Light At The End Of The Tunnel?
Top truck dealers say economy is sputtering back to life — if war, fuel costs don't douse the spark.
Deborah Lockridge
Senior Editor
Uncertainty over the situation in Iraq and skyrocketing fuel prices and insurance costs are causing many potential truck buyers to take a "wait and see" attitude. And that doesn't even take into account the still-sluggish economy.
However, there does appear to be a glimmer of hope at the end of that oft-mentioned tunnel.
That's what we discovered when we talked to the nominees for the American Truck Dealers/Heavy Duty Trucking Truck Dealer of the Year award. This honor recognizes truck dealers for excellence in business practices, industry contributions and community leadership. They are judged by a team of officials from the Kelley School of Business and the Institute of Urban Transportation at Indiana University.
"People are hesitant to stick their neck out until we get this issue in Iraq over with," says Barry Trattner, president of York Truck Center in York, Pa. "Most businesses are struggling to make a profit. Costs are up, revenues are not. Insurance, fuel, benefits, all those things are climbing."
Finalist Edward Gibbs, president/owner of Gibbs International Truck Centers in Oxnard, Calif., says workers' comp and health insurance are huge issues for small trucking companies in his state. "Most of our customers are seeing 25% to 65% increases in workers' comp premiums," he says. "It's totally out of control."
Record high fuel prices aren't helping, either. "The recent fuel-price spike is raising holy hell with everyone," says Dealer of the Year John "Jack" McDevitt of McDevitt Trucks in Manchester, N.H. "We're hoping this is going to be a temporary situation."
Steve White of White's Tractor & Truck in Wilson, N.C., says, "I think we're near the bottom of the curve, but the cost of fuel is going to predicate a lot. Then you've got the big question mark of the war."
Some truck buyers are having to find a new dealer. Many dealerships have gone out of business, caught unprepared by the downturn with a glut of inventory and too much debt.
"We saw some very successful dealers the past few years get themselves in real severe straits — terrible financial difficulties — and as a result some of them failed," says McDevitt. McDevitt Trucks, having experienced a painful lesson in 1989 and 1990 when the bottom fell out of the economy in New England, was poised to ride through the downturn and has actually expanded.
Other dealers are likewise cautiously optimistic. Several reported increased sales activity and more buyers seeking price quotes.
Finalist Steven Bacalis of Tom Nehl Truck Co. in Jacksonville, Fla., predicts more business in the second half of 2003 and in 2004. "I think there's a pent-up demand for trucks, and I think the economy's going to get better," he says. "Hopefully the convulsion that we've had over 9/11 and Iraq will be over with by next year. I think customers, along with the whole economy and the stock market, are waiting to see what happens with the Iraq situation. But I think that if we look at what the truckload carriers are doing, their business is starting to increase. And that's a good sign."
"I think demand is there," agrees finalist George Heidler of Tom's Truck Center in Santa Ana, Calif. "All it would take would be a good positive spark, end the war quickly, or come up with a diplomatic solution, and I think the economy would open up."
Much Ado...
Last year, while engine makers and the trucking industry lamented the October emissions regulations, many predicted a dismal 2003 for truck sales. But nearly every one of the Dealer of the Year nominees reports that resistance to the new engines hasn't been as great as they expected.
Steve White points out, "The new emissions engines are here, they're law, and we're now seeing fleets pricing the trucks. I don't think we've seen the resistance I thought we were going to see."
Doug Danylchuk of Peterbilt Manitoba says his dealership is now getting new orders on post-2002 engines. "We thought it was going to be a lot worse than what it is," he said. "People could only buy so many trucks when the pre-emissions engines were there. Now they need trucks, so they have to buy the post engine. Trucking goes on."
At Badger Truck Center in Wisconsin, Paul Schlagenhauf says his customers are seeing an upswing in their business and need more trucks, or they have the confidence in their situation to replace an older one. "I'm not saying everything's rosy, but the resistance we all expected to see is not there."
The main objection seems to be price more than concerns about reliability or fuel economy, says Trattner. "Nevertheless," he says, "they're starting to come around to the fact that they'll have to buy. They can't just keep running old equipment."
Craig Young, president of Young Truck Sales in Canton, Ohio, says that as a Freightliner dealer, he has been very successful selling the Mercedes MB4000, which does not have to meet the October '02 emissions regulations. The engine costs several thousand dollars less, he says, and in the right applications, it's been an easy sell.
