“Warranty is Exploding!” How Dealerships Are Capturing the $32B Revenue Surge + Winning Strategies | Jim Roche, CEO of Warrcloud

Retention is the lifeblood of any dealership because, you know, you get service and then that sells the next vehicle.

The fewer of those at that's we get, the harder it is to maintain brisk vehicle sales.

But the way that dealership service departments are making up that gap is we're just raising prices.

So we are pricing ourselves out of the retention market to maintain revenue.

Today I'm joined again by Jim Roche, CEO of War Cloud.

Fixed operations now drives over 53% of total dealership gross, fueled by a 33% explosion in warranty revenue.

Jim breaks down why this shift is happening, how dealerships are accidentally driving customers to independent shops,

and the specific technology needed to capture every dollar your store is entitled to.

A big thank you to our sponsors for making this episode possible.

Podium, CDG recruiting, and of course War Cloud, and now let's get into the show.

Jim Roche on the CDG podcast Jim, welcome back.

Go see it's great to see you.

Good to see you as well.

You know Jim, last time you were on, we had discussed warranties and just a state of the dealership service department.

You had shared a lot of important insights.

One thing that I jotted here was that total warranty business at franchise dealerships was 29 billion.

This was from our conversation last year.

And that was growing about 19% per year, compared that to customer pay growth, which was growing at about 2%.

So first question, I'm curious, where are we at today?

Are we still seeing this trend accelerate or have things changed?

Yeah, that's a timely question.

So all of these stats that I cite are from NADA, and they released last year's figures just recently.

And the results, frankly, are amazing.

So last year warranty, and what I say warranty, we're talking about core OEM warranty, not extended warranty.

Core OEM warranty grew again by 13.9%.

So two year warranty growth was 33.8% to over $32 billion, which is just remarkable.

Why is this growing so significantly?

I know that, and by the way, I was referring to 2024 when I met it last year from our conversation,

you're referring to 2025, much more recent figures.

Why is warranty growing so quickly, and how does that stack up historically to what was the standard?

Yeah, that's really the fundamental question, isn't it?

So it seems so recalls, if you look at recalls year over year, the volume of recalls was flat.

And if you look at warranty rate reimbursement, that's 3 to 4% per year.

So I think what it is fundamentally is we're selling plenty of cars, right?

So we're seeing 15, 16 million new cars on the road every year, and those are all warranty covered.

But I think the real thing that's driving it is the cost of the components.

We're putting more technology in the vehicles.

It's expensive.

So I think that really, it's the cost of those parts that is driving that higher warranty revenue

year over year.

Okay, and what do you expect as far as the trend moving forward?

Do you expect us to plateau?

Do you see warranty continue to make up a bigger chunk of dealer service departments?

Yeah, I do.

Yeah, I think there's two parts of that.

One, we're projecting warranty, core warranty to grow about another 12% over the next two years.

So I think the growth slows down now to be fair.

I said that last year, and I got egg all over my face.

So, you know, but we think we see a slight decrease in the growth.

But what's also happening is that customer pay growth is decelerating.

So we had 33, almost 34% growth in warranty last two years.

During the same time, customer pay grew 9%.

So, 359% more growth from a warranty perspective than a customer pay perspective.

And I think we're going to see that trend.

Both of those trends continue.

If you go back 20 years, the rule of thumb was warranty was about a quarter of what customer pay

was, and then 10 years ago was about a third.

Now it's about a half so that gap has significantly closed.

So with customer pay, with the growth decelerating, right, it's not declining yet,

or at least now, but it is decelerating.

Why is that happening?

Are we just, is the industry losing customers to third party independence at a greater clip?

Or what am I missing?

Like, what's driving that?

That's exactly it.

You know, we are getting a smaller and smaller percentage of after warranty service opportunities.

The thing that concerns me the most about that.

Number one, obviously retention is the lifeblood of any dealership because,

you know, you get service and then that sells the next vehicle.

The fewer of those at bats we get, the harder it is to maintain brisk vehicle sales.

But the way that dealership service departments are making up that gap

is we're just raising prices.

So we are pricing ourselves out of the retention market to maintain revenue.

We've got to get prices under control.

