Bright Skies Ahead

Top executives see solid opportunities in leasing, parts and service.

Denise Rondini, Contributing Editor

      Optimism pretty much sums up the mood of many of this year's nominees for the Truck Dealer of the Year award. The American Truck Dealers/Heavy Duty Trucking award recognizes these top dealers for excellence in business practices, industry contribution and community leadership.
      "I am seeing the bright side coming on right now," said nominee Harvey Murray, chairman of the board of Murrays Freightliner, Sterling and Western Star in DuBois, Pa. He said things started picking up in September and have continued to improve.
      "Every facet of our business - rental, leasing, parts, service and sales - is not only up in volume, but in profitability," said nominee Michael McDevitt, president of Husky Truck Center in Seattle.
      Finalist Steven Parker, president of Baltimore Mack Trucks Inc. in Linthicum, Md., agreed, saying, "Fiscal year 2004 will see marked improvement from just about every measurement point."
      For nominee Steve Bassett, president of General Truck Sales in Muncie, Ind., there are three bright spots - used truck sales, full-service leasing and rental and the service business. He said, "I'm very optimistic - especially about 2004 through 2006. It is just going to be a fun time to be in this business."
      According to finalist William Reilley Sr., president of Lakeside International Trucks Inc., Milwaukee, Wis., there is no question that the market is in a recovery. "Large users are leading the recovery and we are beginning to see movement from small fleets."
      He added, "Our parts and service business is robust and our leasing company has grown significantly over the last five years."
      Nominee Ell Linton, who heads Broadway Truck Centers in St. Louis, said he's seen more activity in the past 30 days than in the past six months. "We're also seeing more multiple-deal opportunities than we had been seeing."
      And Jay Luck, general manager of Atlantic Truck Center, Ft. Lauderdale, Fla., said his dealership's bright spot comes as a result of retail growth with small fleets.

MANY CHALLENGES
      While dealers are optimistic, they still face many challenges. They cited a number of issues, including factory-direct sales, the personnel shortage, reduced margins on new trucks, growth pressures, regulatory issues, market contraction and relationships with OEMs.
      Dealer of the Year Bart Warner, dealer principal at Warner Truck Center in West Valley City, Utah, summed up the feeling of many dealers when he said that the biggest challenge is working with the factories to help them see dealers as "a valued complementary service that helps them build and sell more trucks."
      Many dealers believe that during the past several years, factory management has focused on getting their own problems solved. However, dealers now are seeing signs that the OEMs are beginning to work on improving their relationships with dealers.
      "It's better than it's been," Warner said. "A lot better - but it's not what it could be."
      He added, "The biggest challenge also is the biggest opportunity. By working closely together, dealers and manufacturers can provide the best service to our customers. They will want to do business with us because they see a cohesive unit between the manufacturer and the dealer. Whoever can tap into that is going to come out ahead."
      Bassett believes cost-shifting by the OEMs is a major challenge because dealers now have to absorb costs that previously were handled by the truck makers.
      For nominee Mark Hollingsworth, president of Peterbilt of Mississippi in Pearl, Miss., the biggest challenge is going to be the pressure that the factories put on dealers to continue to grow. "In order to grow, you have to have the resources and the money as well as the people in place. You've got to be able to put together a complete package or it won't work."
      Being a dual franchise is a challenge for Florida's Jay Luck. OEMs have been putting pressure on dealers with multiple franchises to operate each one from a separate facility. The cost of land in South Florida makes this difficult for Luck.
      McDevitt, too, sees dealer's relationships with the manufacturers as a challenge. "In the past you had complete loyalty to your OEM and they provided you with a complete product line. We don't have that anymore, so more dealers are getting away from representing only one manufacturer." This can put a strain on the relationship as loyalty is called into question.
      An ongoing challenge for dealers is people. For years dealers have been concerned about the technician shortage, but the people shortage seems to be expanding into other areas of the dealership as well.
      Finalist John Ford, president of I-10 International Trucks Inc. in Phoenix, Ariz., has seen the problem grow into the sales and management areas. "We've lost a lot of qualified, experienced salespeople over that last five years and a lot of management people too."
      He explained that the dealership often will have to look at as many as 20 candidates before finding one who is right for the job.
      Parker believes dealerships are at a crisis stage regarding the shortage of skilled people, particularly technicians. He said, "We, as an industry, are going to have to come together and come to grips with this growing crisis. If we fail to do that, I don't know what the future will be for the truck dealer."
      Another challenge for Hollingsworth, who has four locations in three different states, is controlling the dealerships in remote locations.
      "We have centralized a lot of things, but you still have to empower people at the remote locations to do a lot of things." This is especially true when the location is four and a half hours away from the dealership's headquarters.

