Field and Street
National accounts. Cradle-to-grave programs. Larger and larger tires. Mounted wheel programs. 24/7/365 service requirements. On-site inspections and service. Reduced equipment downtime. There is no doubt the commercial tire business has changed considerably over the last decade. And there is no reason to believe the demands placed on tire dealers won’t keep evolving in the future.
Even the trucks used to service commercial accounts have changed over the years, somewhat because of the changing dynamics of the business, partly because of stricter on-road safety regulations, and partially because of enhancements in available trucks and financing options.
In the face of market changes and shifting customer requirements, today’s tire dealer must work harder at selecting the right service truck, weighing financial options, and monitoring both the cost and value of the trucks he runs. And according to service truck suppliers, the right choices and application of the trucks will help boost dealer profits.
"Margins are so short on new tires and retreading, the service end of the business is probably the highest gross profit aspect of a dealer’s commercial business," said Rick Pearson, president of Fleet Equipment Corp. (FEC). "How much can you make delivering national account tires? How much can you make retreading at national account pricing? Successful dealers have learned through necessity that service has to be the highest gross profit item he offers, and if it isn’t, than he’s in trouble."
Keith Smith, general manager of Piedmont Service Trucks, concurs. "If you want to be in the commercial business and call on trucking companies, construction companies, road builders, quarries or mines, you’ve got to be able to provide on-site service," he said. "And if it’s done properly, that’s where you can make a majority of your money. Just selling truck tires alone isn’t going to do it."
Decide True Needs
The service side of the commercial tire market cannot be denied – either as a necessity or a profit center. But getting outfitted properly to handle today’s service demands can be a stumbling point, and requires a different look at equipment needs and utilization.
"Service trucks are expensive, and in a lot of cases you really get what you pay for," according to Mark Zipse, market and product manager for Iowa Mold Tooling Co. (IMT). "Spending a little more up front and managing it well really brings the overall cost down."
Zipse said in considering the type, size and cost of a service truck, dealers need to determine what their true need is, understand what their future growth potential might be, and get a truck in anticipation of that growth. "If they are trying to expand their business or work into a different market, like small loader tires in addition to medium truck tires, then the dealer needs to look at trucks that meet those specific needs," he said.
Many dealers don’t consider service business expansion when looking at a new service truck, and too often they end up with the wrong truck because they "look at what they can get for X amount of dollars," said Tom Formanek, product manager for Stellar Industries Inc. "The truck they probably need to help them grow their business is a more expensive unit. But they aren’t looking at six months, a year, two years down the road.
"We try to qualify each dealer and go through a series of questions – What is the business you’re trying to service with this truck? How many calls a day are you looking at doing? What type of service do you need to perform? Are you planning to use this truck for multiple things?
"Generally they want to do everything, but when we quote a series of trucks for them, they just want to go with one that will work fine for now. And nine times out of 10 that decision will come back to haunt them," Formanek said.
Another mistake dealers often make is not making a decision, said Piedmont’s Smith. "A lot of dealers wait till the very last minute to buy something, and they end up in a situation where they really have to have a truck now. So a lot of times they’ll take something that’s immediately available, even though it’s not exactly what they need for the situation."
Complicating decision-making for tire dealers are things like mounted wheel and cradle-to-grave truck tire programs that require service trucks with greater weight-carrying capacity, or just-in-time delivery and on-site service programs for trucking or heavy equipment fleets that require specialty attachments, and tire handling and service tools – and even separate vehicles.
"Dealers involved in mounted wheel programs have to keep in mind that while they can carry the same number of tires as before, the weight added by the wheels will limit their total carrying capacity," warned Zipse from IMT. "You have to make sure the chassis is speced properly for the payload. DOT is getting tougher and tougher on all vehicles on the highway, so having the right payload capabilities and making sure the weight is distributed properly is important."
Pearson suggested that serious commercial dealers might look at multiple service vehicles to handle the wide ranges of customer expectations more effectively – and profitably. "In a mounted tire program you’re taking the tires from the customer back to your location, breaking them down, putting new or retreaded tires on, and carrying them back to the fleet," explained Pearson. "So you need a hauling truck that can handle some poundage.
"But there’s also a need to perform the fleet tire checks at the customer’s location. You don’t need to take a full service truck for that. You could just use an airing truck – a smaller vehicle with an air compressor that can be used to check and adjust inflation pressures.
"Then you have to service your other fleet customers that are not on a tire program controlled by the tire supplier," he said. "So that’s where the dealer can also use his standard service truck."
Regardless of the situation, Piedmont’s Smith reminds that dealers have to be serious about commercial tires. "I don’t think there’s a threshold of commercial business that you have to have in order to justify getting a service truck. In this day and age, unless you’re able to show people that you can service them, you’re not going to sell many commercial tires. And whether you have one location or 10, you’ve got to have a truck to do that."
But, Stellar’s Formanek said, getting a service truck first and then going after business may not be the best approach.
"Dealers need that contact into the commercial business because otherwise there is no need for a service truck. You need to have some established business, or actively go out and get commercial business before you can justify getting a truck," he said.
"It would almost make no sense to go after a truck at least until you have some commercial tire sales where you can get established and service the whole thing, too."
