| IN THIS ISSUE JANUARY 2013 SHOWCASE
Charlie Gause was there when John Deere became the ‘big kid on the block’ and during the development of the dealer network that’s kept the company in the top spot.
As told to Dave Kanicki, Executive Editor
“When I started my career in 1962 as a John Deere territory manager — or ‘blockman’ as they were called back then — I was responsible for only 12 dealers in southeast Kansas and my annual sales quota was $850,000.
“The price of those combines pretty much matched their model numbers: a model 45 was about $4,500 list price and a 55 was roughly $5,500 list price. In those days, if a dealer made $200 on a combine he had done pretty well.”
“In those first years, regardless of the territory, the company insisted on having an equipment dealer in every county seat. The end of our fiscal year was October 31, and if you started the next year with an open town, Deere was looking for a new territory manager. But my emphasis was always to find the best dealer in town. As a result, we were constantly changing dealers.
“The area in southeast Kansas that I was responsible for had a lot of flint hills and it was a big pasture area. If I’d been selling saddles and saddle blankets, I probably would have done more business than we were doing with farm equipment in those days. But I still had to have a dealer in every county seat.
“I did a little over $1 million dollars in sales that first year, but one dealer alone sold $250,000 of product. The other 11 dealers sold very little.
“We just had a whole lot of dealers who had very low profit and most of them were so small they might have had one service person, a setup man and a parts person. I had a couple of dealers in the plant hills that had no service personnel at all. So, if they had a service problem, I fixed it. I was the man.”
The ‘Best’ Dealer in Town
“I pushed to find the best dealer in town who had the potential and business skills to grow new equipment sales. I wasn’t just looking for the best farm equipment dealer in town, I was looking for “the best dealer” in town regardless of what he or she was selling.
“The best dealers not only knew how to make a return on their investment, but they made the best return on investment of anyone in town.
“To me, the dealer is the most important asset the company has, and that’s the one thing that hasn’t changed over the years. There are a lot of people who don’t realize this, but that was the key to what made Deere the top farm equipment maker in the world and what’s kept them there.
“This may sound funny now, but I always pushed for the local John Deere dealership to be more valuable than the local Chevrolet dealership. That was the philosophy I always talked about.
“I was constantly recruiting, developing and replacing dealers. That was the territory manager’s primary job.
“I’d often make sales calls with the dealers, which helped me meet the best farmers in the area. A successful farmer could also be a good dealer prospect.
“When I started looking for dealers, I’d go back to those farmers. It used to be a joke in the company that the guy with the most silos, the big blue Harvestore silos, had the money to invest in a dealership.
“I also had a lot of success getting other dealers’ best salesman or parts managers to start up a new dealership. But we almost always needed to get another investor because we required additional capital and the manager needed to have ownership.
Many times we would go to the bank with the dealer prospect and get the bank to loan them the money. You’d do about anything you could do to get a dealer established.
“It depended upon the location, but in those days $100,000 was usually sufficient to get a dealer started. In some cases, dealer candidates might need to come up with $200,000 or $300,000 up front to get the business started.”
No Goals for ‘Used’
“The most successful dealers were those who could move their used equipment and collect their open accounts. But for many dealers, moving used machinery was not at the top of their list.
“In the ‘60s, we never talked about setting a goal for turns on used equipment. The first time I remember hearing ‘turnover’ involved parts sales. We never really thought a lot about turnover on new or used equipment like they do today.
“Of course, the dollars weren’t as big then as they are now. But they didn’t have the financial wherewithal that they have today either, and I believe their vulnerability to failure was a much bigger issue back then.
“My territory was very large and very successful and I had a high market share. If I recall correctly, we did about $6 million a year with 11 dealers.”
Volume was King
“In the 1960s market share wasn’t a metric farm equipment manufacturers paid much attention to, because it was all about volume.
“Market share was a factor, but we didn’t really measure it closely. The first year there were any industry sales figures was about 1958. So there was industry market share and a branch could look at the state and guess what its market share was. But as far as our territories, we weren’t sure about market share, but we did know volume.
“Our whole system was set up to retail as much volume as we could. In the ‘60s, it was a tough period for agriculture; commodity prices were low and it was a very competitive market. Frankly, our approach was to ship as much as we could to a dealer and then push him to sell it.
“The territory manager would get a phone call from the division manager and be told, ‘You’re going to get two carloads of tractors, so you better line up dealers to order those tractors.’
“To get a dealer to place an order, the territory manager had to help him retail the tractors. He’d spend a couple of days at a few dealerships and sell tractors to make room for new shipments. If a dealer made $50 on a new tractor he felt pretty good about it. Of course, he had a volume discount on top of it.
“A territory manager back in those days had a pretty good idea of where to go. You knew the customers, you knew the dealer, you kind of knew how the crops were doing in each area so that’s where you ended up. You went where you had the best shot.
“I was really fortunate, I had a big, big dealer in Minco, Okla. He was a good guy and could sell a lot of tractors. That’s where I would head first.”
‘Unbelievable’ Growth & Change
“The 1970s were a decade of unbelievable growth. Manufacturers couldn’t build enough tractors and farmers were put on waiting lists for new equipment. We also saw our first glimpse of foreign competition.
“We started seeing Kubota and other offshore OEMs come into our market.
“The number of farms dropped from 3.5 million in ’64 to under 3 million by 1974, but their size was growing. This also set the stage for dealer consolidation and multi-store dealerships.
“We started seeing a kind of the migration of people like you and I who grew up on a farm but moved to the cities and the suburbs for work. We still wanted the country lifestyle with 10 acres and a little tractor and mower to keep us connected to the farm. The 1970s were a time of significant changes and growth for agriculture.
