There’s an old joke about a guy who invented a new office printer and planned to sell it for $1 million. Someone asked him how many did he think he could sell at that price. He said, “I only need to sell one.”
This anecdote illustrates the age-old business quandary of margin vs. volume. It’s a strategy that every manufacturer and retailer wrestles with regularly. In my previous life, I used to joke when car sales slowed down, automakers would raise prices to make up for lower volumes. Considering the law of supply and demand, this would seem to be counterintuitive.
What got me thinking about this are comments coming from farm equipment dealers in our monthly Dealer Sentiments & Business Conditions Update survey. A growing number of dealers have begun commenting on price hikes being initiated by their manufacturers, as well as disappearing sales incentives.
In December and January, comments along these lines popped up occasionally. These included: “Pricing has exceeded affordability. We are anticipating a 1-2% price increase in 2017” and “It was surprising to see suppliers take incentives away in October and November. It is hard to end the year strong when the producer cuts us off at the knees.”
The number of dealers commenting on higher equipment prices and lack of programs ramped up significantly this past month. “Our manufacturer announced new price increases and significantly pulled back on incentive programs” … “Our manufacturer raised new equipment pricing by ~5% and reduced cash back incentives in January” … “Programs were less aggressive in January despite continued weak market trends, which was a dramatic change from December” … “We were disappointed to see our manufacturer remove programs for used equipment. These are the machines we need to get rid of” … “We expect more rebuilds than equipment purchases in 2017, as equipment remains too expensive relative to farmers’ income.”
As usual, it’s up to dealers to figure out how to increase sales of more expensive equipment in a market with low and sinking demand. As one dealer commented, “We are being forced to discount to absorb part of the price increases we are getting from manufacturers.”
Are these equipment price hikes and rollback of sales programs a sign that the manufacturers anticipate an improving business climate and increasing demand for farm machinery? Or are they trying to keep shareholders happy by improving their bottom lines without significantly improving their top line sales?
By increasing their equipment prices in the current business environment, it doesn’t appear they have their customers or dealers’ needs front and center.
In AGCO’s case, net sales for all of 2016 were down less than 1%. Its operating margin was flat at about 4.7% vs. 2015.
CNH Industrial’s ag equipment sales, on the other hand, decreased 8.2% for the full-year and margins slipped from 8.6% during the previous year to 8.1% for 2016.
Deere is forecasting a sales increase of about 4% for 2017 — but flat to down for North America. Its 1QFY17 operating margin was 5.9% vs. 4% a year ago.
Overall, the majors aren’t looking for much, if any, improvement in North American sales in 2017. So how do they justify raising prices in a stagnant market?
Your guess is as good as mine, but it looks like it’s every man for himself out there. In other words, nothing much has really changed.