And I think that helps dealers overall with retention.

So you're saying broad brush.

Industry is losing market share at the third parties on customer pay.

Industry is looking for solutions.

What happens?

Well, they raise prices to make up for the delta.

Yep.

That drives more customers away and then we're into death spiral.

How prevalent is this?

Like, are we talking about pockets of the country?

Are we talking about this issue impacting dealers everywhere?

Are certain brands more than others?

Like, how often are you seeing this?

I see it across the board.

And it shows up in the numbers.

You know, year over year we're getting a declining percent of customer pay visits

for seeing more of it go to the aftermarket.

I'm sure there are pockets where people are aware of this,

but I think broadly speaking,

that is the trend.

And it is alarming and dealers need to take a hard look at reversing that.

Okay, so on the bright side here, warranty work is rising.

But there's one area that you noted last time

where it's not so hot, which was there's lots of dissatisfaction amongst techs with warranty work.

Have you seen any change there?

Like, why are techs today dissatisfied with warranty work?

What's driving that?

Well, I'm aware of that anecdotally,

but there's also a wrenchway study that revealed that in the top five reasons

for tech dissatisfaction, warranty work was one of the top five.

And it's pretty straightforward.

What happens is the techs feel they get underpaid for warranty work,

because when you go through and you process the claim,

you may not pick up two tents here or three tents there,

or this $25 fee,

and the techs feel that they're being underpaid.

And it's really, it's no more complicated than that.

You've got to make sure that when you're processing the warranty claim,

you are getting every 10th that you are legitimately entitled to

so that the store gets paid and the tech gets paid.

Okay.

And then just actionably,

if today, if I parachuted you into a broken service department,

right, what are you doing first besides replacing leadership?

How are you handling everything you just mentioned, right?

How are you navigating through warranty work,

you know, fast claims, all this efficiency?

What are you actually doing there?

So, look, I don't want to do a commercial.

So, I'll keep it neutral.

I think the problem with warranty is,

if you look at, okay, it's grown almost 34% over the last two years.

And that's both the dollar value of the claim

and the warranty RO count.

Warranty RO count for two years is up 12%.

So, it's not just that the size of the RO is going up,

it's that we are doing more warranty ROs.

If you're relying on that single person in the store

to handle that much more volume

and the increased complexity of vehicle

so the warranty claiming process is more complex,

I just don't think that's the smart thing that you want to do.

You want to outsource to an organization or a technology

that has the capacity and the sophistication

to handle those two things.

It's too much, too important of a revenue stream

to give it to somebody who you paying 20 or $25 an hour.

That's a, I think that's a fundamental mistake

in how today's service departments are managed.

I have a question that came in here.

We, I wrote in circles that to all the dealers that were recording

and you said, hey, who's a workload?

User who has questions.

So, one, one dealer asked, and I'm paraphrasing here,

but how does AI impact this entire process?

Does AI do the warranty claim for me

over the next month's year?

Like, what actually happens here?

This specific dealer has been, I see, involved in many AI conversations.

I've seen a rise in dealers who are actually kind of tinkering

with their tools and really getting into the weeds

of the capabilities of AI.

But how does AI play into this as you think about

just warranty claims and just operating as efficiently as possible?

AI today and into the foreseeable future

will replace mundane intellectual tasks.

It's very, very good at that.

It's very, very good at answering questions.

But processing a warranty claim has several aspects to it.

One is the specialized knowledge regarding that.

But two is data transportation.

You have to be in the DMS, get the claim out of the DMS

and get it out of the OEM.

Well, those are all highly secure systems.

AI can't help with that.

And I'm kind of generalizing here because it's a little bit more complex.

But AI can't really reliably process or answer a warranty claim today

because of the variable nature of how the RO has written up

and the fact that a lot of that information is behind the wall.

And secondly, it can't help at all with data transportation.

So, you know, in the near term, I don't think it's a supplement,

but it's not an overall solution.

This episode is brought to you by Podium.

If you're like most dealers, you've probably tried some version of AI by now.

The real question, is it actually doing the work

or just answering with generic messages?

In our CDG circles groups, I keep seeing Podium come up

when dealers are talking about vendors.

