SALES TALK
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A major truck dealer speaks frankly to David Wilcox about discounting, public sector sales and dealer practices
• Truck operators often say how much importance they attach to the existence of a good truck dealer; it will have a bearing on their choice of vehicle. But how does the dealer rate these operators? Is his allegiance primarily to them or to the manufacturer whose franchise he holds?
CM has been talking with a reputable, mainstream franchised truck dealer who, in exchange for anonymity, is refreshingly frank and open in explaining how a typical dealer runs his business and earns his money.
It is, says "our dealer", difficult to generalise about the typical dealer because his relationship with the manufacturer can vary. "Some truck manufacturers are almost paternal towards their dealers and will help them and guide them a great deal. I think Mercedes-Benz is like that."
Others have a more distant relationship, but one which nevertheless can be tightly policed if necessary by falling back on a fixed-term renewable contract. Our own dealer's situation is different again; the franchise is dependent on an open-ended contract and the manufacturer has a fairly low-key approach.
"I think we lead the manufacturer, rather than the other way round." He added: "In the 1970s the importers were working hard to establish themselves and so tended to help and subsidise their dealers in the early stages more than the British manufacturers."
It is these first stages that are most difficult for a new dealer. Our man explained that once the would-be-dealer has identified a manufacturer with a gap in its dealer network and provided a thorough business plan, he needs to make a big up-front investment.
Premises are the major capital cost and so hauliers who already have a suitable site have a head start in this respect if they apply to become a dealer too. Our
man was a little suspicious of some operators' motives in becoming a dealer: "They sometimes want a franchise for the wrong reasons — mainly to get maximum discounts on their own vehicles."
No conversation with a dealer can continue for long without that word 'discounts' cropping up. "It's nothing new," says the dealer. "I can remember 15 years ago when 121/2% was the usual discount, with 15% for fleets. It's just that more recently it's got silly and it's gone through 171/2% to 19%."
He feels that these percentage figures are rather meaningless because these days list prices are pitched higher than they need be to compensate for the level of discounting.
The starting point for our dealer buying his vehicles from the manufacturer is 20% below list price. Beyond this, the price paid by the dealer is further reduced by £250-500. This is on tractive units and top-weight rigids with list prices in the £35-45,000 bracket.
So much for the discount the dealer gets — how much does he pass on to the customer, and how much does he expect to make on the sale? "I prefer not to talk about percentage discounts, even though some operators seem to view them almost as a symbol of their manhood." Instead, our man uses the simple but logical approach. He knows how much he pays for the vehicle and then adds on the realistic profit that he needs to make. In explaining the final price to the operator he calls the reduction below price a "special allowance".
He sees this net price/special allowance approach as simpler and less misleading for the operator because it deals in real money, not percentages.
Our dealer reveals that he aims to make around £2,000 profit on the sale of a new tractive unit or eight-wheeler. That is equivalent to a profit margin of about 6%. From this £2,000 he still has to take the cost of the pre-delivery inspection and the labour element of the first service. He is "very reluctant" to go below this 22,000 figure: "You have to be strong-minded about it."
He admits this is towards the upper end of dealers' profit expectations, but counters with the argument that the vehicles he sells are similarly highly placed in the market and so he is not in
the position of selling a large number of vehicles at small margins. Despite this, he knows of another dealer in the network who will, if leaned on heavily enough, sell the same vehicle at a profit of only 2750.
He says this is unrealistic and cites dealers who have gone down this path and ended up out of business. The view that operators should not screw their dealer into the ground because it threatens their future survival is legitimate, he says.
Our man has sympathy for fellow dealers who get caught up in an escalating discount war: "We occupy the middle ground between manufacturer and dealer and we can be pulled both ways like a piece of elastic." He maintains that discounting starts at manufacturer level and in particular points the finger at importers striving to establish themselves in the UK in 1970s. "They made great gains and it was not done by high prices."
One importer, he recalls, allegedly told its dealers never to lose a sale on price alone — if price is the problem then come back to us. This manufacturer's "flexible" attitude paid off and it is now one of the stronger importers which can resist excessive discounting.
Do dealers feel aggrieved when the largest fleet customers bypass the dealers to buy direct from the manufacturer? Our man admits that is a missed sale, but knows that he would be overpowered by these large fleet buyers.
"We miss the front-end deal but we do get the follow-ons," he adds, referring to the parts and servicing and repairs business that will accrue. In addition, the manufacturer pays the dealer a small sum for each vehicle sold direct to an operator in his territory "to encourage us to show interest and goodwill, even though we didn't supply the truck". Our dealer gets a few hundred pounds.
