Interview with J. Ward McConnell, Jr., Chairman, Art’s Way Manufacturing, Armstrong, Iowa
Since becoming Art’s Way chairman in 2002, Ward McConnell has taken the farm equipment manufacturer in a direction that includes product diversity and modern manufacturing. There’s still much more to come, he says.
“I’ve been in the farm equipment business since 1956 when I became an Oliver dealer in a very rural area in upstate New York. In 1960, I took on John Deere equipment, but kept it for only a year to get enough money to get into manufacturing. In 1961, I liquidated the retail business and started manufacturing potato planters.
"Eventually, we evolved into a full-line potato equipment manufacturer that included planters, harvesters and potato boxes. We produced that equipment until 2 years ago, when I liquidated it.
“In 1990, I bought a product line from Massey Ferguson, which was in receivership. It included Massey combines, a four-wheel drive tractor and a wide-level disc harrow. The company was in Ontario, and I moved the tractor business to New York and sold off the disc harrow. We maintained the spare parts business for the 4000 series Massey Ferguson tractor in Racine, Wis., before moving all manufacturing and parts to North Carolina in 1994.
“To give us access to Allis-Chalmers and other dealers, we renamed the tractor the McConnell Marc, but that only lasted about a year before AGCO bought the line from us and moved production to Coldwater, Ohio.”
Growing Art’s Way
“I could have lived happily ever after following the Massey sale to AGCO, but decided to buy some small manufacturing companies. One of them was Logan Manufacturing in Idaho Falls, Idaho, that made potato equipment. Art’s Way bought it from me in 1996 for some cash and stock as well as becoming a director of the company.
Art’s Way Manufacturing
(Publicly Traded NASDAQ:ARTW)
2009 Net Sales: $15.9 million through 8/31/09
Product Segments: Livestock feeding equipment, portable grain augers, plows, no-till drills, sugar beet harvesting and hay and forage equipment
“I sat on their board of directors until 2001 when I resigned. The company was in difficult financial shape at the time and I decided to lay back and see what would happen. It wasn’t very many months before they decided to sell it. Since it was publicly held, prospective buyers were bidding on stock. I made an offer and it was accepted along with the condition that I would be named chairman.
“Art’s Way was founded in 1956 and was primarily a manufacturer of grinder-mixers. Over the years it moved into the sugar beet harvester business, and more recently we’ve gotten into hay and forage equipment with the acquisition of the Miller Pro line. We’ve also moved into landscaping products and we’ll soon be getting into ground-engaging products with tillage tools and plows. We recently acquired Roda Manufacturing in Hull, Iowa, which manufactures pull-type manure spreaders. That took us into another product line niche.
“We plan to continue buying product lines with the intention of modernizing them as needed, and to grow them by improving their distribution. Today, we have pretty good distribution in terms of dealers.”
Acquisitions Increase Distribution
“With consolidation and the majors pressuring dealers to not carry shortlines, it’s been a challenge to increase our distribution channels. Even with this, our dealer numbers have not changed much over the past several years.
“They’ve remained static because the dealers we’ve lost through consolidation, or due to pressure from the majors, were replaced when we acquired other shortlines. Every time we add a product line, there are dealers that come with it.
“In terms of strength of distribution, we’re strongest in Iowa, Minnesota, Wisconsin, Illinois, Ohio, New York, Pennsylvania, South Dakota, North Dakota and Nebraska. Before we acquired the Miller Pro line of hay equipment, we hardly did anything out east in New York and Pennsylvania. Today, we have quite a few dealers out there. Also, by adding lines, we make ourselves more appealing to dealers.
“At the same time, they’re demanding that we continue improving our products, so we’re committed to keep our R&D moving forward. We can’t stay with the same product without advancing them regularly. Otherwise, the product line dies. We want to grow each one that we buy.
“The advantage Art’s Way has by offering a diverse product line to dealers is they can capture four or five individual shortlines that they may have been buying separately from different companies. In those cases, we can offer volume discounts or just make it easier to do business. They can handle several lines with one company rather than dealing with several companies that offer only one line.
“This is all part of our growth strategy. Add product lines and pick up more dealers. The more lines we have to offer, the more dealers want to carry our products. Investing in R&D makes us even more attractive to dealers.
“So far it’s working. Our sales today are 2.5 times more than they were 5 years ago. It’s because we have a stronger dealer base and more products to offer.”
Dealers are More Demanding
“The two biggest changes that I’ve seen in my 54-year career are how dramatically the quality of the equipment has improved, and how much larger the dealers are today compared to my first few decades in the business.
“From the paint job to overall reliability, product quality far exceeds what it was just a few years ago — and it will need to continue getting better. Our dealers have become much more demanding. They want more reliability, which translates into bigger and stronger equipment. They want better parts availability and more service. If you can’t provide it, they’ll go elsewhere.
“They’re also pushing us hard on things like retail financing. In the current credit market, they’re looking for alternative sources and in the past year we’ve had a lot of interest in putting together a retail program, which we’ve done through Pro Partners. This is a big change in the past year.
“Previously, most dealers could get floorplan and retail financing for their shortline products through the majors. With the recent credit crisis and their push for ‘dealer purity,’ the majors don’t want to provide financing for shortline equipment. They used to do it quite readily, but they’ve told their dealers that they’ll only finance their own product. The state of the credit market has had a lot to do with it, but it’s also the majors that would prefer that we weren’t here.
