If anyone is qualified to lend an empathetic ear to today’s ag equipment dealer, Bob Crain is near or at the top of the list. He grew up on the dealership side of the business, and this year marks his 25th year participating in agribusi-ness from the manufacturing side of the industry.
Today, as the vice president North America for New Holland Agricultural Business, his perspec-tive of where the farm machinery industry is today and where it’s heading is a mix of pragmatism and confident optimism. For good or bad, the industry is changing rapidly, he says, and those who choose to accept and adapt to the changes, will find “good news” ahead.
Crain understands the concerns of his New Holland dealers who are hearing the talk and, in some cases, seeing the effects of dealer consoli-dation and other issues like succes-sion planning. His straight-forward response is “There’s no doubt we’re headed down the road to fewer deal-ers. What that number is, no one can say. There is no magic number for New Holland because we don’t know ourselves. This industry is changing so rapidly that what might have been the case last year is not the case this year.”
At the same time, he knows that a solid manufacturer-dealer relation-ship will be the key to understanding and adapting to the changes ahead, and a “one-size-fits-all” approach doesn’t work.
Numbers Tell the Story
Crain demonstrates his point about the accelerating rate of change taking place in the industry by look-ing to the declining numbers of oper-ating farms in the U.S. “In the last 5 years alone, “ he says, “the total farm count has dropped another 4%.”
To further illustrate the demo-graphic shifts taking place in farm-ing today, he says that during these same 5 years, all farm sizes were down except those in the 10 to 49-acre range, which increased by over 6%, and the 2000 plus-acre farms that grew by nearly 5% since 2000. Just as important, he says, is that today 76% of all U.S. commodity sales are generated by just 7% of U.S. farms.
Changes of this magnitude ulti-mately impact every aspect of farm-ing. From governmental farm policies and programs to commodity pricing to ag equipment production and sales, everyone feels the discomfort of rapid change.
According to the New Holland executive, between 1990 and ‘05, the number of North American dealer locations fell from 7,400 to 4,700, a drop of 36%. As Crain points out, “Obviously the trend is less overall ownerships with more multiple locations.”
He says, “Of course, it’s the dra-matic change in production agricul-ture that is the main driver. Fewer and larger farms certainly have had substantial impacts. Not the least of these is the increase in competitive pressures. All of us are competing for fewer customers. And, for the dealer, it has been the need to achieve economies of scale, busi-ness management efficiencies and dealer profitability.”
Crain also cites the tremendous growth of the small tractor industry as a transforming factor for ag equip-ment. Between 2002 and ‘04, the under 40 hp industry grew 37% from 103,000 to 141,000 units. In addition, in ‘04 the under 40 hp segment repre-sented about 60% of the total tractor industry, accounting for 141,000 of 246,000 tractors. Taking these num-bers further, he points out that 70% of the under 40 hp industry growth comes from only 35% of the metro-politan/suburban market.
“We expect this will also begin to reflect multi-dealer locations in sub-urban/metro markets,” says Crain.
Enter the Multi-Store Dealer
In order to cope with these sea changes, much of equipment indus-try is focusing on growing multi-store complexes, leaving some small-er dealers to wonder about their future. Crain sees a future and place for the single-store operator, with some qualifications.
“The dealer must be viably profitable. Without a doubt, it has to be good for him. And if it’s good for him, it’s typically good for us…” –Bob Crain, Vice President Agricultural Business, New Holland
“Multi-store complexes will not be the panacea for everyone,” he says. “There is a place today and a place tomorrow for stand-alone dealer-ships. But in my opinion, these stand-alone dealerships must be in a posi-tion to offer a unique value proposi-tion that sets them apart from the rest of the pack.
Asked to define “value proposi-tion,” Crain explains, “It is not, for example, simply offering good parts and service as everyone advertises and most dealers deliver. That is expected.
“Something that truly sets you apart from the rest of the pack might be some type of unique agronomy service or some type of unique prod-uct not offered by the others. Or it might be filling some special market niche for your customers. There’s a different answer for every location and market,” he says.
On the other hand, dealers look-ing to grow through multi-store loca-tions will face significant changes as well. Crain says that it is going to require “aggressive, challenged and focused dealers who are willing to make the decisions and commit-ments necessary to become a more competitive dealership that can profitably maintain a strong position in the market place.