Local authorities usually avoid the word discount, inviting tenders for the supply of new vehicles. Our dealer says he finds this method of purchase is good — for him, not the ratepayers! "We make good money out of county councils," he admits. He will usually know what type of vehicle the council wants to buy, and, providing that another dealer from the same network does not indulge in out-of-area selling (which is frowned upon by most manufacturers) he does not have to tender too low to win the business.
The new-vehicle sales department is the most cost-effective part of our dealer's business. "Life would be simple if you just had to sell new trucks. All you need is an office, a potted palm and a secretary." He uses the three-legged stool analogy to explain how each part of the business is dependent on the others. The three legs of the dealer's stool are new vehicle sales, the parts department and the workshops. Each is treated as a separate profit centre.
New vehicle sales may be the most cost-effective, but it is the parts department that is the biggest profit-earner for our dealer; he has a 25% mark-up on parts. He justifies this on the grounds that a parts stockholding involves a large investment and, hence, interest charges. He has 200,000 tied up in parts and the money can be slow in coming in. The operators are billed monthly and they're usually late in paying."
Our dealer's aim is to turn over the stock four times a year, so his parts business annual turnover is 21.2 million. "It can be very profitable but it's also the most difficult part to administer if you are going to get the right balance between availability and not carrying dead stock."
The workshops' repair and servicing business is not only profitable in its own right — labour charge-out rates see to that — but have the added advantage of generating parts sales.
Despite this picture of three potentially profitable areas, dealers do occasionally fail. What makes a successful one? Is it the franchise it holds, the territory it occupies or its own inherent business acumen? Without doubt, our dealer believes it is predominantly the last factor: "A good dealer can make a living with any franchise in any area."
It is also wrong to assume that a dealer for a large manufacturer who has a high market share is necessarily doing better than a dealer who holds franchise for a smaller manufacturer. "It will depend on the discounting that is going on to achieve these sales and the size of the dealer's territory." A small] manufacturer will have fewer dealers and so each has a larger territory to cover.
Car salesmen frequently get a very bad press; how does our dealer rate his fellow truck salesmen? "I don't rate the average truck salesman very highly. There are exceptions, of course." He agrees that some salesmen will quite willingly sell an operator a vehicle with the wrong specification. A bodybuilder recently told CM that he is fed up with salesmen who sell trucks with the incorrect wheelbase option so that operators find they are faced with potential axle overload problems when the body position is calculated.
Our dealer sees this as a direct result of the truck industry's customary system of building vehicles for stock — Foden is the notable exception to this, with its custom-building method. A new vehicle built for stock and sitting unsold in a dealer's compound is running up interest charges — hence a dealer's readiness to "move the metal", even if that may occasionally means persuading an operator to take a less-than ideal vehicle.
Some would say this is unscrupulous. Says our dealer: "The pressure is on them. The manufacturers encourage dealers to hold stocks so that they have something to sell. It's bound to lead to the wrong specification sometimes."
The fact that a minority of operators can be lead astray in their choice of specification does not speak too highly of their professionalism.
While by no means tarring all operators with the same brush, our dealer believes that some leave a lot to be desired. "I've met some remarkably igno. rant fleet engineers." He recalls a meeting with a consultant working on behalf of a nationally-known company and who did not know the meaning of 6x2 or 6x4, nor the significance of 3+2 or 2+3 as applied to artics.
Some dealers have a flourishing usedtruck operation and find it another worthwhile string to their bow. Our man does not consider himself active in this field although he sells the used trucks that are taken in part exchange against new ones. This is the one aspect of the business that is not treated as a separate profit centre. The profit earned from the sale of the used truck in the 22,000 that he aims to make on the whole new vehicle transaction is affected by it.
"Buying at the right price is the secret of dealing in secondhand trucks. But is is difficult to buy cheap if the sale of a new vehicle is in the balance."
Naturally, manufacturers like to encourage their dealers to run demonstrator vehicles. For our dealer, this takes the form of a 30% instead of the usual 20% discount on the price paid by the dealer for the demonstrator.
Our dealer believes that the demonstrator system is commonly abused by operators who borrow the demonstrator for a week with absolutely no intention of buying one. "They are so blatant that it's easy to see through them. And too often, it's in the hands of your best customer anyway. The system has to be policed very carefully to make sense."
Both dealers and operators have become more financially sophisticated in recent years with the growth of developments such as contract hire, leasing, buy-back deals and pence-per-mile repair and maintenance contracts. Our dealer has kept things fairly simple on this front. He has shied away from buyback deals at a pre-determined price ("they are more of an opportunity for the dealer to lose money, not make it") and says the majority of his customers still pay by hire purchase or cash.