Fifteen years ago during a series of speeches I delivered to various equipment dealer associations throughout North America, I predicted that the agricultural equipment industry would lose between 25-40% of its dealers during the first decade of the third millennium.
Thankfully, this prognostication was woefully overstated and the attrition that has occurred has been more a manifestation of dealers wanting out rather than being forced to get out.
That earlier prediction was simply the result of reading the tea leaves, and in this case, the tea leaves were the operational results of equipment dealers throughout the previous decade.
Between 1990 and 1999, the average equipment dealer, as reported in NAEDA’s annual “Cost of Doing Business” and then published by the North American Equipment Dealer Assn., had an average net profit for that 10 year period of 2.33%.
Even more revealing was the fact that the average equipment dealer’s operational profit for that period was 0.11%. In other words, if it wasn’t for the manufacturers’ largesse in the form of a volume bonus, the average dealer would have only made one-tenth of a penny on each dollar’s worth of sales.
Although the operational profit of the average North American dealer only improved to 0.29% for the period 2000-09, dealer attrition was significantly below what this humble prognosticator had predicted. With such paltry performance, why didn’t more dealers close their doors?
There are several reasons that help explain how dealerships survived over the past 13 years.
First is the interest rate that prevailed during this period. While the prime interest rate averaged 7.97% between 1990-99, the same rate declined to 5.98% for the period 2000-09, and was only 3.25% between 2010-13.
Another reason for dealership survival during the past 13 years is the price of commodities. From 1990-99, corn averaged $2.45 a bushel, while soybeans averaged $6.02, and wheat sold for an average of $3.39 per bushel. For the period 2000-09, corn, soybeans and wheat sold for $2.68, $6.85 and $4.23 respectively. Since 2009, however, the same products have sold for $5.50, $12.12 and $6.72.
Low interest rates and higher commodity prices have led to record farm income that has led to ever increasing dealership sales that, in turn, has resulted in the aforementioned higher dealership profits.
Since the increased dealership sales have been overwhelmingly oriented toward machinery sales that require fewer dealership expenses, total dealership expenses as a percent of total sales have declined which, in turn, make the paper profits appear even more sanguine. Thus, low interest rates and higher commodity prices had become catalysts for prolonged existence, vis-à-vis, paper profits.
While 2013 should finish strong since many end-users have pre-sold their harvest, the recent decline in commodity prices and the Federal Reserve’s announcement of impending interest rate hikes during 2014 should awaken many dealers who have relied on market exigencies rather than managerial acumen to sustain their profitability for the past few years.
To this end, dealers interested in long-run prosperity should undertake the following changes.
First, dealers have to get their dealership sales mix under control. Ever increasing machinery sales have pushed those sales, as a percent of total dealership sales, especially for those dealerships in the row-crop market, to a level in excess of 80%. Thus, parts and service sales, the cash cow of a dealership, are accounting for less than 20% of total dealership sales in many dealerships. This is a harbinger for disaster.
Therefore, dealers have to either (a) significantly increase their parts and service sales relative to their existing machinery sales, which is not easy to do since most dealership product support is customer driven rather than marketing driven; or (b) consciously and courageously reduce machinery sales proportionate to their product support sales, which is not easy to do with the manufacturers demanding market share.
Next, the dealers have to focus on increasing their used equipment turnover. Dealers should be tracking their used equipment turnover by product mix and by using rolling 12 month numbers and should be focused on achieving an overall used equipment turnover of at least a three, and preferably a four. No dealership, going into 2014, should have a used equipment turnover of less than three. Furthermore as the equipment sales mix exceeds 75%, the used equipment turnover should increase proportionately.
Finally, dealers have to ensure that their used equipment margins are significantly higher than their new equipment gross margins.
Dealers in the capital goods market who post a higher margin on the new equipment than on the used equipment simply don’t “get it.” This in turn will require a change in the way in which the used equipment is purchased as well as a discipline in controlling the reconditioning costs; actions that have been sorely lacking in the agricultural equipment industry.
Storm clouds are gathering and 2014 should be a defining year. Will you be ready?