Long-Term Warranties Have Hidden Costs

Warranties can make purchasing a piece of equipment more attractive to a foodservice operator. While longer-term warranties might seem like a bargain up front, they create other costs that operators and members of the supply chain have to reckon with in other aspects of their businesses.

It’s been said that the entire field of economics boils down to one idea: There’s no such thing as a free lunch. That simple line of thought drives a lot of activity, much of it unseen, around the multi-year warranties some foodservice equipment manufacturers now offer, said Wayne Stoutner, president of Buffalo, N.Y.-based Appliance Installation & Service Corp.

Up until about 10 years ago, a one-year warranty came standard when operators purchased foodservice equipment, according to Stoutner. Refrigeration and ice machines tended to be the exceptions in this area.

Over the past decade, though, many foodservice equipment manufacturers extended their standard warranties to two or three years and even more on certain lines they produce. By Stoutner’s estimation, roughly half of the foodservice equipment manufacturers adopted this practice.

Operators are the ones driving this change, Stoutner added. These companies, typically large chains, want the fixed costs that long-term warranties provide, and they have the purchasing power to get what they want.

Of course, changes like this ripple through an industry, forcing their costs to be assumed elsewhere.

To become an authorized service agency, a service company must agree to treat warranty work differently than other jobs. When performing warranty repairs, an authorized service agency generally gives the manufacturer a 20 percent discount on labor charges. In addition, the service agent forgoes any upcharge on parts and often has to pay for parts shipping. In the end, most of this work is done at a loss, said Stoutner.

Service agents are willing to assume a loss for a variety of reasons, starting with the marketing angle. Manufacturers advertise their authorized service agents online and in their print materials. In addition, said Stoutner, “doing the warranty gets our foot in the door. It gets us the ability to meet the customer and impress them with our service.”

Authorized service agents can buy parts directly from the equipment manufacturer, cutting out the middlemen and saving themselves time and money. Most important, said Stoutner, is the training and support the manufacturers provide.

“If you’re not an authorized agent, generally speaking you cannot get tech support and training from the manufacturer. You can get some limited tech support but you’re probably not going to get invited to their training classes. That is a very valuable tool. With all the new equipment coming out you need to keep up with their training.”

While this trade off works for equipment on a one-year warranty, over longer periods the warranty losses become too big for service agents to swallow. In fact, based on information from the Commercial Food Equipment Service Association, Stoutner has calculated that if all manufacturers went to a three-year warranty, the average CFESA member company would be roughly 8 percent in the red by the end of that third year. And that applies to the entire company, not just the item under warranty.

As a result, service agents continue to adjust their business models to make up for these losses, said Stoutner. Many companies, including Stoutner’s, have been forced to increase their labor rates for non-warranty calls and/or the premium they charge for parts. They’ve also negotiated higher labor reimbursement rates for warranty work from the factories they represent. Since manufacturers pay for this extra warranty work as well, they’re also likely increasing their prices, he added.

In the end, Stoutner figures that the long-term warranty offers short-term peace of mind along with a fixed number for budgeting, but doesn’t provide any long-term financial benefit. “Ultimately, when [customers] are demanding these extended warranties, they may get a short term boost. But at the end of the day they’re going to pay for extended warranties in one form or another.”

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