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Sonic Cautious About CFPB, But Revs Up Hybrid F&I Push

July 21, 2015

By Brittany-Marie Swanson

CHARLOTTE, N.C. — During a quarterly earnings call on July 20, Sonic Automotive executives touched on the dealer group’s “unique and bold” business ventures — including its hybrid sales process and pre-owned specialty stores — as well as what the Consumer Financial Protection Bureau (CFPB)’s recent action against Honda Finance means for its plans to launch a captive finance company.

Heath Byrd, Sonic’s CFO, told callers that the group had been evaluating the launch of a captive finance company for the past year. But in light of the CFPB’s recent actions in the auto finance market, the executive said the group will ease up on those plans.

“And we’ll be very cautious about it and slowing that down just a little bit,” Byrd noted. “I think we all know we can make money doing it. I think we’re confident that we could execute with right models, but that one bogy that’s out there — that, as someone mentioned, is gaining strength — is [the] CFPB.”

Earlier in the month, the bureau and the Department of Justice reached a $24 million settlement with Honda Finance Corporation, alleging that the finance company allowed its dealer partners to charge higher interest rates on auto loans to minority buyers.

The settlement required Honda’s captive to cap dealer markups at 1.25% above the buy rate for auto loans with terms of five years or less, and 1% for auto loans with longer terms. The CFPB has been pushing the industry to limit dealers’ ability to mark up the rate on retail installment sales contracts as compensation for arranging financing, claiming that such policies result in minorities paying more for loans.

“… I think as long as the captives are allowed to continue to reimburse the dealership at the same level, it doesn’t matter if it’s a percent of the deal, a flat fee,” Byrd explained. “I think we can get to the same number and not have an impact on F&I at the dealership level. If you look at our average, ballpark average, we’re probably one percentage point over our buy rates. And so right now this is at 1.25 — in theory, that wouldn’t have an impact on us anyway.”

During the second quarter, the dealer group recorded total gross profit of $355.6 million, up 2.5% over the prior year. It also reached its goal of retailing 100 pre-owned vehicles per store per month, selling 30,301 pre-owned units — up 6.3% from a year ago.

Sonic’s Echo Park pre-owned specialty stores accounted for 881 of those units, up 221 units from the prior quarter. The dealer group plans to open two additional Echo Park locations in the Greater Denver market in the next 12 months.

Sonic realized increases in revenue across the board, led by used, fixed operations and F&I. Fixed operations gross profit reached an all-time record high of $170.2 million, up 6.5% over the prior year. F&I gross profit per retail unit was $1,268, up $57 over 2014’s second quarter.

Also during the call, Jeff Dyke, Sonic’s executive vice president of operations, announced that the dealer group has decided to begin a partial technology rollout of its One Sonic-One Experience hybrid sales process next month.

“We’ll be rolling out our CRM, desking and appraisal tools for our guests and associates to use,” the executive said. “These tools' improvement will be very effective in the Charlotte test market and will greatly improve the experience for our guests and associates.”

Still to come is the initiative’s second phase, which includes Sonic’s F&I, pricing and marketing tools. Dyke told callers that those tools will not be rolled out until the group has increased share and profitability in its Charlotte test market where it is piloting the process. The pricing tool was the cause of a delay in the One Sonic-One Experience rollout, according to executives in a previous conference call in May.

“When we first rolled out in Charlotte, we rolled everything out at one time — and we learned that you don’t want to roll everything out at one time,” Dyke explained. “It’s like drinking from the fire hydrant.”


  1. 1. WilliamV. Fowler [ July 21, 2015 @ 01:46PM ]

    Jeff, I have developed a loan origination tool that will help auto dealers and their financing sources comply with the new rules and regulations. You will find it to be a great tool to help dealers and their financing sources originate loans or leases in a compliant manner.

    If you are any of your associates would like a demonstration, give me a call at your time and convenience, or just e-mail me.

  2. 2. David Ruggles [ July 21, 2015 @ 02:56PM ]

    Sonic's issues are just beginning. Their hybrid sales model doesn't seem to include training for sales people in F&I compliance, yet those same sales people are tasked with doing the F&I part of a car deal as well as making the sale in the first place.

    Last I knew, the people involved with this "new" sales approach, didn't even know who AFIP is. (Association of Finance and Insurance Professionals.)

    I would also note that this approach is NOT NEW. It is the way things were done pre Pat Ryan.

  3. 3. JW [ July 23, 2015 @ 03:14PM ]

    Mr. Ruggles I'm sure Sonic appreciates your valuable insight. I have personally reviewed your Linkedin page and can see why you feel like people need to hear your advice. The 186 page training manual you wrote in Japanese is absolutely impressive. Your Pat Ryan reference was totally lost on me but I'm sure the other experts in our industry absolutely appreciate it. I do however appreciate you spelling out the AFIP accronym, it's apparent that you realize most people were not familair with them or you would not have had to spell it out. It has to be scary for people in the consulting field to know that Sonic is trying to change the culture of this industry. What are they thinking? To try and repair a process that has been so perfect for so long. I mean just ask our customers how they feel about it. To be so bold, so customer oriented, so offensive...I can understand why you are concerned. Maybe they will heed your warning and stop now! But knowing what I know about Sonic they will press forward. I am 100% sure they knew this would not be easy, they knew the issues would pile up, they expected random people on internet sites to doubt their ability to see it through. Being innovative has never been easy. You are right about one thing, trying a new approach is NOT NEW. No newer than on-lookers telling the ones trying something new how things have always been done.


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