FINANCING IS A MIXED BAG
      During the recent downturn, many dealers saw financing sources dry up. With the industry rebounding, financing is becoming more available.
      Bassett spoke of seeing a slight improvement in availability, but no movement on interest rates. And while a lack of financing hasn't affected his salespeople's ability to close deals, it does limit their options. "I'm encouraging my customers to get their own financing - more so than I've ever done in the past."
      Hollingsworth said finding appropriate financing has been especially difficult with what he called marginal customers. "There is all kinds of money out there for well-financed companies or well-financed owner-operators, but there are a lot of people who are marginal, and those people are the hardest ones to get financed."
      Reilley agreed with that assessment and added, "If a strong-operating truck company running a strong business needs financing, it's readily available and rates are competitive. However, as credit risks worsen, the money dries up and interest rates go up dramatically."
      The ability to get financing has been critical to Warner in allowing him to keep his 45 salespeople. "We feel the finance companies are getting more aggressive than they have been. They definitely are not where they ought to be, but they are getting better."
      On the other hand, Linton sees finance companies working harder to structure deals to fit the customers' needs. "They'll look at leasing. They'll look at some residuals where it is warranted. They'll look at extended years. They'll look at guarantees. They'll try to do a little bit more to put a deal together if they can."

USED TRUCKS ARE LOOKING UP
      In recent years, an oversupply of used trucks led to depressed values. However, the fallout from the October 2002 emissions-compliant engines affected the number of low-mileage used trucks now available, and as a result, values for these types of trucks have improved. Many dealers are seeing renewed profitability from their used truck operations.
      According to Warner, it's very difficult to get good low-mileage used trucks. "Anytime it's a clean truck, the price definitely comes up," he said.
      Used trucks are one of the largest and fastest growing areas of McDevitt's dealership. "In fact, our used truck business is up 62%," he said.
      Reilley sees used truck values up, but only slightly. However, he is confident that as the trucking industry continues its recovery, the supply of used trucks will start to dry up and values will start increasing.

THE IMPACT OF REGULATIONS
      Dealers have been hit with many external challenges in recent years. A great deal of them are the result of regulatory changes. Most notable among them are the push forward of the 2004 emissions standards and the hours of service regs.
      Many dealers benefited from the pre-buy that took place as customers scrambled to get trucks before the October 2002 emissions deadline. Unfortunately, that business boom was immediately followed by a business bust as customers took a wait-and-see attitude about these new emissions-compliant engines.
      Ford said things have not turned out as "doomy and gloomy" as was feared. "As we talk to our customers, they are realizing that clean air costs money. I think they wish someone else would have to pay the bill, but they're coming to understand that they are the ones who have to pay."
      Following closely on the heels of the stringent emissions regulations was a revamping of the hours of service regulations at the start of this year.
      Parker said, "It's a bit premature to determine the impact on vehicle sales. Many customers are still grappling with the procedures and controls to make sure they are in compliance. But down the road a bit, I think the hours of service changes are going to have a definite measurable impact on the trucking industry's productivity."
      Ford wondered how customers would gain productivity by having to add more equipment to do the same job. "That doesn't work," he said. "Customers might be forced to buy more trucks, but they will only do so as a last resort. Some of them will be looking at things like route rationalization instead."
      McDevitt's two biggest customers already have told him they anticipate needing both more trucks and more trailers. They are indicating they may need between two and four trailers for every truck.
      Several dealers see the regulations putting pressure on dealers - not so much from a sales standpoint, as from a servicing standpoint.
      "These regulations are going to put pressure on dealers when the truck comes in for service to get it turned around quickly," Reilley said. "Dealers will have to perform."
      McDevitt agreed. "We will see pressure at service locations to be open 24 hours a day. The impact of mobile maintenance is going to increase to get out to where the customer's vehicle is broken down and get it fixed and up and running as quickly as possible."
      These dealers see this as an opportunity to differentiate themselves and they think the service departments that react quickly will prosper.

