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A Primer On Used Equipment

Leading up to MHEDA’s Rental & Used Equipment Conference, three presenters talk shop.

On September 17 and 18, 2009, MHEDA will hold a rental and used equipment conference titled “Making Money in the Rental & Used Equipment Business.” The focus will be on best practices and strategies to maximize the profitability of dealers’ used and rental equipment departments. To give a sneak peek of what to expect, The MHEDA Journal asked conference presenters Richard Donnelly, executive vice president at Gregory Poole Equipment Company (Raleigh, NC), Greg Morrison, vice president of Morrison Industrial Equipment Company (Grand Rapids, MI), and Bill Rowan, president of Sunbelt Industrial Trucks (Dallas, TX), to give a crash course on the used and rental equipment business.

  
Richard Donnelly

Richard Donnelly, executive vice president, Gregory Poole Equipment Co., points out that the sale of used equipment, like this reconditioned 2003 Cat GC15, can also generate new parts and service business.

What benefits can focusing on used equipment sales provide a distributor in times like these?
Bill Rowan: New opportunities. To put it simply, not everyone is a new equipment buyer—especially in this economy. Many end-users have budget constraints and are looking toward used equipment in one form or another. If you’re not focusing on used equipment, you’re closing yourself off to those customers.

Richard Donnelly: You’re also going to be able to get significantly higher margins on used equipment than new. Then, when you do sell a piece of used equipment, it’s going to need a lot more maintenance and repair work than a brand new one would, so you will get additional parts and service business.

Greg Morrison: Exactly. The parts and service departments of your business benefit greatly from used equipment sales. You can also be a lot more flexible. You can take a truck, do no repairs on it and sell it in a wholesale condition. Or you can take that same truck, make some moderate repairs and sell it at a higher price point. Or you can recondition it and sell it at an even higher price point. The same truck can serve three different customers.

How do you decide if a customer’s application can be handled with a piece of used equipment?
Donnelly:
Let’s just say that you’re not going to be selling used equipment to perform in high-production type applications.

Morrison: We’ve always used four hours as a dividing line. If you’re running your truck for less than four hours on a daily basis, that’s a used truck application.

Rowan: You can’t sell used into new applications. You have to be careful and make sure you understand the customer’s true needs. If a truck is going to be used four-plus hours a day, that’s a new truck application.

Morrison: Seasonal business owners are a good market for used equipment.

Bill Rowan

Bill Rowan, president of Sunbelt Industrial Trucks, says used equipment, like the reconditioned (left) and rental-ready (right) Y2005 Komatsu's, provide higher margins to the selling dealer.

How do you determine pricing on a piece of used equipment?

Donnelly: The market dictates most of it. Depending on the hours the machine has logged and how old it is, the market will be different. In addition, the reputation of the dealer—positive or negative—can affect pricing.

Morrison: At Morrison, the cost of a used piece of equipment varies. Our used equipment manager, David Morrison, takes the acquisition cost of the equipment at lease end and estimates the repair cost on it. We take that number and mark it up 25 percent.

Donnelly: A lot of it has to do with how much work we’ve put into the particular truck. If a piece of equipment has been fixed and cleaned up, we can get a lot more money for it.

Rowan: As Richard said, everything depends on the condition of the truck and how much we have to pay to get it into sellable condition. On a four-to-five-year-old piece of equipment, retail is going to be about 60 to 70 percent of the cost of a new vehicle.

What sort of warranty do you offer on used equipment?
Donnelly: We offer a 90-day warranty on the drivetrain and a 30-day warranty on the truck itself. This warranty is something we handle, unlike new equipment warranties which are supported by the manufacturer.

Morrison: We offer a 30-day bumper-to-bumper warranty on used equipment sales, and we generally offer a 90-day powertrain warranty as well.

Have you considered any extended warranty options?
Morrison: That’s something we’ve recently started offering. I think there is a really good future in extended warranties. People are looking for peace of mind when it comes to the major components on the vehicle that they’re purchasing, and extended warranties are a good way to provide that. They also present an additional revenue stream for distributors.

Greg Morrison

Greg Morrison, vice president, Morrison Industrial Equipment Co., points to this used Caterpillar three-wheel truck as a reflection of what the current marketplace is requiring.

