Two years ago in this space, the discussion centered on “Margin or Volume?” It appears this may deserve some more attention as dealers continue to confront this age-old retail battle.
Often times manufacturer volume discounts are at the heart of the matter. This, too, has occupied a lot of space in these pages.
In the past couple of weeks both publicly held Canadian farm equipment dealers — Rocky Mountain Dealerships and Cervus Equipment — released their earnings reports for the full year 2018. Both groups reported record new equipment sales for the year, and the two dealership groups saw increased used equipment revenues. Both also reported that their gross margins had declined. They weren’t down dramatically, but they were lower for both dealer groups in 2018 vs. 2017. At the same time, their inventories of used machines also grew.
There’s no doubt that industry used equipment backlogs are much improved compared to 2-3 years ago. But still nearly half (46%) of dealers responding to Ag Equipment Intelligence’s March survey (which covers February data) say used combine inventories are “too high.” When it comes to tractors, 37% of dealers report their used backlog is “too high.” So, work remains to be done and discipline is key.
This concerns Ben Cherniavsky, machinery analyst for Raymond James. In his report to investors for both Rocky Mountain and Cervus, he noted his concern about falling margins, used equipment inventories and the role that OEM incentives may be playing in dealer sales.
In the Rocky Mountain note, he said, “The company was rewarded for its higher sales volume with a generous $2.4 million OEM incentive payout, but this came at the expense of lower prices, weaker margins, increased inventory levels, higher interest expense and no organic product support growth (the shops were reportedly too busy reconditioning trade-ins to increase parts and service activity).”
While his comments were certainly direct, I would characterize them as more concerning than critical. I think nearly every North American dealer can empathize with what’s going on in the industry at present. I’m also pretty sure that most are also feeling the pressure to sell more, both internally and externally.
The Raymond James analyst goes on to say, “Market share is an important growth driver for the relatively mature machinery industry, but its pursuit, if undisciplined, can create a race to the bottom. As Case has done for Rocky, OEMs can help mask the pain in the short term with incentive bonuses, but in the longer term this simply risks the creation of a supply glut. Our scars from the last ‘inventory bubble’ are still relatively fresh, which may be why we are so mindful (paranoid?) of any sign that suggests imbalances are creeping back into the market.”
He also stressed the lower gross margins in his note about Cervus. Cherniavsky said, “Cervus reported fourth quarter 2018 results that were largely in line with our expectations. The only variable that materially strayed from our forecasts was the gross margin which compressed as competitive pressures in ag intensified and the timing of OEM incentive payments shifted quarters.”
Like Cherniavsky, this column is not meant to be critical of either Rocky Mountain or Cervus. It’s intended to give the entire industry a heads up that we need to maintain our discipline to avoid being overrun by used equipment again. And gaining market share and pleasing the OEMs must remain secondary to maintaining dealership profitability.