AGCO Corp. is restructuring its North American dealer program in an effort to boost business in a market where it has struggled to make a profit.
The U.S. company has created a three-tier dealer system to reduce its dealer-support costs, a move that could also help avoid the messy battles that U.S. auto makers have had in trimming their own dealer outlets.
AGCO recently notified its 1,000-strong North American dealers that they have been designated as platinum, gold or silver dealerships, based on their historical sales.
"The way we used to deal with every dealer is we didn't differentiate between the dealer doing $200 million a year with us and the one doing $1 million with us," said Greg Peterson, director of investor relations.
AGCO won't say how many dealers are in each category, but platinum and gold members will continue to receive in-person visits from AGCO's sales staff and more intensive training and support services.
Silver dealers will be relegated to AGCO's in-office sales staff. Most of AGCO's contact with these dealers will be conducted over the phone, cutting costs to service lower-volume dealerships.
The approach also avoids a potentially costly and lengthy battle with dealers if the company had tried to cull its dealer network. A variety of state laws protect franchise agreements, effectively blocking companies that grant franchises from quickly rescinding them.
AGCO was assembled from a series of acquisitions during the 1980s and 1990s, leaving the company with a patchwork of dealers in the U.S., some with overlapping sales territories.
Its dealers typically sell other manufacturers' farm or construction machinery as well. The company's Challenger brand, for example, is sold exclusively through dealers for construction machinery manufacturer Caterpillar Inc. (CAT).
AGCO is the world's third-largest farm equipment company by sales, behind Deere & Co. (DE) and CNH Global NV (CNH), selling Massey Ferguson and Challenger tractors, Gleaner combines and White planting implements.
Most of its income and sales come from Europe and South America. North America has traditionally been its weakest market, representing just 1.2% of operating income in 2008, despite accounting for 21% of total sales.
AGCO has been expanding its product line recently in North America with more high-horsepower tractors in a bid to market more higher-margin products. Industry analysts said Agco's performance should be helped by concentrating on dealers with the ability to purchase and sell large volumes of equipment.
"They definitely need better [dealer] distribution if they want to do anything in the U.S. ," said Lawrence De Maria, an analyst with Sterne Agee & Leach Inc.
But Lincoln Fraley, a Massey Ferguson dealer in Rushville, Ind., considers Agco's dealer strategy short-sighted. He said AGCO appears willing to sacrifice sales from small dealers instead of making meaningful reductions in the company's overhead expenses.
"They've got a car company mentality," Fraley said, referring to the deep cuts in the number of dealers for General Motors Co. (GM) and Chrysler Group LLC. "The dealer that sells one tractor to one customer at a time is just as important as a dealer that sells 200 tractors."
Fraley, president of Fraley Truck & Implement Sales, described his business as a small-volume dealership, but said he did not know what designation Agco has assigned to the business.