Tight Money
Financing is still tight, especially for owner-operators and buyers with less-than-stellar credit. But many of our dealers reported some easing of credit, partly with the help of special programs from the captive finance arms of the truck manufacturers.
"The in-house, captive finance companies, like Mack Commercial Finance, Paccar Financial and DaimlerChrysler, have really stepped up these last couple of years and become much more pro-active," says McDevitt.
It's still a big challenge to get customers financed, he says. But because their dealership handles more local, vocational customers, and they have had very few repossessions, he says, "we're able in many cases to convince the finance companies that our portfolio is better and they ought to treat us differently."
Craig Young says while financing is still a problem, it is a little better. CitiCapital and the captive finance companies, he says, are still extremely tight on owner-operator credit.
"One thing we don't do, especially with used trucks, is get involved with manufacturer programs that inflate the value of a used truck to cover future losses," says Young. "Some of these programs take a $25,000 truck and make the price $40,000 with a minimal down payment. In our view, if he doesn't have the down payment, it's not the right time for him to get into the truck. Typically someone who doesn't have the money saved up for a down payment won't be able to save for repairs.
"We try to explain what it really costs to run a truck, what they have to save for tires or major repairs, the fact that they have to pay themselves a driver's wage. They'll probably just go somewhere else and buy the truck, but when things go bad, maybe they'll remember someplace gave them some honest advice."
Some finance companies are pushing for dealers to take on some of the risk for customers with shakier credit — what's known as dealer recourse. But some dealers would rather lose the sale than resort to that option.
"We have elected not to go recourse," says White. "Hopefully the industry will not drive dealers to have to go on retail paper as it did in the early '90s and late '80s."
Paul Schlagenhauf with Badger Truck Center says financing is a particular problem on the used-truck end. While the dealership has seen what he calls "a huge turnaround in how receptive DaimlerChrysler's finance operation is for business," that's only for new trucks.
"It's a nightmare trying to get used trucks financed," Schlagenhauf says. "A, they won't do it, B, the rates are outrageous, and C, they're asking you to be on the hook (dealer recourse) to take it." His dealership does try to shop the loan around to some local banks in addition to the captive finance companies, but, he says, "unless you want to sell your soul and be on the hook — and we're not really willing to do that — there's not a lot you can do."
While many dealers shop around for financing for their customers, Edward Gibbs's outfit takes a different approach. "Sometimes financing is as good as your relationship with the finance company," he says. Instead of shopping paper all over the place, he says, they give International Finance Group all their "A" paper. Then when something comes along that's not quite "A," he says, they're more likely to consider it.
Overall, Gibbs says, financing seems to be loosening up a bit. Finance companies are becoming more aggressive, he says. International Finance Group recently wrapped up a zero-percent promotion that started customers out with zero percent the first year, and added interest the second through the fifth year. "It's a really good program, trying to get that apprehensive customer to make a decision," he says.
Disappearing Glut
Most dealers report that the glut of used trucks is easing and they expect used truck business to be brisk as the economy recovers.
"You're starting to see the values of trucks go back up," White says, "especially our medium- and heavy duty low-mileage daycabs. The glut of used trucks is slowly drying up."
Trattner says the used-truck business was strong last fall and flat over the winter, but it could get better in the spring. Used daycabs and trucks with specialty bodies still have a good value, he says. "The run of the mill sleeper truck has had a pretty strong run," he says, "but most of the late-model, low-mileage models have been sold."
Gibbs says there's almost a shortage of some types of used trucks, including under-$30,000 1998 and 1999 heavy duty tractors and late model medium-duty trucks under $20,000.
At Tom Nehl Trucks in Florida, they've been selling plenty of used trucks. Making money on them, however, has not been easy. "In the next two years, we look at used trucks to be a much better opportunity," Bacalis says. "I think there's a glut of used trucks on the market, and I think they're going to find homes before new trucks come back."
Bacalis predicts that as the economy gets better, truckload carriers will want to sign on more owner-operators — and those owner-operators are going to gravitate toward used trucks. He feels so strongly about the potential, the dealership opened a Freightliner SelecTrucks used-truck center in Jacksonville in January.
Service Sells
Many dealers are surviving the slump in truck sales by expanding the parts and service business they offer customers. In some cases, they have also seen an increase in business related to the downturn.
