Last month I wrote an article entitled “Lines of Delineation.” In the article, I write about 6 different buyer types. New buyer, the late model low hour used buyer, high depreciation used buyers, 5- to 10-year-old used buyer, and the high hour used buyer.
After reading the article, I am not sure one paragraph did each segment justice. Each of these segments is critical to the new and used equipment ecosystem. If any of these buyers stop buying or decide to extend their buying pattern, bad things happen and take years to fix.
The price of new equipment continues to climb. Many reasons account for the rise in new equipment prices, like technology, more horsepower than the previous model and availability, to name a few. The efficiency of new equipment also plays a part in the price.
When I first started in the farm equipment business, it wasn’t uncommon to see farms with a mix of both new and used equipment.
The farm owner might have a new combine and 3- to 5-year-old tractors in the machine shed, depending on the trade cycle. Each tractor patiently waits to be the next one up in the trade cycle. In good times the trade cycle might have sped up and, in difficult times, it slowed down.
Nonetheless, having a mix of equipment on the farm wasn’t anything out-of-the-ordinary. I can’t say that is the case today.
In most cases today, new equipment is sold under a structured cost per hour trade cycle based on various volume discounts available from the manufacture. The discounts allow the new buyer to have the lowest operational cost per hour of operation and, typically, the lowest entrance cost. With machines still under the manufacturer’s warranty, this lowers the operating cost per hour. For these customers, buying new equipment fixes the equipment costs year-in-and-year-out.
The new buyer is looking at the lowest cost of operation and foregoing the opportunity to build equity. New buyers have the balance sheet for $5-10 million plus of equipment on their balance sheet, not counting other support equipment.
“If a dealership oversells its ability to sell used equipment, it will have a mess to clean up that might take a while…”
So why is this important? Simply put, it keeps the used equipment pipeline full. I have had the opportunity to travel to Eastern Europe and see how the equipment business works in countries like Ukraine, Romania and Hungary. I found two kinds of equipment readily available — brand new or 10,000-plus hours for sale.
There wasn’t much available in between. The need for parts only outweighs the thirst for 500–3,500 hour machines. In addition, because of the lack of machine population, most dealerships don’t have the parts and service departments North America is accustomed to.
The flow of used equipment starts with the sale of new equipment. Every new machine sold, depending on the platform, generates 3-5 subsequent sales. For example, 10 $400,000 new machines are sold. How much was sold? I don’t see $4,000,000; I see $13,000,000 in just machine sales and 10-15 years’ worth of parts and service opportunities. Like anything else, there can be too much of a good thing.
Understanding the market and what used buyer availability looks like is very important. I once had a mentor say, “The used buyer doesn’t need to come to the market. The new buyer does.”
If a dealership oversells its ability to sell used equipment, it will have a mess to clean up that might take a while.
The new buyer is where it all starts. Understanding who those buyers are and why they need to buy new is step number one.
The dealership sales staff can now identify the chain of used buyers required to win the washout cycle. The better planned this cycle is, the better chance of success the dealership will have.