Colonnade Provides Insight Into The VSC Industry

By: Jeff Hatch

January 23, 2019

A new report from Colonnade Advisors details the significant interest among investors and consolidators in the vehicle service contract industry. The following is an excerpt from the appendix of the whitepaper, which provides an in-depth look at the trends and growth drivers behind this expanding market. 

Strong Macro Trends are Driving Acquisitions and Investments in the VSC Industry 

U.S. consumers spent an estimated $35 billion on VSCs in 2018. VSCs are typically marketed at three points in the life cycle of an automobile:

(i) at original sale (the new vehicle segment – extended warranties),
(ii) near or after expiration of factory warranty primarily via direct-to-consumer sales (the end-of-warranty segment) and
(iii) at resale (the used vehicle segment).

The VSC market benefits from high new and used car sales and increasing penetration rates. Consumers value VSCs as they have limited funds to pay for repair bills and they are owning vehicles longer. Dealerships focus on VSC sales to enhance margins. F&I products provide increasing incremental profitability and represent 25% of total dealership gross profit, compared to 15% in 2009. We expect these dynamics to continue.

The VSC market size has grown by 6.9% to $35 billion since Colonnade’s last whitepaper in August 2017. The growth is attributed to three trends:

1) the increase in attachment rates on new vehicle sales,
2) the increase in used car sales and
3) the increase in vehicles out of the OEM warranty period.

Retail Market for VSCs in 2018 Compared to 2017

New car sales ultimately drive sales in the VSC market. New car sales were 17.3 million units in 2018, a slight increase from 2017. However, VSC attachment rates, or the percent of new vehicles sold with a VSC, have increased significantly in the last year causing the new vehicle VSC market size to increase by 5.9% to $16.2 billion.

Used vehicle sales are at an all-time high level and are driving the purchase of VSCs. Older vehicles have typically outlived OEM warranties and have higher maintenance needs, factors that have a positive impact on consumer demand for VSCs. There has been an influx of late-model off-lease vehicles returning to dealers which are older, higher mileage and outside of the manufacturer’s warranty, thereby increasing the need for VSCs on used vehicle sales. Colonnade estimates that 42% of used vehicle sales through franchise dealerships and 20% of used vehicle sales through independent dealerships have a VSC attached. The estimated franchise attachment rate increased from prior Colonnade analyses based on surveys completed by Baker Tilly and NIADA.

The number of vehicles post-OEM warranty has increased to an estimated 87 million vehicles from 86 million in 2017. These vehicles were post OEM warranty and less than twelve years in service, the “sweet spot” for aftermarket VSCs. Year 2017 represents the fewest vehicles in the sweet spot in the last seven years, as a result of the low number of new vehicle sales during the recession. Our research indicates that longer vehicle life coupled with continued high levels of new car sales post-recession will generate a continued growing market for post-OEM sales of VSCs.

Increasing Number of Vehicles Off OEM Warranty

Of the 276 million vehicles on the road, 48% are eligible for a VSC. This group includes new vehicle sales, used vehicle sales and post-OEM warranty vehicles that are less than twelve years old.

Increasing Consumer Demand for VSCs 

Consumer demand for VSCs is increasing as the vehicles on the road are older and higher mileage vehicles have heightened maintenance needs. U.S. consumers are holding on to their cars for longer than ever, partially due to the higher quality of vehicles.

The average age of passenger vehicles on the road was 11.7 years at the end of 2017, up from 9.6 years in 2002. One of the reasons for the increase was the 40% drop in new vehicle sales in 2008 and 2009. The record number of new vehicles purchased in 2015 and 2016 will slow the rate of increase, resulting in an average estimated age of 11.8 years in 2020, according to IHS Automotive.

Length of Ownership

Vehicle owners are increasing their length of ownership. New vehicle buyers now own their vehicle for 6.6 years compared to an average of 4.3 years in 2006, according to IHS Automotive. Used vehicle buyers now own their vehicles for 5.5 years compared to an average of 3.3 years in 2006. This trend is due to longer loan terms and the higher quality of vehicles. By using longer-term loans, consumers can reduce monthly payments and afford more expensive vehicles. Over 85% of new vehicle and 53% of used vehicle purchases are financed, and six to ten-year loans are becoming more popular. As a result of the extended terms, borrowers are not in a net equity position until their fourth year and frequently beyond the manufacturer's warranty. To increase a borrower's ability to pay on loans, lenders include the value of F&I products in loan-to-value calculations as a borrower is more likely to stay current on a functioning car. These trends create the opportunity for higher VSC penetration.

The increasing number of older cars is creating more vehicles that need repairs and maintenance; repairs generally become more expensive as vehicles age. Many consumers are unable to afford repairs as the growth in costs is outpacing wage growth and 40% of Americans do not have $400 in emergency funds. These trends are driving demand for VSCs.

F&I Focus at Dealerships 

Despite improved auto sales, dealership margins remain under pressure, and F&I products provide meaningful incremental profitability. Dealerships have become more dependent on F&I products, as they represent 25% of total dealership gross profit compared to 15% in 2009. This trend will continue as dealership margins on vehicle sales may be squeezed in coming years. In addition to increasing vehicle sales margins, F&I products improve long-term profitability by enhancing customer loyalty and retention by setting the stage for repairs, routine servicing sales and subsequent car purchases at the dealership.

