What started off innocently enough nearly two decades ago as a means to sell low hour, high dollar used equipment, farm equipment rollover programs have morphed into a Bernie Madoff-type ponzi scheme where one dealer has been recently sentenced to federal prison and many other dealers are on the precipice waiting to lose their life’s savings.
Here’s how it works. Dealership X sells a new combine (substitute any product you like) to Farmer A who trades in his one year old, high dollar, low hour combine for a minimal cash difference that will be financed with a balloon payment. Dealership X now sells the first trade to Farmer B who trades in his two year old, high dollar, low hour combine for a minimal cash difference that will be financed with one year interest free and one year terms. Dealership X now sells the second trade to Farmer C who trades in his three year old, under 3,000 hour combine for marginal cash difference. Farmer D now purchases the third trade (if the dealership is lucky) and the dealership, for the first time, generates some positive cash flow. If the dealership is not so lucky, it may take a fourth trade and a fifth customer to “wash-out” of the transaction. Up to this point, the dealership has been floor-planning the trade-in deficiency, paying salespersonnel a commission for selling the product, and investing cash into reconditioning the various trades. Exacerbating this precarious cash position is the fact that a wash out of three to four trades may in fact take upwards of 18-24 months.
In the above example, which was communicated to me by a dealer now serving time, a new sale, which made the manufacturer happy and counted toward market share requirements, even though the machine may have been sold to a customer thousands of miles away, required four customer trades. Thus, if the dealer sold 60 new combines and won a plaque from his manufacturer for his efforts while being held up as a positive example to other dealers, he then had to have 180-240 customers waiting in the wings to purchase the used combines.
Now let’s say the dealer got greedy, and the manufacturer got hungry for market share, and the dealer sold 80 new combines. That would mean that he would have to find an additional 60 to 80 customers to purchase the used machines. On the other hand, what happens to the value of the used units if the manufacturer expends vast sums of discretionary monies on the new unit thereby making the used units less attractive? In either case, do you think that this could possibly open a real Pandora’s Box of mendacity, chicanery, venality and financial mischief? And do you think that the manufacturer, rhetorically asking, may turn a blind eye to this nonsense and financial suicide?
And these are in good times! What happens if commodity prices suddenly turn downward and “irrational exuberance” is replaced by cautious pessimism? What happens if the brand’s image is seriously damaged? What happens if product failures arise? Or, where does the rollover expert go when some other market exigency impacts his/her ability to market the plethora of used equipment sitting on the lot? If he’s lucky, only bankruptcy awaits. If he isn’t, a black and white uniform and a ball and chain may be in his future.
Who is the most likely dealer to engage in excessive rollovers? The one who runs an operationally poor dealership! The one whose sales mix is skewed to wholegoods! The one whose profit is totally dependent on the manufacturer’s volume bonus! The one who has a very poor parts and service business! The one whose service work is skewed to internal service! The one who, in all likelihood, is paying their order takers on the basis of salary or cash difference! The one who is always chasing market share! The one who is loved by the manufacturer today and vilified tomorrow!
And who is the biggest victim of a rollover program? The competitive dealer, in-line or otherwise, who is trying to run an operationally sound dealership. Not only is this dealer victimized by those customers who are always looking for the lowest price, but also by the manufacturer who is asking for orders and using the rollover dealer as a poster child for “how to run a business in a competitive world.”
Dealers interested in maintaining a profitable business long-term should scale back the number of “rolls” that they do per year to no more than 5 per location, or 25% of the total unit sales for that product, whichever is greatest. Dealers should stop chasing market share and start managing their operational bottom line and free cash flow from operations. Dealers should eschew low margin wholegoods transactions in the name of market share and instead focus on optimizing their parts and service business by stressing dealership value. In other words, dealers should manage their business by forsaking greed and stupidity.