“It’s going to require financial strength, a willingness to make cus-tomer satisfaction a top priority, and a willingness to pursue a closer and stronger business relationship between you and many of your cus-tomers. And a closer and stronger business relationship between your-self and the manufacturer. “
One Strategy Doesn’t Fit All
But Crain makes it clear that it is a mistake to lump all dealers into a single group and to make general assumptions about what individual dealers need to do to succeed in the future.
“While a reduction in the number of operating dealers is inevitable,” he explains, “what we all need to under-stand is that what’s right in a certain area of the country is not necessarily right for another area of the country. It truly varies area by area. The California ag market is a whole lot different from Iowa or Illinois, which is a whole lot different from that in Northeast. One strategy will not fit all dealers. Each situation must be looked at individually.”
Crain agrees that 5 years down the road ag equipment dealers will not look and operate as many do today. But successful dealers may take very different paths.
“I strongly believe what’s good for the Midwest industry is not necessar-ily right for the Northeast. Is not right for the Southeast. Is not right for the West Coast.”
Crain exclaims that, “What’s real-ly fun about this industry, from my vantage point, is that it is truly an eclectic industry and as a result, our dealers are eclectic. One size shoe does not fit all.”
It Comes Down to Performance
When all is said and done, per-formance and results ultimately tell the story.
“There’s no magic to it,” Crain says. “Obviously we have industry numbers on what is being generated in each dealer’s area of responsibility. It doesn’t take a rocket scientist to figure it out. If you look at the indus-try dollars generated in an area and you see three other competing deal-ers in the same area, you know that , in some situations, there’s no way that all of these stores can profitably maintain a business in that area in the long term.
Some Advice for Expanding Dealers
For dealers looking to expand their operations, Crain offers his thoughts on some critical issues they’ll need to consider.
“Capital is obviously one of the most critical areas. You can only grow as fast as you can fund the growth. Sounds simple enough, but poor capitaliza-tion has been the downfall of many attempts to grow a business. It’s essen-tial that you have enough operating investment to support sales volume. And likewise, if there is adequate working capital, it is equally essential that it is properly managed.
“Our guidelines show that dealers need an operating investment of$125,000 for every $1 million in sales revenue. So, if you are adding a new location with sales of $4 million, you’ll need about $500,000, not including land and buildings. A multi-store location must be funded to support planned sales volume.
“Another key requirement for expansion is to build a skilled staff and match their skills to their roles and responsibilities. At times, that means assuming the role similar to a CEO — being able to distinguish between man-aging the minute details versus the big picture or somewhere in between. It means listening as much as you speak. It means having a company philoso-phy or culture that the staff buys into and follows.
“Staff and organizational planning is a critical — and a very sensitive topic. For companies that are expanding, I strongly encourage a well thought out ‘transition plan’ that incorporates your strategies and policies into the acquired organizations. There should be ‘one’ benefits program and ‘one’ pay and incentives program, and a good system to measure and track employee performance.
“As multi-store organizations increase, one must recognize the need for more professional, as well as technical, expertise. Computer literacy through-out the organization is a critical requirement.
“There is also the need to establish financial management accountability, including cost control, at every location. Key managers must be responsible for asset management and expenses. And these managers should be involved in a ‘by location’ budget process.
“If you make the decision to be one of the survivors in this industry through expansion, make certain that you do it with eyes wide open. “
“The dealer must be viably prof-itable. Without a doubt, it has to be good for him. And if it’s good for him, it’s typically good for us.”
Succession Planning Concerns
Another issue causing dealers con-cern is that of succession planning, turning over a developed business to a family member or even selling an the concern to a willing buyer. Dealers continue to report that the manufacturers have often succeeded in thwarting a sale to satisfy their consolidation interests.
Crain is familiar with this dealer fear too, and says, “At New Holland I don’t know of any situations where we’ve told a dealer you can’t leave it to your kids or grandkids.”
From Crain’s perspective, many of these situations boil down to the manufacturer-dealer relationship.
“Without a doubt, part of the working relationship is to have discussions like these and say ‘Mr. or Mrs. Dealer, you’re responsible for a total universe of only $6 million. There are two other competitors here in the area and you’re compet-ing with them for a slice of that $6 million pie. With all the overhead of a pure, stand-alone dealership, it’s going to be extremely difficult, if not impossible, for you to do succeed without specific actions.’ We do have these types of discussions. Again, I think that’s what good manufacturer-dealer relationships are all about.”