Growth in the number of older vehicles is a positive trend for aftermarket repairs. However, dealerships will face strong competition for these increased repair revenues. Longer periods of ownership take consumers farther away from the selling dealership service lane to less expensive non-dealership repair facilities. Dealers seek to counter this trend by selling VSCs and prepaid maintenance plans to increase the likelihood of drivers returning to the dealerships.


Click on the following link to read this report in its entirety: https://coladv.com/wp-content/uploads/VSC-White-Paper-January-2019-Final.pdf

Filed Under: Colonnade, contract, industry, market, service, vehicle

Let Warrantech’s Extensive Industry Expertise Take Your Business Further

By: Jeff Hatch

November 29, 2016

There’s a lot to be said for experience. Having someone in your corner who has a greater understanding of what you are trying to accomplish can help you fully realize your goals and even uncover new opportunities that you never knew existed. That’s what we do best.  
 
Warrantech is comprised of service contract / insurance industry veterans and is led by a management team whose members each average more than 23 years in the business. Our executives are thought-leaders who serve as industry board members and conference speakers, and possess numerous industry designations and certifications. This expertise translates into a comprehensive perspective with vast insight that enables us to uncover hidden growth opportunities and structure programs that offer a high-value proposition for our partners and their customers. 
 
Our real-world experience also guides our team to help clients refine their sales strategies and create lucrative programs that build customer loyalty and enhance brand image. With a team of highly skilled underwriters, actuaries, legal/compliance professionals, marketing and management experts, Warrantech has the depth of knowledge to launch and administer your program successfully within your defined timelines. 
 
Our experienced team is masterful at driving large, complicated projects, based on years of integrating, developing and managing a variety of well-positioned acquisitions and meaningful, large-scale client programs. We are able to design, develop and implement a program with minimal strain on your team, while working within any desired parameters you establish. We typically focus on:
 
Optimization of price tiers and bands
Ensuring all eligible products are covered
Designing clear and concise customer terms and conditions
Continuous development of marketing materials and sales tools
Robust field and online training programs
Aftermarket and renewal marketing activities
Development of appropriate compensation and incentive programs  
 
The Warrantech team has the expertise to ensure that you receive a carefully coordinated program that integrates all aspects of your business, including sales, service and marketing. In turn, this ensures a perfect fit for both your business and your customers.
 
Visit warrantech.com or give us a call at 800.833.8801 to learn more about how we can help you.

Filed Under: business, expertise, industry, marketing, sales, service, Warrantech

TWICE Magazine’s Extended Service Report

By: Jeff Hatch

February 17, 2015

Sean Stapleton, president & CEO of Warrantech, recently took part in TWICE magazine’s roundtable discussion on the state of the extended-service contract industry. The following is his response to the challenges and opportunities that lie ahead. 

What is the greatest challenge facing the extended-service contract industry?

A significant challenge faced by our industry continues to be retail margin compression. As a result of the fierce competition between retailers for customers, retailers have few choices but to generate savings in other parts of their businesses. Extended service contract programs are certainly high on the list of many retailers as an opportunity to retain additional revenue. The result is that administrators and their respective underwriters are forced to try to become more efficient or reduce claims funds to compete.

While competition should be seen as a positive force in business, this continued underwriting pressure could lead to administrators underpricing programs to win opportunities. This will likely result in programs being underwater, thereby leading to frantic attempts by the administrators and their underwriters to reduce both administration expenses and claims costs. The likely downstream effect will be negative customer experiences and further diminished customer loyalty.

Conversely, where do the industry’s greatest opportunities lie?

The greatest opportunity for our industry will be the development of protection solutions that allow customers to cover a broad spectrum of devices and equipment utilizing diverse payment mechanisms. Warrantech has developed solutions that better enable customers to purchase protection plan products in a convenient manner, covering more items, and providing additional value that ultimately will result in additional revenue and customer satisfaction for our partners.

What is your biggest takeaway from last month’s International CES?

The consumer appetite for connected products is gaining momentum at an astounding pace. Manufacturers are clearly listening to consumers and are focusing their efforts on smart products, which are able to communicate and synchronize in ways never before imagined.

With this enhanced communication functionality being developed for devices, we believe that consumers will demand a unified platform that can seamlessly monitor, control and report back to the consumer on the status of their connected equipment.

The next logical step will be a protection solution that is able to provide coverage for each connected device. In order to provide a comprehensive single solution, providers of protection plans will need to be able to provide protection for connected products ranging from smart appliances, televisions, mobile devices and even automobiles. 

Please share any new programs or services that would be of interest to our readers.

The Amynta Group [Warrantech’s parent company] has been an innovator in the telematics space with regard to protection offerings. Last year we launched our Connected Protection solution, which provided vehicle service contract purchasers with the ability to protect mobile devices connected to their vehicle’s WIFI network.

For 2015 we plan to provide our retail partners with the ability to offer monthly protection plans to their customers, which will provide comprehensive protection for an extensive array of equipment owned by the customer. Customers will enjoy additional benefits for products purchased through the retail partner, including disappearing deductibles and in-store service. The goal is to drive both recurring protection plan sales and traffic to the participating retail partner’s stores. The offering, known as our Loyalty by Warranty™ program, will provide retailers with an innovative way to increase revenue as well as customer loyalty.

Visit twice.com to read the extended service roundtable discussion in its entirety and for more industry insight.

And be sure to keep up with Warrantech on Facebook, Twitter and LinkedIn so you can learn more about our innovative products and services as they become available.

Filed Under: CES, contract, customers, extended, industry, Sean, service, Stapleton, TWICE, Warrantech