And it's not hype.

It's because they're meeting the needs of dealers right now.

One in three dealerships is already using Podium

and thousands of their customizable AI agents

are actively running sales and service workflows every day.

What makes them different is they're not just another AI add-on.

They consolidate sales, service, messaging,

and especially voice into one customizable platform

so you're not stacking a bunch of disconnected systems and let's be real.

The phone is still where a lot of money is won or lost.

Podium's voice AI books appointments, routes calls correctly,

and escalates when it should, based on your dealerships' playbooks.

If your AI isn't driving real outcomes, it might be worth a look.

Check out podium.com slash CDG

or click the link in the show notes below.

Tell us more about just the overall trend of the service department,

the growth of the service department. Where are we at today?

Well, yeah. So in Q1, our friends from NCM and Presidio,

you know, they published dealer performance data.

They showed that in Q1, fixed operations

contributed 53.8% of total dealership gross.

The rest of it was divided up between new vehicle,

used vehicle, and F and I.

Previously, the high had been 50.2%.

So to see fixed operations contribution jump that much,

I think that just highlights the, once again,

this incredible importance of fixed operations

to a healthy dealership operation.

And what's driving that specific growth?

Number one, it's the growth of fixed ops.

And as we've said, warranty is growing much faster than customer pay.

But the other is, is that that's being balanced against, I think,

the margin compression that we're seeing in both new vehicle sales

and used vehicle sales, you know, we're making plus money selling cars.

So we're making, you know, we got to make more money in service.

I see where you're saying.

Is there any scenario where you see someone who's leaning into warranty?

And maybe their gross is growing,

but their net is staying flat or possibly declining.

Like, is there, are there dealerships you've observed

that have to say leaky bucket syndrome,

where their expenses are creeping or for some reason,

while their gross is growing, their net is not from the warranty specifically?

Oh, sure. Well, in warranty,

there's a couple of things that I consider best practices

in addition to automating warranty claims processing.

One, obviously, dealers should be regularly doing warranty rate reimbursement,

where they're petitioning the factory to raise the labor rate and parts markup to retail.

Pretty much everybody does that now,

so that doesn't make up a big part of a rising service department.

The other, and I know you and I've talked in the past about our friends at Busy Car,

but you should be really being doing everything you can

to identify open recalls in your market area,

in your inventory, even in your service lane,

and make sure those are coming in.

Now, those are 100% covered by warranty,

so that's another way to lift warranty.

But the inefficiency of warranty claims processing

comes, in my opinion, when you're hiring people to do this work,

because people can't move as fast as technology can,

and they're very expensive.

The typical warranty admin gets paid 7-year-80 grand a year, including benefits,

and you can get the same thing or a better service for less than half the price.

I think that's one of the areas where you see profitability leak is in that arena.

If I had to say, hey, James, show me the top performing dealers you've seen on the fixed

upside when it comes to warranty. You're saying, bring into recall work,

that's going to grow your warranty business,

rely as much as possible on technology to actually do your claims.

A third, anything I'm missing?

Oh, just make sure that you're doing warranty rate reimbursement,

so that you optimize your warranty rate reimbursement.

Those are the three tools of a healthy warranty operation.

Optimize warranty claims processing,

make sure you're getting all of your recalls,

and make sure that the labor rate and the parts mark-up

is the highest it can be for your market area with factory permission.

Are you seeing any process difference between the two to three store group and the 40 to 80 store group?

When it comes to leveraging technology to process claims,

is there a big difference in the actual way it's done at these stores?

Yeah, the one thing that I see, and again, I'm generalizing,

is that the larger stores, one, they can get economies of scale,

but the other is that there seems to be a much higher focus on schedule hygiene.

The warranty receivable is the dealership's second largest receivable

after a new vehicle inventory, so it is very important that you be paying attention

to the schedule and your warranty receivables,

and there seems to be higher sophistication there in the larger dealer groups.

In response to that, we've developed a series of tools, something we call war schedule,

that essentially gives the dealer the ability to drill down to a single warranty RO

or pull back and look at the trends for a zero to 30, 30 to 60, 60 to 90.