LIMITED OPTIONS
      In an effort to contain costs, many truck manufacturers have formed strategic partnerships with component suppliers. One of the results of these partnerships is that fewer choices are available to both dealers and customers when it comes time to spec a truck. These alliances have affected a wide range of components from engines and transmissions to fifth wheels.
      Dealers' reaction to this trend has been mixed. Some dealers said they've lost sales as a result of not being able to spec a specific component. Others, like Bassett, see it as an opportunity to differentiate the type of trucks he sells from his competitors' trucks.
      Certain applications are going to feel the effects of these alliances more than others. "Especially in municipalities and bid business, it's going to be pretty tough because the bid specs may have been set five years ago," Ford said. "If all of a sudden you don't have the option that is in the bid spec, you are out of the deal."
      In some instances, dealers are able to cope with the problem by having the service department install certain items their customers need rather than having them installed at the factory.
      Ford cited the example of a customer who wanted a certain filtration system that the factory would not install. He had it installed in the service department of his own dealership after taking delivery of the vehicle.
      Linton said OEM decisions to form alliances that limit options mean his salespeople have to point out to customers the advantages of using the offerings that the dealership's vehicles do have. This may put pressure on salespeople to not only know all the details of the vehicles they sell, but to thoroughly understand the options available on the competition's trucks.
      Warner is trying to turn the situation into a positive, and he said he hasn't lost any deals as a result. "It's been insignificant as far as losing business. However, as far as things like fifth wheels, it's been an aggravation that we are dealing with. Do I like it? No. Can I live with it? Yes."
      Reilley summed things up. "There is no question that manufacturers are aligning themselves with suppliers and not just with engines and drivelines. It is going even further than that. This is creating problems for dealers," he said. "The manufacturer has taken the customer out of the loop. The customer may be forced to buy an Eaton driveline component, for example, rather than a Meritor version - even though he has no relationship with Eaton."
      He believes this trend will continue and could even get to a point where it affects things like seats. Dealers are concerned that there will be a single supplier for many components and accessories.
      "This will put the salesperson in a tough position. A customer will draw a line in the sand and say ÔIf you can't do it, I will find someone who will,'" Reilley said.

LOOKING TOWARD THE FUTURE
      While dealers are optimistic today and see business conditions being good through 2006, they are less sure of what 2007 and beyond will bring.
      Warner expressed concern about the ability of medium-sized fleets to remain competitive. He has created a separate company called Fleet Service that manages the service, including breakdown service, for these fleets.
      This gives these smaller fleets the same economies of scale and access to service as the larger fleets.
      Technology will continue to impact dealers and customers and may present an opportunity for dealers to cement their relationships with their customers.
      "The customers actually are going to come to rely on the dealer more and more. Trucks are getting more technologically complex to diagnose and repair and this can be beneficial to dealers who position themselves to take hold of it," Parker said.
      Technology will not only impact the trucks but also will impact the internal operation of the dealership itself. To cope with the demands of staying abreast of in-house technology, some dealers are looking to add a full-time IT person to their staff.
      "We know that we are not utilizing the system we have to the fullest extent," McDevitt said. "We think an IT person can come in and create a great deal of improvement in our productivity."

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Bart Warner: Truck Dealer of the Year 2004