"We've seen an increase in shop work from our customers who have their own shops and can't do the big repairs," Young says. "They used to be able to trade them out before they got into engine and transmission repairs."
Schlagenhauf notes that they have picked up more service accounts as small local garages go out of business, either because of the economy or because they don't have the technology needed to work on today's more sophisticated heavy trucks.
Badger Truck Center even hired an outside service salesman to go out and solicit accounts, Schlagenhauf says. Splitting the company's light/medium-duty and heavy duty business into two separate shops has allowed them to specialize more. Another separate facility rebuilds transmissions and rear axles.
Young's dealership has also started working with select customers to manage their inventory for them. "We'll put in an inventory at the customer's location, and they only pay for them as they use them." This system also saves the customer the cost of an onerous personal property tax on that inventory, Young says. "We usually do this in exchange for exclusive business," he says.
While there has been pressure in some areas to be open 24/7, it's not necessarily the right way for every dealership to best serve its customers. If the dealership is on a major interstate in a large city where they get a lot of long-haul customers, sure. But for many of the dealers we spoke with, they feel they can serve their customer base better with different strategies.
For instance, Doug Danylchuk in Manitoba says his dealerships have cut hours in one area and expanded in another. They used to be open until midnight, but now they close at 8 p.m. However, they're now open until 6 p.m. Saturdays and Sundays. "We have people on call after hours and mobile service trucks," Danylchuk says. "If a customer's down and has to get going, we'll take care of him. We find we can manage our people better with these hours, and we felt the quality was better."
Dealer of the Year McDevitt has a similar situation. Two of his five locations are open until midnight. Even if he had the right people, he says, he could only justify 24/7 operations in one or two of his locations.
"It's basically the local, vocational customer we're dealing with, and they don't care when we work on their truck as long as it's ready at 5 a.m.," McDevitt says. "If it means we have to stay a little later that night to finish it, or put two mechanics on it at the same time, we do it. If it means we have to cannibalize a part of a truck on the front line because we don't have the part at the moment, we do it. There are times when we can do things in 18 hours it would take other people 24 hours do to."
Steven Bacalis in Florida is an example of a dealer for whom 24/7 makes sense. A dealer with a large emphasis on parts and service, it has two locations on busy interstates and a fair amount of truckload carrier business. "I think it adds something for our customers to know that we're open all the time for them," he says.
Relationships Work
Dealers had a lot to say about relationships with customers — and how truck owners can benefit from nurturing those relationships, as well.
Young notes that another result of the tighter financial times is that manufacturers have tightened up on their warranty policies. In past years, he says, if a truck was past its warranty by 100 miles, the manufacturer would often go ahead and cover it. "Today, they follow the warranty to the letter of the law," he says. "If your dealer tells you the warranty didn't cover it, that's not a lie. The problem originates with the manufacturer, not your dealer." In other words, don't shoot the messenger.
Gibbs advises owner-operators and fleets to develop a relationship with their dealer. "I think dealerships are more inclined to work with regular customers than the company that doesn't maintain their equipment and all of a sudden they come in with serious problems. There's a lot of pressure on operators to delay maintenance, but if they can develop a more consistent rapport with their dealer, we're more likely to work with them, offer them specials because we see them all the time."
Heidler also talks about the importance of the dealer-customer relationship.
"I think one of the biggest mistakes made in a medium-duty truck by a customer is not getting the correct specifications," Heidler says. "A lot of customers are just thinking price, and in reality, what they really want is something that will offer value throughout the lifetime of a vehicle. A good dealership can provide that, providing vehicle information from the cradle to the grave. From the first time the customer calls, spec'ing out the truck, getting the right amount of vehicle for what the customer has budgeted, supplying the customer with service and parts — and eventually being a source of reselling the used vehicle when he's done. That's a big benefit to the customer."
For nominee Emil Beyer, president of Beyer Bros. Corp. in Fairview, N.J., service has long been a vital component of his relationships with customers. "Being there, whenever and wherever, is essential to the support of these customers," he says. "If they need a truck part on Sunday, someone has to get it for them. If there is a snowstorm, I will be there to supply customers with parts and my people will be on the road towing them in, to repair them, and get them back on the road. Keeping the trucks rolling, you end up with a dedicated life-long customer."
Dealer of the Year continued...