What are your thoughts on selling used equipment “as is”?
Rowan: The problem with selling “as is” is that the customer doesn’t usually understand that it means what it says. They think that if it springs a leak after a week, it should be covered. It’s a struggle because then it can upset your customers and damage your reputation. That’s why at Sunbelt, we try to avoid selling as is.

How does the sales cycle on a piece of used equipment compare to new?
Rowan: It’s definitely a much shorter sales cycle with used equipment. It can take two to three weeks compared to several months.

Morrison: The sales cycle is much shorter with used equipment in part because the piece of equipment is usually something that we have on hand and can deliver quickly. Most used equipment sales are done cash-on-delivery, so we get paid right up front which can really help with a dealer’s cash flow.

What are some potential pitfalls when it comes to selling used equipment?
Morrison:
You have to manage your customers’ expectations. They need to understand that if they’re paying 50 percent of new to buy a truck, they’re really getting 50 percent of a truck, so they need to have half the expectations. If you manage their expectations in that manner and then exceed them, the customer will have a positive view of the experience. However, no matter what price you sell the equipment for, if you haven’t managed their expectations up front, they’re going to be dissatisfied with the piece of equipment.

Rowan: Another critical thing to understand is that you can’t be everything to everybody. You have to decide what your niche in the used market is going to be because you ruin your reputation and lose money by over-representing or by selling cheap equipment that doesn’t hold up.

Donnelly: You also want to make sure that the equipment is in good condition and, on the same token, that you haven’t put too much money into fixing it up. A lot of times a salesperson or manager does a trade-in and overvalues the piece of equipment, and then he compounds the problem by putting too much money into repairing it. The next thing you know, he’s priced himself out of the market.

Rowan: There are a lot of opportunities out there for used equipment, but if you don’t do things correctly, there’s a definite downside.

Are there any unique skills a salesperson must have to sell used equipment?
Donnelly:
When selling used equipment, the salesperson has to have a different mindset. When the salesperson is selling new, he or she is focused on selling the product, productivity and the dealership. The manufacturer and product brand play a major role in the decision-making process. When selling used, the salesperson has to gain the confidence and trust of the customer that they are properly representing the used lift truck and the dealership that will support the equipment. The product brand is less important than the relationship with the salesperson and trust in the dealership.

Morrison: They must have good negotiating skills. Customers might ask for a lower price, but we may not change the tires or replace the seat. We might not paint the truck.

Rowan: The used equipment salesperson must also be able to adapt to a shorter sales cycle and have the ability to recognize a customer’s financial situation, which often includes budget constraints.

Donnelly: They have to be able to look at different types of customer applications and figure out what piece of equipment truly fits their needs. That’s why some salespeople do very well selling used and others don’t – because they fail to ask and listen to the customer.

Rowan: Ultimately, it has to be the customer who makes the decision to buy used, not the salesperson.

What have you done to boost your used equipment sales?
Rowan:
At Sunbelt we’ve been making a conscious effort to be sure that people are seeing the specials that we offer. We offer a special on new equipment to pique their interest and get them to come in. Then we tell them what a piece of used equipment would cost in relation to the new so they can make an intelligent decision.

Donnelly: We’ve been encouraging our salespeople to get out there and call on some of those smaller, less traditional customers. We don’t want to lose contact with our big customers, but there are a lot of smaller companies out there who aren’t large fleet owners. They will be looking for used equipment and we want to make sure we’ve got them covered.

Morrison: A year ago when things started going south, we began doing something new at Morrison. We’re now putting used equipment out on Rental Purchase Options. We rent the equipment to the customer but apply a percentage of the monthly cost to the purchase price of the vehicle. Of course, we’re charging a higher price for the unit overall, but it’s worth it for some customers.

Have you noticed an increase in the amount of used equipment inventory available for dealers to purchase? If so, how are you taking advantage of it?
Donnelly:
Absolutely, there’s a lot of inventory out there in dealers’ hands, and a lot of dealers are downsizing rental fleets.

Morrison: There is a definite increase in used equipment availability. And wholesalers often call and let us know what’s available and what they have access to.

