The end of 2012 was certainly an interesting one, on a lot of levels. The election in November helped to shape the way the budget talks went at the end of December, and no matter where you fall on the political spectrum, it's probably safe to say that no one really won here. There were wins and losses on both sides, concessions made to pass a deal late on New Year's, but that was mostly a stop-gap effort, with more political debating about our economy and debt to come. But why are we talking about that here? Because it will play a very strong role in what 2013 will bring for the automotive industry in general, and agents and F&I managers specifically.

We talked to a few industry players to get their take on what to watch for in 2013, and the first striking trend was that almost all of them are only cautiously optimistic. They all see the economy — and the industry — either holding steady or showing moderate growth, and all of them prefaced their remarks by noting that a lot of that is due to uncertainty with where the economy will go, and how the politicians will solve various debt issues. One of the major fallouts from the New Year's bill that passed Congress is that the payroll tax cuts expired — meaning every American has less discretionary income now.

"I don’t know that there has ever been a time I’ve been so confused as to what will come in the next year," said Tony Wanderon, president and CEO, Family First Dealer Services. "There are so many changes and uncertainty in the economy. I'm not going to think anyone on a salary will be taking home more, and that could put pressure on car sales, which will then put substantial pressure on F&I sales. If that increases payments, even if consumers need a new car, they might not be able to afford it. The first half of the year could be a challenge as we absorb the changes that will occur."

Wanderon went on to note that he does believe that, once consumers adjust to the changes, the second half of the year will see the market expand, and as auto sales grow, F&I will follow suit. He also said that without economic uncertainties, the trends all suggest 2013 will be a great year, with lending starting to open up, especially the advanced lending that is key for F&I sales.

Ryan Williams, executive vice president, Fidelis Systems, agreed, noting that he doesn't see the market shrinking, but doesn't predict a huge swell, either. "I don't see much of a change in overall penetration. With banks loosening up a bit we may see a lift of 5% or so."

Another expert in agreement with that sentiment is Kelly Price, president, National Automotive Experts. "I would think F&I penetration will remain fairly steady. With grosses declining and the pinch on the economy and tax increases, I don’t see it increasing overall."

"The swing between pessimistic and optimistic industry pundits is 500,000 units — an estimated 14.5 or 15 million cars and light trucks will be sold in 2013. I concur with those who predict a second, but less severe, recessionary dip, likely in the third or fourth quarter," noted David Robertson, executive director, AFIP. But that number is still up from the 2009 levels of 10.4 million, so even with that slight dip he sees coming, the industry is still in a much stronger position today than it was a few years ago.

Bright Spots

Despite the economic troubles that will impact every aspect of every industry in this country, there are some bright spots. F&I, the experts agreed, might not grow hugely, but they don't see it shrinking either. And one category in particular saw a number of them as fairly optimistic: service contracts.

"Service contracts will continue to be the predominant product sold in the F&I office. It provides the most value to the dealership as it not only drives revenue at the point of sale, it brings customers back for service work contributing to fixed operations coverage," said Jimmy Atkinson, COO, AUL Corp.

Williams agreed, noting that he sees a similar product, pre-paid maintenance, as being right up there with service contracts in sales volume this year. "I see pre-paid maintenance as one of the winners. With so many manufactures offering it, customers are now asking for it; it will probably will be a banner year for pre-paid maintenance."

Robertson was a bit more specific. He sees the growth area as coming in not just service contracts, but in contracts for used vehicles. He believes the economy, coupled with an aging overall fleet of cars on the market today, will drive consumers to the used-car lots, which will drive not only those sales, but the F&I on those types of vehicles as well.

"Generally, shifts in the aftermarket product mix are reflective of the changes in consumer demand. The joust between GAP and VSC may be decided by increases in used vehicle service contract sales in 2013. A tepid economy, coupled with the need to replace a rapidly aging fleet — Experian estimates that 52 million vehicles on the road today are 16 years or older — may drive a growing number of wannabe new-car buyers to the franchised dealers’ used-car departments."

Wanderon cautions, though, that while consumers are seeing more of the value in F&I products, in some cases they might be priced out of the market. "Service contracts have gotten more expensive. One of the most valuable products for the consumer might be out of their price range. But consumers are keeping cars longer, so they realize they need to take care of them now."

Predictions for 2013

So where does that leave the industry overall? Our experts had a few predictions to share.

Robertson sees 2013 as the year that will bring a shift in how the market sells cars online. There are still challenges, he notes, but he sees the concept as one that is going to gain acceptance. "In my view, the latter part of 2013 will see the natural progression of the 70% of prospective car buyers who currently shop online opting to complete the entire transaction electronically. A major manufacturer is beta testing an online vehicle purchase program, with very promising preliminary results. F&I is an integral part of the program. However, numerous obstacles exist. Handling the trade-in is chief among them. Also, the E-SIGN Act left numerous procedural hurdles to be addressed before 'paperless' transactions, in all phases of the vehicle purchase, funding, and owner indemnification processes, become a practical reality. But the inevitability of online car sales is a given, and in many respects, the car business as we once knew it will never be the same."

Wanderon believes customers will still be coming in the door, but believes there will be fewer of them. But while that might mean fewer car sales, he sees it as an opportunity for F&I. "We need to focus on products that retain customers, because it’s too expensive to get new ones; we haven’t done a good job of selling products and the experience at a dealership that gets customers to come back in the door. I see 14-15 million sales for the year, and I will be surprised if it goes higher than that. If car sales drop, F&I has more time to focus on each individual and their needs, so they can sell more and better products – it takes more time to explain each one as products become more complicated, and when it’s busy, it's easier to hear 'No' and move on to the next customer."

Agreeing that F&I is key, Williams noted that, overall, he's positive about F&I in 2013, "because the market is growing, but I'm nervous about the overall economic climate. F&I sales are more important that ever as they usually represent the profit of the store."

At the end of the day, said Price, there will be growth, but she agreed that it will come from better F&I sales and penetration, rather than because more cars are sold. "We are personally forecasting growth again this year, but I don’t believe it will be from an increase in unit sales."

Atkinson summed everything up, and put it into perspective, noting that at the end of the day, if an agent wants to see growth in this tough economy, they need to be proactive about it. "Growth for agents is in direct correlation to the value you provide a dealer. Agents should find their niche, whether it be training, F&I income development or other areas for the store. Develop that and have a relentless focus on leveraging that strength to bring you growth. 2012 was a strong year for our markets and 2013 could be even better. It’s up to each of us to make it our best year ever."