Finding Real Money
Service truck suppliers agree that there’s plenty of money to be made servicing commercial accounts, even if they are on a national program. But sorting out the real profit picture is something that can easily escape a busy dealer.
"In a lot of cases, dealers don’t charge enough for services," said Zipse. "They often subsidize the cost of the vehicle with sales. And a lot of times, it’s how they allocate the costs. The sales group may not get charged for some of the duties performed by the service people that are actually sales related, like delivering tires. Or the dealer has a good customer and they want to keep them, so they go out and do service calls real inexpensive.
"It would be great if a dealer could look at his service trucks on a pure ROI standpoint where you know your costs and know you get this many sales at X profit," he said. "But I’m afraid some of that stuff is subsidized from other areas. If you’re going to do it in a traditional ROI fashion, you have to really know where all the different revenues and expenses come from, and consider not giving away some sales and service support."
"You’ve got to understand what your costs are," said Piedmont’s Smith. "You have to factor in all your costs so you can charge a proper amount for the service that you do. Some of those costs include vehicle maintenance costs, fuel, personnel, pay/benefits, any commission you have set up, the cost of vehicle, insurance, tools and equipment – anything directly related to that truck.
"I’ve heard of some people having 40%-50% ROIs on the trucks they’re using, so I don’t think it’s unreasonable to expect that. You should look at what this investment is going to do for you. You’ve got to expect a 15%-20% return anyway, and that’s kind of a baseline figure to make it worth your while," he said.
"Probably the biggest challenge a dealer faces is making service trucks a profitable piece of their business. It’s so easy for it to go the other way. If it’s not handled properly, if you don’t really manage your costs and know what you’re doing with it, it can turn into a black hole that you keep throwing money into."
Besides the obvious cost/price issues, there are some intangibles connected with service trucks, according to Formanek of Stellar. "What added business is brought to you because you have a service truck? A lot of times those aren’t realized. What about the fleet customer who directed friends or family your way because you were there? Or the guy who sends his wife in with her car? Things like that you can’t tie directly to the service truck. And service trucks are rolling billboards. People see them and recognize your name."
Check Financing Carefully
Today’s service truck financing options are probably as complicated as some of the customers a dealer has. Outright cash purchases are still a favorite among dealers, at least those with large sums of available cash. But traditional loans are taking a back seat to the wide range of lease options now available (see sidebar).
"The biggest thing with any loan is tying up your capital," said Smith. "A lease is considered an expense, so it doesn’t tie up your bank line. Cash flow and having a free capital line are extremely important to running your business."
"Outright purchases deplete a dealer’s ability to maintain inventory and do the other things that are often better addressed with working capital," said Zipse.
"It just doesn’t make any sense to own a depreciating asset," said FEC’s Pearson. "So why not lease the truck with the option to buy at the end so that you can pay for the truck as you earn with it. You aren’t going to get the truck any cheaper plunking down cash vs. leasing the truck. Either way, the truck gets paid for."
Pearson said some tire company dealer support programs require the dealer to lease any service trucks, and in some cases, tiremakers offer assistance to dealers wanting to acquire a service truck. "They want you to keep your service fleet up-to-date, to represent a good image in the marketplace. And if an account is well-serviced and maintained in good, clean condition, the happy customer will buy more and be more loyal."
Every supplier agrees that dealers need to get their accountant involved in any purchase or lease deal on capital equipment. The dealer’s CPA should advise on what the best financing options are based on a dealer’s tax and capital situations, and thoroughly review and understand all the terms of the financing agreement.
"There are absolute horror stories where a fellow thinks that after paying for the truck for 60 months he owns that truck for some small amount of money," said Pearson. "And then he finds out at the end of 60 months he still owes the 25% residual value on it. Or that he can buy the vehicle at the residual value, but the book value on it is 50% of that value."
Bottom line: Get any salesman’s promises in writing. Make sure you know exactly what the terms of the lease are. Ask the right questions, and understand the answers. And, remember, just because a lease has a big name company behind it doesn’t mean it’s written fairly.
|TRACing Down Lease Options
TCF Leasing Inc. is one of a number of national companies that offer a broad selection of equipment leasing and financing options to tire dealers and retreaders. While there are a number of standard options – financing products, in industry parlance – TCF can also customize leases and outright purchases to best meet a customerÕs need, according to Don Hunter, TCF vice president of specialty markets.
As with other lease/loan institutions, TCF offers a wide array of options. Ranging from the popular Terminal Rental Adjustment Clause (TRAC) leases (including Zero TRAC leases) and Modified TRAC leases to Fair Market Value leases and CAP leases. In addition, TCF offers traditional loan financing, standard operating leases, and early buyout leases.
Like other outside financing arms, TCF can be used by any dealer through virtually any service truck supplier. Other national lease/financing operations, like GMAC or Ford Motor Credit, may be restricted based on the chassis of the truck selected.
Every service truck company we talked to strongly suggested dealers and retreaders work closely with their own financial advisors to sort through various available financing options, and understand the financial impact of each option. And before they sign anything, they should be careful to read and completely understand the terms and conditions of any financing option. Ask questions, and be sure you understand the answers, one suggested.
Hunter can be contacted at 800-442-7811 or by e-mail at [email protected]