“Our used equipment sales have grown probably faster than any other part of our business over the last 3 years,” says Graham Drake, president and CEO of Cervus Equipment Corp., one of John Deere’s largest farm equipment dealer networks. “It’s the biggest financial risk out there.”
Besides buildings, Drake says used equipment represents the biggest asset Cervus has on its balance sheet. “We spend a lot of time focusing on the metrics, the visibility of what’s coming, what we have, the age inventory as well as on building the business to be able to sell that iron and keep it moving. It’s a big concern. Used equipment matters,” Drake says emphatically.
Executives of Cervus Equipment admit they don’t believe the trend toward “flipping” equipment is necessarily a positive trend for the farm equipment business.
“It’s a big challenge for the industry,” says Peter Lacey, executive chairman of Cervus. “There’s been a bit of over-zealousness by the manufacturers to get new product out the door. So there are lots of very, very competitive, multi-unit discounts and strong financial incentives to encourage new sales. We’re seeing a definite trend toward multi-unit deals, lots of trades and flips done every year. We don’t think flipping every year is a good strategy. The industry can’t absorb that much used, so you’re really stealing sales from the future and it’s going to come in one big crash if the industry doesn’t sort it out. Unfortunately, we all can talk about it and agree that it’s not sustainable, but it still continues to happen.
“Our preference would be for farmers to trade every 2 or 3 years where the owner make full use of the warranty period and gets some hours on the equipment, especially combines. By rotating equipment every 2 or 3 years, the industry can absorb that; there are enough buyers of used for that.”
At the same time, Lacey and Drake acknowledge that the company needs to compete in the current environment. “The reality is that the market is out there and if a customer wants to flip his units every year, we’re not going to say no to him,” Lacey says. “So it’s the challenge. Usually there are a number of buyers for that first year flip. It’s becoming more challenging because of the consolidation of farms and the growing size of farms. There’s very little market for that 15-year-old combine, other than overseas.” Lacey asks, “So, this trend is creating big challenges for dealers. How do you find a home for that 15 year-old combine?”
Anticipating Used Inventory
Cervus Equipment executives believe the best approach to controlling used inventory is to utilize the newest tools to not only monitor inventory levels, but to project what’s coming down the pike.
“We have a report called the ‘Room Report’ that takes into account our rolling 24-month used equipment sales history,” Drake explains. “It gives us great visibility at what we’ve got in inventory today and what trades are coming as part of our sold-ahead orders on new equipment. The other thing is as soon as a deal is made, even if the new machine isn’t coming for 6 months, the trade is loaded into our system right away so all the salesmen have visibility about what’s there and what’s been sold.
Drake adds that, as an entity, Cervus continually monitors the 24-month rolling figures and based on a reasonable number of turns, they have a good estimate of the room available for more trades.
Drake points out that if the report shows “negative room,” it alerts sales they need to be doubly cautious of what trades they take in and how they value used machinery. “It’s been a very good tool and everyone understands how it works. It gives us a lot of visibility and has a lot of metrics behind it like aged inventory parts, work in process and other financial data. They’re all important.”
He explains that the name “Room Report” refers to the program’s capability of determining if a dealer has room, or capacity, to take in trades by product type. For example, the report will take into consideration the number of combines or two-wheel drive tractors that the dealership has sold over a period of time. Based on historic sales of this equipment across the entire enterprise, the report may show that there’s room for two-wheel drive tractor trades, but not combines.
In other words, says Drake, “it tells us what our capacity is to sell the trade if we take it in. It doesn’t mean that a dealer has room in his yard, but whether you have room to sell it in a certain period of time. The information is available for all salespeople in each of the Cervus locations to see what’s available from the first day it’s taken in on trade or what’s been sold and is no longer available. It gives us systems and processes to make sure everybody knows what’s available, what condition it’s in and provides photos of the equipment. It’s helped us increase our turns.”
Speeding Up the Cycle
According to Cal Johnson, general manager of Agro Equipment, a 10-store group of dealer locations, owned and operated by Cervus, the goal for used machinery is three or more turns.
“The other thing we’re doing is aggressively going after the aged equipment that’s been in inventory over 12 months,” says Johnson. “Our goal is to have that down to zero eventually, but we’re putting much our focus on moving inventory before it hits the 12-month mark.”
He adds that moving used inventory and speeding up turns starts as soon as the deal is made and before the equipment ever hits the lot. Systems have been put in place to assure that both the retail customer who’s looking for used equipment and Cervus personnel know what’s coming in on trade, so the marketing starts before the machine ever hits the Cervus lot.
“Once the equipment shows up and the unit physically enters the dealership, our push is to quickly get it reconditioned — assess what needs to be done, get it done, get it clean, get it saleable, get it marketed. All processes are aimed at speeding up the cycle,” Johnson says.
Added Sales Muscle
Drake says used machinery is the fastest growing segment of Cervus Equipment’s business. “It’s grown dramatically just over the past few years. We recognize this and we’ve put a lot of our energy and resources into managing our used equipment business.”
He says the company has taken several steps to improve its turnover rates of used machinery, including better marketing, better valuation, turning equipment over through the shop quicker and getting it reconditioned to a more consistent standard to ensure a good quality product going out to customers. This all adds up to better sales, he says.
Another major move Cervus has undertaken to improve its used business is adding to it sales team to meet the growing demand the dealer group has seen emerge.
“We’re going down the path of bolstering our account management capabilities so our salesmen are thinking in terms of what our customers need vs. what we have on the lot. If we can get that philosophy embedded throughout our organization and start thinking about what we’re going to buy because we know we can sell it, it makes our used equipment much more strategic from the point we agree to take the trade.”
In the end, this also means adding salespeople. “Across our organization, we’ve grown our sales team probably as much as any other part of the organization,” he says. “But it’s not just ‘adding’ people to improve the process. It’s putting the right people in place. So far, we’ve been able to do this. We’re very pleased with how our guys have responded.”
Advice for New Dealers
From his 30-plus years of experience retailing farm equipment, Lacey says, good people will always be vital to the long-term success of any dealership. But, he adds if a new dealer asked his advice on how to succeed in the equipment business, he would suggest paying particular attention to managing used equipment inventory.
“When a young, aggressive dealer starts in this business, they tend to overtrade and overvalue their used equipment because they’re anxious about getting that sale. They usually don’t have the systems in place or the discipline to say, ‘No.’ From my own experience, I’ve found the lack of experience as to what to do with used equipment is the biggest challenge for new dealers coming in.”
He explains that a part of the problem is with the manufacturers. “They see that you’re selling lots of new equipment, so they tend to celebrate that. Experienced dealers know that when you sell a lot of new, you’re probably building a big inventory of used. You need to understand and plan for this upfront. It can get away on you pretty quickly.”