We support that the dealer should have near zero a warranty receivable over 60 days and 10%

or less between 30 and 60 days, but you've got to have visibility into that to manage that,

so we provide a series of tools so the dealership can see how they need to manage those,

and we're seeing that larger groups are doing a pretty tight job of that.

So you're saying don't rely just on the Excel spreadsheet.

That is what I'm saying there.

That's a great summary.

But in terms of optimizing that, so is there any best practice?

I mean, it's obviously cash flow and you want to get it as quickly as possible.

You mentioned war schedule, which is your specific tool.

How are you actually optimizing that receivable?

So without naming names, we have a large public as one of our customers.

What they determine is that they can free up significant capital to deploy against other

practices versus dipping into the treasury, just by making sure that you're increasing the

velocity of your warranty receivables.

The number that they threw out was about $6 million in freed up capital that they can use for

investment into other areas of operations versus having to dip into treasury.

I mean, who the heck wouldn't want to do that, right?

You had mentioned to me as well before this podcast that you have now crossed a thousand dealers,

which is remarkable progress since we are first conversation probably two years ago at this point,

maybe more. I am curious, let's turn that over, right? For the dealers that haven't reached out to you,

that haven't adopted this type of technology in your stores, like what's the excuse? What's the

objection? So I have never, and I have never heard of us talking to any dealer about what we do,

and the dealer said no. The dealer always says one of two things. They say yes or not right now,

but no one's ever said bad idea. Automate warranty claims processing. What are you crazy? Let's

keep it with the pencil and the data entry. So the not right now, I know, right? The not right

now is amazingly the biggest reason is because they have a warranty clerk that they have an

emotional attachment to. We call it the Bob and Gladys Factor. I have more dealers that I can count

who say the Bob and Gladys Factor. I like that. Bob's been working with us for 25 years,

and we love Bob. So we'll come to you eventually, but I can't fire Bob. Now, the thing is, is that

the typical dealership has at least three open wrecks or open jobs. So what we always say is we don't

want you to fire Bob. Let's give Bob something else to do so that he can spend more time with his

grandchildren. And the 45 minutes a week, we need help. Bob can help us, and you know, touch all

these other areas of the dealership. So that's the, I think, the biggest one, but the other one I've

come to notice, you see, so last week, I was at an event at a merit sponsored event in Southern

California with about a hundred automotive people, including dealers. And I was amazed at the

number of people who had never heard of war cloud. So I think some of the, the lack of uptake is

on us. We just haven't done as big a job as to get the word out, which is one of the reasons why

you and I are talking today. It makes sense, especially when it's a pain point that every dealer

faces. So it makes total sense. How was that event? By the way, I did hear about that. Oh, it was

fantastic. It was, it was the content was fabulous. You know, it was Steve Greenfield was one of

the key notes speakers, you know, Steve being a mutual friend of ours was well attended. Just,

just really a great event and merits puts on a world class event. This episode was brought to you

by CDG Recruiting. Here's the truth. Top dealers don't leave talent to chance. That's why I built

CDG Recruiting that go to talent partner for dealers who want the best. We're placing general managers,

FNI talent service directors, controllers, you name it from the showroom to the C suite. We work

with dozens of the largest groups in the country. So if you're working with us, you're in good

company. And because we've built the largest audience and automotive backed by over 180,000

industry professionals across our media platforms, we know exactly where to find the people who can

move the needle for your store. If you're ready to stop hiring like everyone else, go to cdgrecruiting.com

to book a free call. Again, that's cdgrecruiting.com or click the link in the show notes below. What

are you seeing now? Like that's surprising you when you just look at the broader trends and what's

happening. The landscape is going to be an acquisition that's announced tomorrow. There's one

couple of acquisitions announced a couple of weeks ago. I mean, things are moving, right?

Changes happening. What's surprising you right now in the industry from a technology perspective?

Yeah. Well, the first thing that's non technology, but their link that amazes me is, you know,

just announced fixed operations makes up 54% of total dealership grows. Does fixed operations

get 54% of dealership executive time? No. And it's just I can't I can't rent my head around that.

