As Vehicle Sales Slump, Competition Heats Up

This story appears in the April 20 print edition of Transport Topics.

Common wisdom has long maintained that truck dealers make more money from parts and service than from new vehicle sales. But the economic reality today is challenging even that old maxim.

Dealership executives say increasing parts-and-service revenue — and building lasting customer relationships — are becoming even more important as vehicle sales slump significantly in the sagging economy and credit crunch.

As the recession continues, dealers say they also are seeing fewer vehicles pulling into their repair shops because truckers are traveling fewer miles and some fleets are performing their own maintenance or considering turning to independent shops in an attempt to keep costs down.

Mike Gorsch, sales manager for Baltimore Mack Trucks Inc., Linth-icum, Md., said customer caution over the economy is now creating as big a challenge for the maintenance shop as for the sales floor.

“Along with decreased truck sales, we are also seeing decreased levels of parts-and-service sales, and customers are very careful about what they buy and how much they spend,” Gorsch said.

Kyle Treadway, owner of Kenworth Sales Co., Salt Lake City, and chairman of American Truck Dealers, said fleets that try to skimp on maintenance now could face more expenses later.“I think the smart operators, when they get down to it and study the numbers, realize they’re not saving any money” by doing maintenance in-house, he said. “They don’t have the expertise they thought they did, and it’s costing them more in terms of missed maintenance and bad practices.”

Newer engines in particular require specialized training and leave little margin for error, Treadway said.

And while common sense suggests that fleets keeping older vehicles on the road might have greater maintenance needs, Gorsch said, that theory isn’t holding true in practice.

“If you lost your job tomorrow, would you trade your current vehicle for a new one?” Gorsch said. “Probably not. Assuming that you do not have a job and are not driving to work every day, would your car require the same level of maintenance? Definitely not. When you decide to have maintenance done, would you allow your dealer to up-sell you on work that may not be necessary? Maybe.”

U.S. dealers sold 21,832 new Class 8 trucks during the first quarter of 2009, down 27.8% from a year earlier, according to WardsAuto.com.

Surviving during the sales slump will be a main theme this week at the American Truck Dealers’ annual convention. ATD is a unit of the National Automobile Dealers Associations.

“There are great challenges in selling new trucks, and as such, every dealer should be focusing on fixed operations,” said Marc Mar-tincic, a maintenance-operations consultant with MM Profit Group. “Parts-and-service expense absorption will be the difference in who makes it through these tough times and who falls by the wayside.”

For many dealers, the focus on parts and service is nothing new.

“We’re in a market where we don’t sell a whole lot of trucks,” said Jim Henson, president of West Texas Peterbilt in Lubbock. “There’s not a lot of population here. In a good year, we might sell 300. In a bad year, we might sell 175. So we’ve never relied on truck sales. We’ve been pretty back-end.”

Dave Kenney, chief executive officer of Westrux International, Santa Fe Springs, Calif., said his company’s many locations near ports have actually helped boost new truck sales, but he acknowledged the growth is slower than usual, making back-end operations more crucial.

“We are keeping an eye on parts and operations services and making sure we are being as greatly profitable in those departments as we can,” Kenney said. “It’s hard, because that business has fallen off also. Fleets aren’t running as many trucks, so there’s not as much to do service on.”

Kenney said Westrux’s primary strategy for weathering the downturn is to be more proactive in customer contacts and make sure it has the right products on the shelves for them.

Among the keys to running a successful back-end operation, consultant Martincic said, are accurate costing and competitive pricing.

“One of the main rules of a successful business is that your price must be competitive,” he said. “In the service business, we sometimes are overpriced, or at least our customers think so. This results in many customers buying truck services at non-dealer facilities.”

Even when dealers achieve competitive pricing, Martincic said, they often still battle customers’ perception that their maintenance operations are overpriced.

“Although overpricing is the perception in many markets, competitive surveys often reveal that dealers are actually underpriced, especially in the areas of heavy repairs and hard jobs,” Martincic said. “More than ever, we are working with dealers to align their prices to their specific market.” It always has been the dealer’s job to explain value to customers, Martincic said, but “maybe we need to focus more heavily on it right now.”

Some dealers are turning to customer relationship management technology, or CRM, to help grow their businesses. They said the technology can be a powerful tool to help bring customers back for preventive or scheduled maintenance.

“Most larger auto dealerships run pretty sophisticated CRM tools,” said Gary Gibson, a past ATD chairman who recently sold his Cincinnati-based business, Tri-State Sterling Trucks Inc. “They’re in contact with their customers with e-mail and di-rect mail.”

“There’s a term called ‘service absorption,’ which represents the profit from parts and services,” said Richard Witcher, president of Ford dealership Minute Man Trucks Inc., Walpole, Mass. “That’s where you see your results.”

Witcher said marketing activities also play a crucial role in the overall success of larger operations.

“Unlike a lot of truck dealerships, we have a marketing staff, and those people are handling advertising, Web site development and all that sort of stuff continually,” he said. “I think you need to run a lot of specials. You need to find ways to entice stable parts of the business to come in.”

Martincic suggested dealers be open to special pricing for certain tasks.

“Special pricing on small quick service jobs such as oil changes and preventive maintenance is always important,” Martincic said.

Even if simpler tasks such as oil changes don’t move the bottom line much, dealers said they are important.

Oil changes are “always there,” said former ATD chairman George Grask, owner of Cedar Rapids [Iowa] Truck Center, a Peterbilt and GMC medium-duty truck dealer. “If the economy’s good, they still have to do it. If the economy’s bad, they still have to do it. If they have a new truck, they still have to do it.”

“It’s not a moneymaker,” said Henson of West Texas Peterbilt. “It’s a loss leader. But it’s a way to get people in, and you try to get people in, absolutely. You get a driver or a dispatcher in the habit of sending his truck into your place, even if you lose $100 on the oil change, when the clutch fails or the transmission goes out, you make money on that service.”