funded and doesn’t fail often. So this new service is worth watching. It’s also the perfect time to train your advisors on how to overcome price objections or comparisons between dealership and independent service. While this is something all great advisors should already know how to do, it’s only going to become more important as transparency creeps into the service business.
FCA US Decides To Make More Money At Their Dealers Expense
April 2015 saw FCA US CEO, Sergio Marchionne, announce that, in an effort to increase profits, FCA US will be increasing invoice costs for its vehicles, while keeping the suggested retail prices the same. This move further reduces potential front-end profit margins for all of its dealers. In this time of transparency, many dealers are already rolling cars off their lots with small front-ends and have to rely on undervaluing trades and finance reserve to stay profitable. This move will certainly not be celebrated by their dealers and will present more challenges in terms of financial stability. It’s all well and good to make a decision to hold more front end gross, but reality shows us that consumers know more about incentives, rebates and dealer cash than many dealers do. Most consumers truly don’t care how much money a dealer makes when they buy a vehicle — hence the popularity of price shopping sites.
If FCA US doesn’t provide rebate, incentive and subvened rate support for its dealers to continue to help them sell cars and stay competitive, dealers will be forced to look to other departments to increase revenue and/or cut budgets. Of course, the most likely department that dealers will look to is the service department. Short of building new facilities that can handle increased service work, dealers without the financial means (or willingness) to do so should start looking at ways to increase their workload capacity through technology and process changes in the service department.
Any efforts to increase workload, however, may be thwarted by the lack of available well-trained technicians. No matter how large a service department you build, you won’t be able to increase your service business if you don’t have the technicians to support it. Large auto groups are already on a hiring spree with at least one – Asbury Automotive Group – publicly stating that they are looking to add 200-400 technicians within the next 1-2 years.
All of these events have occurred within a 2-month period (March-April 2015) and by no means are these all-inclusive.
Service departments have always been the foundation on which all successful dealerships have been built. This has never been truer than it is right now and into the future. Take steps now to shore up your fixed operations by maximizing the efficiency of your departments. Hire extra technicians as needed, train staff properly, optimize the shop load capacity and introduce technology that will help to deliver a better customer experience. In this way you can position your dealership for long-term success despite the challenges that may be ahead.