Crain feels that when a solid rap-port exists between the two parties, the two can address the situation fur-ther. “We might say, ‘Have you thought about some type of arrange-ment with a dealer in an adjoining area? As a company, can we at New Holland help you facilitate this? Can we get together and at least start the discussions if you’re interested at looking into it?’
“But we have never had a discus-sion with a dealer where we’ve said “Are you are a buyer or a seller?Decide which one you are.”
“I suppose, in certain situations, we could decide not to renew a contract,” he continues. “It would obviously depend on the perform-ance of the individual dealer for the past several years. If it’s a marginal operation, we would need to have a difficult discussion.”
The Manufacturer’s Role
While much of the discussion today revolves around what the deal-er can or can’t do, Crain also under-stands that the manufacturer plays a significant role in the success of its dealerships. For example, in light of the rapidly shifting market for ag equipment, it’s the manufacturer’s responsibility to provide the retailer with the products to meet changing customer requirements.
In terms of the small tractor boom, Crain says, “New Holland’s core strength has always been in the under-100 hp business, particularly for the hay, dairy and livestock busi-ness. We have very loyal customers that we will never abandon. We will continue to grow that segment of the business.
“There is a value proposition the dealer offers and that proposition is significantly different and of more value than what a box store can offer…”
“Going back to the early ‘90s, we took a hard look at the big equipment business, the cash-crop type opera-tions, and made some substantial investments in the CX and CR com-bines and the row-crop tractors. This allowed our dealers to make signifi-cant inroads into the bigger equip-ment markets and it has been a very good business for all of us during the past 3 or 4 years, especially with net farm income at record levels. We installed some very good dealers dur-ing that time, too. “
Crain also credits the Internet with helping New Holland improve communications and fill niche needs for its dealers and customers.
“New Holland is such a global company that we make some very specialized equipment for unique applications and geographies. The information is on our web site for our dealers and customers.
“I’ve gotten calls from our dealers who say, ‘I saw on the website that in Italy you’re selling this specialty tractor for the vineyards (or for some other specialty application). That tractor would be perfect for this area of California.“ Because of these types of discussions, we have on occasion made decisions to bring products designed for use in south-ern Europe, for example, to California,” says Crain.
As a result, he says, “There are always new markets being generat-ed. More and more of our small trac-tors are being used for different applications, such as municipal work and they’re being used for much more heavy-duty work that will require replacement in 2, 3 or 4 years. The business will always be there if we listen to our customers and our dealers are our ears in the marketplace.”
What he says New Holland will not do is circumvent its dealers. “At New Holland there has been no dis-cussion of bypassing the dealer. Zero discussion. It’s common sense that we need the partnership. There’s no way around it.”
He also reiterates the value a good dealer can bring to the equa-tion. “Can you offer the agronomy or service knowledge that cus-tomers rely on? There are a lot of soft skills needed to sell our equip-ment. Can we do it without a strong, local or regional distribution net-work out there? No, I can’t see that happening. Within New Holland, there has been no discussion of moving in that direction.”
And what about the box stores?
In his own matter-of-fact way, Crain says, “We take all competi-tors seriously. We try to keep our eye on the ball and do what’s best for New Holland, our dealers and our customers.”
Does New Holland ever see the day when we do something like this? “You can never say never, but there has been no discussion. Again, it comes down to what the dealer offers the customer. This varies from area to area. It might be serv-ice, it might be parts, agronomy knowledge or whatever. There is a value proposition the dealer offers and that proposition is significantly different and of more value than what a box store can offer.”
The Good News
On the heels of three surprisingly strong years for farm machinery, some are already sending dour sig-nals about how the market cannot possible hold up in 2006.
Crain is pragmatic enough to know that all market cycles eventu-ally come to an end. This doesn’t necessarily portend bad times ahead. “For the most part,” he says, ”the past 10 years has been good for this business and I’m hearing and seeing enough good now to feel that the future is extremely bright for this industry. If you look at key indicators such as the stocks-to-use ratio, plus the developing world out there, I think there is good news for not only the North American farmer, but for worldwide farming as a whole.
“I think you have to be extremely bullish on agriculture. Arguably, more so now than ever because of the potential growth beyond North America. For the Corn-belt farmer, exports will be the key. Exports will be the key for all of the small and course grain markets.”
The following “Special Report” was put together to give Farm Equipment readers the manufacturer’s perspective on these and other issues con-fronting ag machinery dealers.