“All of this could change if and when the credit markets loosen up. The majors will want to get back in the financing business and won’t care where it comes from as long as they’re loaning money. If they want to grow their finance arms, they’ll probably want the shortline business.”
Big Dealerships vs. Niche Dealers
“Today, we have about 300 dealers, some of which are occasional equipment buyers or Art’s Way parts buyers. With a 54-year history, we obviously have a lot of product in the field, so the parts business takes us back a long way. “In any case, it’s a continual struggle finding good dealers to carry shortline products.
“Five years ago, Art’s Way products were marketed entirely through reps, but today we have 12 direct sales people working with dealers. No disrespect to the manufacturers’ reps, but it has worked better for us as we’re getting better coverage.
“The other change that I’ve seen is that many dealerships have become unbelievably large. Dealerships the size of the Titans and RDOs were unheard of just a few years ago. This is having a profound effect on the shortliners like us, because as dealers get bigger, they don’t seem to want to deal with shortline products. Not only are they getting pressure from their major suppliers to carry only their equipment, but to not carry shortline products either. In some cases, the mega dealers don’t really care if they have us or not.
“That doesn’t mean we don’t sell to through some mega dealers, but our volume with them isn’t nearly as high as we’re getting from our niche dealers. So we put forth much more effort searching for niche dealers We could use more in the Southeast and in Texas. Those are two areas where we’d love to grow.”
Warranty Claims: A Sticky Issue
“Another thing that our higher volume dealers offer are far fewer warranty issues. The dealer who buys a piece of equipment every 5 years often doesn’t understand how the product works or how to work on it, which can lead to some pretty sticky situations.
“Where a repair done by one of our high-volume dealers might cost us $100, another dealer that isn’t familiar with the equipment doing the same repair may virtually consume the whole cost of the product. It’s not very pretty, but that’s a big part of looking for good dealers that are committed to our products.”
Dealing with Dealer Purity
“We understand that ‘dealer purity’ is a very real issue for a lot of farm equipment dealers, and it’s a difficult battle for shortliners. I’m sure we spend more effort going around it than fighting it. It will definitely be more difficult selling shortlines to major line dealers in the future.
“It’s not going to get any easier as dealers consolidate. Without a doubt, the pressure is on them. And as dealers consolidate, we’ll see the small manufacturers consolidate as well.
“One advantage that we have is we’ve been around for more than 50 years and we’re well recognized by the dealers. Our history is one of our strong points. Our continuing R&D also appeals to dealers.
“Dealers also like working with us because we give them room to make sales without competing with other local dealers that carry our product. Many dealers have told us they make more money on their shortlines than their long lines. They like the margins we provide. When I was traveling out east last year, the comment I heard most often was ‘Don’t put a dealer too close to me. I made good money on that last grinder I sold.’ They like the fact that we give them room to sell and the opportunity to be profitable.
“If a dealer can make a good margin on shortline equipment, they’ll find a way to carry it. That’s one way to compete with dealer purity. If we have a good strong dealer in an area, we’re not going to set up somebody next door to them. We want our dealers to love us as long as we can take that love to the bank.”
Shortlines Need to Grow Up
“If shortliners are going remain competitive, they need to grow up in terms of their business and operating practices. Our customers are becoming more astute business people, and we need to match or surpass their level of sophistication. And from what I see, many shortlines are doing a better job and they’re growing and making more money.
“We need to get better in our manufacturing practices, whether it’s making a better-looking product or tightening the bolts better.
“We’ve adopted lean manufacturing processes and moved toward utilizing computer software more thoroughly and effectively for scheduling and process control. It’s a real challenge for small manufacturers like us to get to this position. We need to be more cost effective in building our equipment. It requires a lot more training than we ever dreamed we would need 5 years ago.
“We used to cut, weld and keep track of everything in a notebook. We can’t do that today. We’ve gone to powder coating, laser and plasma cutters and computer software. It’s a much different world than we were used to. Today, we’re in the process of growing up as a company.”
The ‘Wal-Mart Syndrome’
“Another tactic by some of the majors to keep shortlines off their dealers’ lots is what I call the ‘Wal- Mart Syndrome.’ They’ve introduced brands like Frontier to compete with shortline products, and they use the Wal-Mart approach to keep the prices down. At the same time, they’re taking the margin out of it for their dealers.
“As it turns out, Frontier is no more than a distributor. Their dealers aren’t making a heck of a lot of money selling the line. In order to make a profit, they’re forced to raise the price. We know of at least one product that Frontier is handling that costs 10% more than our competing product, and our dealers are making a decent margin on it. Sooner or later, this will play in our favor.”
‘Dealers are Our Pipeline’
“For my entire working career I’ve watched farmers grow and consolidate. I don’t see anything on the horizon that indicates that this is going to change. They continue to become more sophisticated and produce more product. This is good for us as long as we keep up or ahead of them. We’re capable, and we’ll keep up with their need for larger, more productive and reliable equipment.
“As far as the dealer’s role in the future, they will always be our pipeline to the producer. We don’t sell anything except through dealers. We want and need to listen to them. If they’re growing, we have the opportunity to grow with them.
“Sometimes, all of us manufacturers will sit back and complain about dealers. But at the end of the day, we really love them and want them.”