Dealers Make List of Most Influential Competitive
Advantages for Heavy Equipment Manufacturers

September 16, 2014

If you have any doubt about dealers’ value to their manufacturers, you should know that the independent research firm Morningstar rates the quality of dealer networks as one of three major characteristics that sets heavy equipment manufacturers apart from each other.

Morningstar uses the term “economic moat” to describe a firm’s sustainable competitive advantage, or how likely a company is to keep competitors at bay for an extended period. When it comes to the heavy equipment industry, Morningstar says Caterpillar and Deere & Co. have the widest moats relative to their competitors.

According to the August 2014 Industrial Observer report, “Digging Economic Moats with Heavy Equipment,” Morningstar says moats in the heavy equipment industry are largely built on three factors:

1. brand impressions,
2. dealer networks and
3. an investment-grade captive financing business.

“Deere and Caterpillar have the strongest scores in our framework, and we reaffirm our wide moat ratings on both companies,” the authors say. They believe that R&D and advertising spending, coupled with dealer performance, contribute to brand perceptions.

The report points out that Caterpillar and Deere are the only heavy equipment firms that Morningstar covers that appear in Interbrand’s list of top 100 best global brands — Caterpillar at #58 and Deere #80. “Interbrand’s valuation of the Deere brand represents 14.2% of our Deere fair enterprise value estimate (excluding loan receivables), relative to Caterpillar’s $7.1 billion brand valuation or 10.6% of Caterpillar’s fair enterprise value estimate (excluding loan receivables). We think this confirms our impression that agricultural equipment brands tend to be stronger than mining and construction brands.”

In fact, Morningstar compares the customer loyalty of Deere customers to that of “Coca-Cola drinkers.”

The report contends that Caterpillar spent $300 million more on R&D than Deere and more than twice what CNH spent in 2013. When it comes to advertising, most of the manufacturers report spending between 0.5-0.7% of annual revenue, in which case, Cat and Deere lead the pack once again.

The Morningstar researchers believe that, based on average manufacturer revenue per dealer location, they “can discern how a well-trained and well-capitalized dealer performs. Ultimately, we think that the comparison of revenue per location is the best measure of dealership profitability and success.

“To foster this professionalism, many manufacturers have encouraged consolidation,” say the researchers. “Low-performing dealers were pressured to conform to brand standards, and outperforming dealer groups were offered the opportunity to buy other locations.”

Considering Morningstar’s moat framework — initial product quality and brand impressions, strength of dealer network and captive financing subsidiary —Caterpillar and Deere are clear-cut leaders. In comparison, AGCO and CNH Industrial’s overall moat framework scores were “good,” while Deere and Caterpillar are rated as “very strong.”

Whether or not you agree with Morningstar’s assessment of the companies themselves, it’s hard to argue about the importance it places on dealers in the overall success of their equipment suppliers.