“Dealers were making a bunch of money and most of it was coming through sales of complete goods. That dealer who was making $50 a tractor in the ‘60s was now selling at list price in the ‘70s. He wasn’t having any problem moving used tractors and combines either. Farmers had money, dealers had money and things were booming.
“You could buy a new John Deere tractor in 1974 and it was worth more money in 1975 even with the hours on it. It was just a really good time.”
“Even in that boom time, I believed Deere had too many dealers, and most were single-store operations. But with everyone getting list price for nearly every piece of equipment they sold, it was impossible to talk anyone into getting out of the business or merging with a neighboring dealer.”
A Different Kind of Dealer
“In 1976, I became a general sales manager in Portland, Ore. I was responsible for most of the West Coast. That’s where I saw a lot of agricultural diversification and a different kind of dealer.
“California dealers and a large number of dealers in the Palouse region of Washington and Oregon had been John Deere/Caterpillar dealers. They were far more profit-oriented than the dealers I had seen in other parts of the country to the point where they weren’t competitive. They were used to making a full margin on whatever they sold, and if they couldn’t sell it for that they didn’t sell it.”
“An even bigger difference was John Deere didn’t own the market there. That’s where we really got into the market share thing and market growth and how we planned to get it.”
“This is when Deere increased its marketing focus and began doing research on how acceptable the product was to the customer, as well as defining customer needs and wants. These are things everyone does today, but it was unique to our business back then.
“For example, I remember we looked at our utility tractors through the eyes of three research firms and they came back and told us, in the customer’s view, we had the best product on the market, but didn’t have it priced or powered right.
“We increased the horsepower but not the price and we grew our market share tremendously over the next 12 months. I think they were pretty positive moves and really helped us with a dealer organization that had never been highly successful selling our utility tractors.
“We were able to capture a lot of market share where Massey Ferguson tractors were previously the big sellers. We also began recruiting competitive dealers who specialized in the utility tractor business, and converted them to John Deere dealers. That was how we built that utility tractor market share during that period of the late ‘70s on the West Coast.”
The Farming Crash
“I hate to throw politics into the conversation, but everything was going strong until Jimmy Carter put the embargo on wheat, and that was the end of it. Commodity prices dropped and we had a severe farm crisis on our hands.
“I’d say about 50% of all farm equipment dealers in the early 1980s went out of business. John Deere lost about 30% of its dealers. In 1979, North American industry sales of combines had reached 32,000 units. I remember that number because that’s how much capacity all the industry manufacturers had, 32,000.
“By 1982, industry combine sales fell to between 15,000 and 20,000 units. In our Kansas City branch, which was my assignment starting in ‘79, we had sold 4,000 combines. Within a year we couldn’t sell 1,400. The impact was unbelievable. Nobody was buying anything.
“One year a branch would sell 2,500 disc harrows and the next year it barely sold 800. Dealers had no business and their used equipment wasn’t moving. They were going broke right and left and banks were going broke and farmers were going broke. Deere went from 65,000 employees to 30,000.
“It was during this period that the term ‘absorption rate’ came into the farm equipment business. To succeed, or to just survive, we had to completely change our philosophy and start training dealers how to be succeed in parts and service and to absorb more of their overhead with their parts and service gross margins. Some dealers ran their service business 24 hours a day and were very, very successful in parts and service.
“Most dealers’ mindsets up to that point was, ‘We’re going broke, so we need to sell more.’ So their big push would be to sell more new equipment, often times giving it away, trade for equipment, and build inventory believing they still had some profit margin. Of course, their cash flow wasn’t any good. So they had to generate cash flow and do it fast. This caused us to really change our whole philosophy and show our dealers how they could make money on parts and service.
“We had to put a whole new system in place. It included training people how to keep track of time and properly bill and be efficient. That’s also when we started to use flat rate billing.
“This shift in thinking was the biggest change in Deere’s dealer organization during my 40-year career. The goal during this period in the Kansas City branch, for example, was to get the average Deere dealer to where they were absorbing 80% of their overhead with parts and service gross margin.
“The push for high absorption rates was very successful, but more importantly, it set the stage for the next generation of Deere dealers to look at their entire operation, not just wholegoods.”
Moving to the Next Level
“All of a sudden dealers had to become real business managers and get away from being sales-oriented. The old dealer was a salesman, a ‘good old boy’ who did a lot of back slapping, answered the phone and was mayor of his town. The dealers that survived and grew in the ‘80s were the dealers that moved into the ‘90s as top-notch businessmen. They learned how to function as a manager; to plan, organize, delegate, direct and control. The most difficult transition was getting even the best dealers to plan. It probably still is.”
“Another major turning point for the ag equipment industry occurred in the late ‘80s because the first seeds of the multi-store dealership were planted. It didn’t get any real traction until the 1990s and finally took off in the 2000s.
“I wasn’t necessarily on board with the idea at first. I’ll admit to being a little more old fashioned than others about the multi-store concept. I thought it was good, but I was concerned that you could get too many stores and lose control because the span of management wasn’t good enough.
“I was also concerned that Deere dealers buying other Deere dealers weren’t really bringing in any new dollars or new talent. I felt like it was the easy way out and we needed to be challenged to get new money into the business. So I really was a little bit slow on the multi-store concept. Although I agreed with it, I had reservations. I didn’t want it to get to where someone owned too many locations. I didn’t want that to be the only proposal I looked at for a new dealership is a good way to put it.”
“It became pretty obvious the more sophisticated farm equipment became, the higher the investment required by dealers to take care of the equipment and the customers was going to be. It would require a multi-store type function to justify that investment.
“The big difference in owning a Deere dealership today is that it’s a good investment with a good return. When I started it was not that good.”
Well done Charlie. thanks.