Colonnade Advisors offered quite a bullish forecast for the penetration level of vehicle service contract purchased by consumers that should make F&I managers and VSC providers smile now and seven years down the road.
The boutique investment bank and registered broker dealer providing investment banking services to F&I firms and other financial services companies released a new white paper that showed the macro fundamentals in the VSC industry are “compelling,” and the industry demonstrates growth, strong margins and recurring cash flow. Analysts computed the industry already totals $33 billion at the retail level and comprises a large and important component of automotive sales and profitability.
“New entrants and consolidators should enjoy industry tailwinds for several years,” Colonnade Advisors said in the white paper.
The firm highlighted the market size of the “sweet spot” for aftermarket VSC sales is estimated to continue to grow and cyclically peak in 2024. Despite the recent dip in new-vehicle sales, analysts insisted the market for the purchase of VSCs to cover following the expiration of an OEM warranty is increasing.
Colonnade Advisors estimated 85 million vehicles had a VSC attached in 2016 with the penetration growing to 108 million vehicles by 2024.
The white paper pointed out that consumer demand for VSCs is significant. Authors cited other studies that stated an estimated 46 percent of Americans do not have cash on hand to pay for an emergency expense of $400 or more.
“As the average age of vehicles increases and drivers hold their cars longer, the need for protection plans is increasing,” the firm said.
“These vehicles typically outlive their OEM warranties and have higher maintenance needs, creating demand among consumers that are increasingly accustomed to buying vehicle protection products,” the firm continued.
“Dealership margins remain under pressure, and F&I products provide significant profitability,” Colonnade Advisors went on to say.
Analysts went on to discuss another element of the VSC space, insisting the pace of mergers and acquisitions is increasing. Why? Colonnade Advisors noted demand from investors, low interest rates and availability of capital.
“Private equity is attracted to the industry by its high margins, strong cash flow, fragmentation and growth and making platform and add-on acquisitions to existing portfolio companies,” the firm said. “More and more, industry participants are considering vertically integrating, potentially disrupting market dynamics among the pure plays.
“Administrators, seeking to grow revenues and improve margins, are acquiring to increase and protect product distribution, improve scale and capture more of the value chain,” the firm continued.
“Sellers and administrators are bringing the payment plan function in-house. Insurance companies, looking to preserve books of business or enter the industry, seek the acquisition of administrators,” the firm went on to say. “Colonnade Advisors expects strong demand for well-run companies in this industry to continue.”
Colonnade Advisors’ entire white paper that explores trends, growth drivers and M&A in the VSC industry can be downloaded here.