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Extended Equipment Warranties: Nothing in Life is Free

On the surface, extended warranties for new pieces of foodservice equipment may seem like a low-cost way to help drive sales. But it is important to understand the hidden costs and how it impacts all members of the supply chain, including foodservice operators and service agents.

As the business climate continued to sour over the past few years, foodservice operators and restaurant equipment manufacturers looked at any number of options to sweeten things a little bit. One of the more popular ways of doing so was including more extended warranties on foodservice equipment purchases.

Foodservice operators, particularly chains, like extended warranties because it allows them to lock in the costs associated with new equipment purchases for up to three years. Manufacturer salespeople, and presumably their dealer and rep networks, like extended warranties because it gives them another incentive to get customers to purchase equipment.

It would appear as if everyone wins with this scenario, right? If only that were the case. "On the surface it would appear the extended warranty is good for the operator because they feel they get free parts and service for three years on the equipment," said Wayne Stoutner, president, Appliance Installation and Service Corp., Buffalo, N.Y. "But nothing in life is free. The manufacturers and the service agents have to raise their prices to cover their costs. So you end up paying for it in other ways."

Generally speaking, warranties for cooking and other pieces of hot equipment tend to last for one year and cover parts and labor, including travel time. Refrigeration warranties tend to vary across the board due to the nature of the product. Many brands of walk in coolers and freezers, for example, don't have a labor warranty from the factory because final assembly and refrigeration installation is performed by the installer. But that's not the case with other refrigeration equipment. Many ice machine manufacturers have a three years parts and labor policy but do not cover any travel time."

There are some benefits associated with extended warranties. For example, it means that an authorized service agency takes care of the product for the operator. That tends to be important because the factory authorized service agent's technicians are trained by the manufacturer and in most cases are able to perform a higher level of service than others. "An extended warranty keeps the operator from using a lesser cost service provider that may not have the proper training and may not supply the proper OEM parts,"said Stoutner.

Extended warranties also allow more time for service agent to assist the operator with proper care and maintenance of the equipment. So the operator's team gets more time with the properly trained service agent and that can lend itself to more training among other benefits, according to Stoutner.

Despite these benefits, extended warranties are far from perfect. "The downside for us as service agencies and the manufacturers is that it costs a lot to implement these programs," Stoutner said. "We, as service agencies, do this warranty work slightly below cost. For a product with a one-year warranty, that's OK because it helps us to get our foot in the door with a potential customer. But extend that warranty period out to three years and it is not as acceptable. So, by extending warranty periods out to three years, our out of warranty prices, including parts, labor and travel time, have to go up in order to pay for the loss we incur doing warranty work. At the end of the day, it's a pay me now or pay me later scenario."

Oftentimes, the extended warranty can lull the operator into a false sense of security. For example, if the product was not level upon installation or if there are too many pieces of equipment drawing from the same gas line, performance will be impacted in a negative way. "Ultimately, we look like the bad guys when this happens," Stoutner said. "People will argue to the end that their equipment is under warranty but issues caused by improper installation and improper usage are almost never covered under warranty."

Ways to Improve the System

Stoutner points out a number of inefficiencies within the current warranty system that need to be addressed. For example, the agreement with factories and service agents only allows the agents to bill back their time at 35 percent less than a normal service or maintenance call. And, according to a recent CFESA study, the typical service agent makes a 3.3 percent net profit on sales. "Obviously, you can't bill back at 35 percent less than cost forever," Stoutner said. "There's not much more for us to give."

Stoutner does see some opportunity to improve the system so it better benefits everyone. First, he would like to see factories become more consistent in how they implement extended warranties. Most factories will offer an extended warranty for one piece of equipment but not all of them, which keeps the service agents guessing and impacts customer service. And when the factory does decide to offer an extended warranty, more timely and consistent communication with the service network would help. "Extended warranties are a bit of an unknown for us because we are not always notified by the manufacturers when they have made such a change," Stoutner said.

In addition, Stoutner sees an opportunity to limit some of the bureaucracy associated with warranty work. Right now, service agents have to enter the work into their internal systems and then again into the system that manages the factory's warranty program, he said. Finding a way to connect the two would cut the administrative work in half, thus lowering costs.

Parts management is another time and money consuming aspect. Warranty parts need to be sent back to the factory instead of being tossed in the trash, so it costs time and money to pack and ship them. "As a member of CFESA I have the opportunity to talk with many of the manufacturers' national service managers and find that in most cases they, too, are against the extended warranty policies being driven by their own sales departments," Stoutner said.

"In the long run, extended warranties are not saving anyone any money," Stoutner continued. "And it eats into our margins, impeding our ability to train people and stock parts, which is ultimately a disservice to the operator."