Technology disruption, new target customer groups, emerging business opportunities and expanding portfolios will create exciting growth potential for stakeholders in the North American OEM service and maintenance contract market over the 2018-2025 period.
Increasingly complex vehicle architecture and new vehicle ownership models will pave way for innovative finance and insurance (F&I) products, such as targeted service plans for electric vehicles, prognostics, and new mobility models. Digitization will have a transformative impact in terms of streamlining purchase processes and opening up omni-channel retail solutions for F&I products. Meanwhile, opportunities for higher F&I penetration will expand, driven by increasing vehicle maintenance costs, used vehicle sales and automotive loan tenures.
The promise of solid profits, strong cash flows and steady growth rates will continue to lure private equity firms, even as a host of new stakeholders makes inroads into the service and maintenance contract market. As this happens, the ecosystem is set to evolve with administrators foreseeing forward integration with direct-to-consumer marketers, automotive consulting groups, and franchised/independent dealerships in an effort to consolidate the distribution of service contracts and boost profit margins.
Service and Maintenance Contracts to Play Critical Role in Increasing Customer Retention and Profitability
Service and maintenance contracts offer multiple strategic advantages, particularly in terms of improving customer retention, strengthening the brand image of OEMs and dealerships, and driving profitability.
For instance, OEMs gain a positive brand image among customers returning to the dealership for vehicle service requirements even as future purchase decisions are influenced by such interactions. At the same time, OEMs stand to benefit from improved cash flows and enhanced profitability as most F&I products are paid up front. OES channels can retain customers throughout the contract term and increase parts sales by mandating the use of only genuine OEM parts and accessories. Moreover, OEMs can expand dealer participation and profitability by developing innovative F&I products with attractive compensation plans.
Today, customer retention rates are a cause of apprehension for both dealers and OEMs, the more so because only around half of 0-3 year old vehicles return to dealerships. Therefore, dealers will need to focus on developing their service-related F&I products in order to capture and retain more customers to their channel. In addition to mandating the use of only genuine parts/services during the contract service tenure, another strategy being adopted to boost customer retention rates includes combining the cost of F&I products with automotive loans and stretching this across the loan tenure, which automatically reduces the cost burden on the consumer.
OEMs are looking to F&I to offset falling margins and vehicle sales. Dipping new vehicle sales and the rising average age of vehicles (11.7 years) is being paralleled by improving consumer awareness about the critical need for preventive maintenance. This will spur the growth of F&I products and services over the forecast period. Advanced vehicle technologies and the increasing complexity of vehicle architecture will encourage consumers to return to dealerships for their service requirements, thereby generating revenue opportunities for OEM-backed F&I products.
While new vehicle sales are dropping, used vehicle sales are increasing. The heightened service and maintenance requirements of these out-of-warranty vehicles, together with rising annual vehicle maintenance costs, will positively impact the demand for F&I products for used vehicles.
Solid Revenue Growth Forecast for Prepaid Maintenance Contracts
Frost & Sullivan estimates F&I product revenues at $29.96 billion in 2018, representing 27% of the gross dealership profitability. By 2025, F&I products will account for 35% of gross dealership profitability.
In terms of revenue potential, prepaid maintenance contracts are poised to register the highest revenue growth rates among key vehicle and service maintenance contract segments, posting a CAGR of at 7.6% from 2018-2025. Maintenance obligations towards leased vehicles, rising costs of vehicle ownership, and improved awareness about preventive maintenance will fuel the uptake of such contracts. The mandatory use of genuine OEM parts, service discounts, and factory-trained technicians will highlight their appeal. Customers will be further attracted by the prospect of protection against price inflations, one-time investments in factory recommended maintenance procedures, as well as by enhanced safety, performance and product value.
Appearance protection plan contracts are anticipated to hit a revenue CAGR of 6.3% over 2018-2025. These contracts will receive a fillip from the increasing numbers of premium leased vehicles with customers adopting such contracts to minimize the high penalties associated with returning damaged vehicles at the end of the lease period. This will be reinforced by higher sales of premium/luxury vehicles and the high costs associated with maintaining their appearance.
Revenue growth in the tire and wheel protection contract segment will be spurred by heightened wear-and-tear caused by the increase in average miles traveled. State regulations on seasonal tires will also impact replacement demands, opening up new revenue opportunities for OEMs and dealerships, while setting the stage for a CAGR of 5.9% over the 2018–2025 period.
Vehicle service contracts are set to receive growth impetus from the estimated 36% of vehicles in operation in 2018 that were beyond OEM warranty and had less than 11 years of service life. Extended automotive loan terms, increasingly complex vehicles, new mobility solutions, along with the overall increased usage/average miles travelled, are set to transform the demand and pricing structure in this segment, resulting in a CAGR of 3.1% during 2018–2025.
Digitization to Transform Customer Experience
The future, as in many other spheres, will be about digital transformation. Digital technologies have the potential to streamline automotive purchase process flows, while directly addressing traditional pain points like low product awareness, bargaining, and excessive paperwork.
For instance, the entire online-to-offline purchase experience can be digitally transformed to support a seamless experience for customers and improve F&I awareness. This could be done through the creation of a digital platform that showcases relevant content, the provision of chat support on dealer websites and the use of tablet-based menus in dealerships.
Digital signatures and eContracting could be used to digitize existing paperwork and documentation, thereby rationalizing the buying process and supporting regulatory compliance. Digital in-store interactive menus and product videos could be used to promote more meaningful customer engagement and informed decision making. Online credit applications could be used by dealerships to generate leads and develop personalized service solutions through Big Data analytics.
The Future: Portfolio Expansion, New Customer Groups and Business Opportunities
To attract millennials who will be largest car buying demographic segment in the next few years, OEMs and dealerships should transition their business model from a transactional, dealer-centric one to an omni-channel, customer-centric one. They also need to increase product awareness through quality online content.
The use of digital menus, eContracting and biometrics-based authentication systems will enable OEMs to remove bottlenecks and streamline the F&I buying experience.
For more information on Market Analysis and Benchmarking of OEM Service and Maintenance Contracts in North America, 2018–2025, please contact Anuj Monga, Research Manager- Aftermarket Mobility, Automotive & Transportation at anujm@frost.com
