2005 Business Outlook: The Race Is On Written By Pam Gruebnau
Article Date: 01-01-2005
Copyright (C) 2005 Associated Equipment Distributors. All Rights Reserved.
On the heels of a very good 2004, dealers are in hot pursuit of yet another good year.
Dealers are expecting good things from 2005; nearly 85 percent are forecasting an increase in revenue in 2005.
In December 2004, 254 member dealers responded to an AED survey on business conditions for 2005: 41.7 percent said they are forecasting increases of 1 percent to 5 percent in 2005 compared to 2004, and 42.9 percent said they are predicting increases of 6 percent or more.
While the percentage of dealers predicting sales increases is down slightly from 2004, it is still a significant improvement over 2003, when only 38 percent of dealers expected any increase in sales. Only 4.7 percent of respondents expect sales to decrease this year.
Last year, more Heavy equipment dealers (dealers who sell the majority of equipment in the 100-hp-plus category) forecast increases in revenue for 2004. For 2005, Medium dealers (majority of equipment sold is less than 100 hp) are more optimistic; nine out of 10 Medium dealers are predicting increases in revenue this year, compared to 83.1 percent of Heavy dealers.
While nearly 85 percent of all dealers are predicting revenue increases in 2005, among the largest dealers the number is higher. More than 94 percent of dealers with annual revenue of $100 million or more are forecasting increases in revenue in 2005, up from 91.9 percent in 2004. Even more upbeat about the coming year, 95.1 percent of dealers with annual revenue of $25 million to $50 million expect increases in 2005.
Heavy and Medium dealers in the $5 million to $10 million size category are least positive about 2005: Only 72.7 percent are predicting an increase in revenue.
At the beginning of 2004, 81.5 percent of dealers expected new equipment sales would be the source of increased revenue, for 2005 only 73 percent of dealers expect revenue increases to come from new equipment. This year, more dealers are forecasting increased revenue from parts - 83.7 percent, up from 77.4 percent in 2004 - and service - 84 percent, up from 76.1 percent in 2004.
This is consistent with CIT's 2005 Construction Industry Forecast, which indicates that U.S. construction industry leaders are predicting a strong year ahead as confidence hits an all-time high. For the forecast, more than 900 contractors and equipment distributors were surveyed by phone.
"The Optimism Quotient is the Forecast's primary indicator for assessing and comparing the respondents' level of confidence in the health of the construction industry," says CIT Equipment Finance, a unit of CIT Group. "Generally, a number of 100 or higher indicates strong optimism in the industry's one-year outlook. For 2005, the optimism quotient rose six points overall - from last year's 103 to 109 - the highest rating since it was developed in 1995. The optimism quotient for distributors only was 118!"
Asked what they think gross margins in new equipment, used equipment, rental, parts sales and service will do in the coming year, most dealers said they expect no change in 2005. Still, nearly 38 percent are predicting an increase in rental gross margins, hopefully due to strengthening rates, and 35.1 percent think gross margins on service will increase, up from 31.6 percent in 2004.
Inventory/Rental Fleet Investments
Nearly 63 percent of dealers are planning to invest more in new equipment inventories and rental fleets in 2005 than they did in 2004. Given the excellent year most manufacturers reported in 2004, this bodes well for the equipment industry as a whole.
According to the CIT forecast, "While the percentage of contractors planning to buy new equipment stayed about the same, they are planning to spend considerably more on purchases in 2005 than they did in 2004. On average, contractors who plan new-equipment purchases expect to invest $79,223 in 2005 - double what they planned to spend in 2004."
More Heavy equipment dealerships (68.3 percent) plan to boost their new equipment investments in 2005 than Medium dealers (59.2% percent) or Specialized dealers (50.0 percent). More than two-thirds of Heavy dealers (66.3 percent) will increase investments in their rental fleets next year, as will 60.2 percent of Medium dealers and 50 percent of Specialized dealers.
As they look ahead to busier project schedules in 2005, reports the CIT forecast, "contractors expect to be slightly more active when it comes to leasing and renting construction equipment. Sixty-three percent of contractors said they rent the kinds of equipment they do not need to use all the time. Fewer contractors (23%) cited cost as a motivator for renting more equipment than last year, when 37% said they rented equipment because it was more cost-effective."
Further, CIT says, "As demand for rented and leased equipment rises, so will rates. An equal number of distributors and contractors (52%) anticipate rates will increase in 2005."
With increased equipment sales and some dealers reporting problems getting equipment from manufacturers in 2004, it comes as no surprise that at the end of the year, excess inventory was not a problem for most dealers. Only 16.3 percent of dealers said they had more excess inventory at the end of 2004 than at the end of 2003, while 43.0 percent said excess inventory was not a problem.
Dealers Will Hire In 2005
While 50.6 percent of the dealers responding to the Business Outlook survey last year said they planned to add staff in 2004, 62.2 percent actually hired new employees last year. That's up from 32.7 percent who increased staff in 2003. And in 2005, 63.4 percent are already expecting to need additional personnel.
More than two-thirds (66.9 percent) of Heavy dealers will add staff in 2005, so will 62.5 percent of Medium dealers and 50.0 percent of Specialized dealers.
Only 1.6 percent of dealers plan personnel layoffs in 2005, down from 6.7 percent in 2004 and 27.7 percent in 2003. All of the dealers saying they expect layoffs to be necessary in the coming year are Medium dealerships. The number of dealers who only plan to replace employees who leave continues at about one-third.
2005 Regional Outlook
While nationwide 84.6 percent of AED dealers are predicting an increase in revenue in 2005, in three regions and Canada a larger percentage of dealers expects revenue increases this year.
The highest expectations are coming from the Midwest region, where 88.6 percent of dealers are forecasting increased revenue. Also strong are the Northeast and West regions with 87.8 percent and 85.7 percent, respectively, planning for revenue increases in 2005.
Canadian dealers are also strong on the coming year, and 86.9 percent are planning for increased revenue.In the Southeast region, where this time last year 95.5 percent of dealers expected increased revenue in 2004, 12.5 percent are predicting decreasing revenues in 2005. Likewise in the South, 94.1 percent of dealers predicted an increase in revenue in 2004; for 2005, that number drops to 70.9 percent, although 16.7 percent are expecting no change from 2004.
Essentially, in 2005, dealers expect sales to go up, with emphasis on rental and service; margins to stay flat, although rental and service may provide a bump up; and new equipment and rental fleets to grow. To do all this, they'll add staff.
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