Rowan: Without a doubt, there’s more equipment available and the price of that equipment is being driven down by the fact that there is so much out there.

What effect does this abundance of available equipment have on how much inventory your company is stocking?
Morrison:
Right now we’re not adding to our inventory, but it’s made it easier to find specific equipment for our customers. Between networking with other CAT dealers, MHEDA members and wholesalers, David Morrison, our used equipment manager, can find almost any piece of equipment a customer could ask for.

Rowan: There’s more equipment out there, but it’s just sitting there because dealers are trying to reduce inventories. Ultimately, that equipment will get sold, and as people start buying more, they’ll get that surplus down and get it back into a good balance. Right now, the key is keeping a close eye on the marketplace so when it does turn, we can quickly get our hands on that equipment.

How have used equipment sales performed compared to new since the downturn began?
Rowan:
This is the most challenging economic situation I’ve seen in 30 years. There’s been very little activity, if any at all, new or used, from late last year through now.

Morrison: It’s been much the same situation at Morrison. Both new and used equipment sales have been down in our market, but I wouldn’t say there’s been a significant difference between the two.

Donnelly: At Gregory Poole, our used equipment business has dropped off, but not quite as much as new equipment sales.

Is the actual process of selling used equipment different now than it was a year ago?
Morrison:
We really have to be more aggressive in responding to the marketplace. In Michigan, there are far fewer buyers out there, and those who are buying are seeking out bargains. We have to be able to respond to their demands without sacrificing too much of our margins. There have been sales we’ve walked away from for precisely that reason.

Rowan: If we’re trying to sell someone new equipment and we let them walk out the door, odds are we haven’t necessarily lost the sale. But with used equipment, if they walk out the door, we’ve probably lost them because they’re going to find something else at the next place. However, in an economy like this one, even the used equipment buyers are not as impulsive as usual.

Morrison: Now more than ever, we have to rely on our salespeople’s negotiation skills. If a customer wants a lower price, then maybe we can negotiate a deal where we sell the truck for less but we don’t repaint it or replace the seat.

This economic slump will bottom out and things will start to turn around. What will that mean for used equipment dealers?
Rowan:
Used equipment will be what eventually leads us out of this recession. People say, “Ok, I can’t put off not having a forklift or not upgrading my forklift any longer, but I can control what I spend.” That’s where used or rental equipment comes in. People who never thought of purchasing used equipment are still getting quotes on new, but they also want to know, “If I do decide on used, what can I get?”

Morrison: As the economy starts to recover, we’ll first see a pickup in used equipment. I think that the customer sees used equipment as a short-term solution as compared to new equipment. As the economy gets stronger and they have a better vision of their future, they will feel more comfortable and then possibly new sales will increase as well.

Donnelly: There certainly are going to be more opportunities. Many of these small to medium-size companies that have struggled in the current economy are going to see their business picking up again. What dealers have to do is make sure they have the sales coverage out there. A lot of dealers have cut their sales force and lost a lot of coverage. So when the economy does turn around, they’re going to have a harder time reaching these potential customers.

How are you positioning your company to take advantage of that increase in used business?
Donnelly:
We’re making sure that we have the right equipment in our fleet according to customer demand. We’re also making sure that we acquire it at the right price.

Morrison: It’s a matter of managing inventory. Used equipment inventory has to reflect what the marketplace is going to require.

Any final words of wisdom for your fellow MHEDA members?
Rowan:
I want to reiterate that one of the most important things you can do as a used equipment dealer is to understand your customers’ applications. Things are going to get better; it’s just a matter of striking when the iron’s hot.

Donnelly: If properly managed, used equipment can be a great pocket of business. It’s not just selling the equipment, either. It’s also generating parts and service business. You’re keeping your population up out in the field and that’s what you’ve got to be able to do.

Morrison: I think I speak for all three of us when I say that we’re really looking forward to this conference. It’s going to be a great opportunity to get together with our fellow MHEDA members and share best practices for the used and rental segments of the material handling industry.

Rowan: And remember, you heard it here: Used equipment will lead our industry out of the recession!

Material Handling Equipment Distributors Associtation

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