I mean, that's certainly in my business or in your business that wouldn't be the case. So the

fact that we're not paying as much attention as we should be either from a financial investment or

a time investment standpoint is amazing. And the follow on to that is the investment in technology

that drives 54% of our total dealership profit. You know, I saw some stats recently that, you know,

60% of dealers had dabbled in AI and that, you know, a like number was satisfied with the results.

But given where AI has come, the fact that we're not seeing more of it in service is amazing to me.

I mean, just think for a second. And I know you know this, but this is more for the audience.

In 2018, AI was essentially brand new. You know, it struggled with basic reasoning and coherence.

Is there some anything else dealers are missing here? If you're a dealer listening like,

what's the actionable takeaways for you from this conversation? Of course, we talked about

a streamlining all warranty claims. And you mentioned warranty rate reimbursements recalls. These

are great. Just pieces of advice that everyone can do to increase their margin, improve their

customer experience, bring more customers in the door that you didn't have previously. Is there

anything else that's top of mind that dealers are missing today? Well, where I would start. And this

might be one of the reasons why we're seeing with slower uptake, OC is if I'm a dealer principle,

if I'm an executive in a dealer group, the first thing I would do is I would go out and just take

a primer on AI because people tend to talk to say AI like it's just this thing. And it's not. AI

is many things that fall under the AI umbrella, right? You've got GPT. You have natural language

processing. You have a genetic AI. Once you understand the different, the different disciplines

of AI and what's available, develop your game plan and then implement that but lean into it. Those

would be the two things. If I was a dealer operator, then that would be step one and step two for me.

Yeah. And like I mentioned, I'm very pleasantly surprised at just the level and depth of many dealers

who are not technical. But you know, the question that I brought up earlier was from our AI

builders channel in circles. And you just really deep conversations where dealers are embracing it,

leaning in. And I just, I wouldn't have expected that. You know, like I said, I always talk about

like the definition of being a dealer has just completely changed. And you see just the ability to,

I mean, go listen to Ryan Roermitt talk about customer data platforms and data lakes. It's just

like you think you're talking to the CEO of like a, you know, like a private tech company. So

it's pretty remarkable. Yeah. I agree. But you know your audience and maybe you'd agree or disagree.

But I think those interactions are probably a couple of standard deviations from the norm.

And I'm talking to the norm. The 15,000 dealers who haven't dabbled into AI yet. I mean,

it really is something that is the business gets harder and harder. Look at what we've got,

margin compression and new vehicle sales, margin compression and use vehicle sales. F and I

growth is down a bit. You know, who knows what's going to happen with tariffs? Who knows what's

going to happen with EV? You know, finding operational efficiencies in your business is paramount.

And the low hanging frithers is an AI. So I urge dealers to lean into that here in the near term.

Jim, we just had a general manager from Walser Auto Group in Minnesota on the platform.

And they were saying that Walser just did a two day or recently did it a two day like AI summit

for the team where they brought everyone all their GMs to one place. You know,

I don't know exactly what they did those two days, but they just, you know,

like a bootcamp or something, they really dug into what we're doing is something similar

at our company in a couple of weeks where, you know, we're doing like an AI session,

all in person, all together. I think that's a great way just to, you know, dig in and just try

different things. And the way we're structuring it is we're taking everyone is sharing their workflows

that are applicable and tactical that others can use. So in a dealer's perspective,

right, if you're looking at another GM or it's like, hey, how are you using it in your day-to-day?

What are applications you've embedded and integrated to your dealership, right? We spoke

obviously about warranty and all these other things, but there's many, many great ways to

just implement it and get the advantages. So I love that Walser and you are doing that. And you'll

see, I know that I think about it. You're not doing it with us. Walser did it separate,

but I'm saying, but we should. I mean, there is a clear need out there. CDG would be great to

fill that need. You know, you guys come up with a one hour, two hour, you know, AI tutorial or

primer for the industry or they'd be lined up outside the door. Stay tuned. Okay. Jim Rose,

War Cloud, Jim. Thanks for coming on. Always a pleasure. Us is great. Thanks.

All right, hope you enjoyed that episode. Please give the podcast a rating,

consider subscribing to the show and check the show notes for links to what we talked about.

Thanks for tuning in. I'll see you guys next time.