Charting A Course For Change - Industry Round Table
Construction Equipment Distribution magazine is published by the Associated Equipment Distributors, a nonprofit trade association founded in 1919, whose membership is primarily comprised of the leading equipment dealerships and rental companies in the U.S. and Canada. AED membership also includes equipment manufacturers and industry-service firms. CED magazine has been published continuously since 1920. Associated Equipment Distributors
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Charting A Course For Change

Written By Pam Gruebnau and Mary Seaman

Article Date: 07-01-2005
Copyright (C) 2005 Associated Equipment Distributors. All Rights Reserved.

Equipment dealer and manufacturer executives discuss today's critical issues and tomorrow's brightest opportunities.

How did equipment manufacturers and distributors miss the recent market upturn? How can we recognize the next one? Manufacturers respond:

  • We saw the upturn coming, but I don’t think we saw it coming as fast as it came. In the interest of protecting our financial return, we were overly conservative.
  • We have to look globally.
  • It’s a cyclical business. Many of us were expecting an upturn but not expecting it to be that large. We’re seeing a little slowdown now. The industry is still strong, but it’s gone from a 30 percent growth rate to 16 percent.
  • Components were a real problem. For example, it’s difficult to get tires. Tire manufacturers refuse to make the capital investment necessary to keep up with demand.
  • The first year in a downturn, we get the double whammy of reduced volume and all of the sell-off from dealer rental fleets. We’re finding ways to listen better and be more connected. It’s high on the priority list right now.
  • We have distributors that give very accurate input, and some that are horrible at it. Our production schedule for the year is sold out and has been since March. Still, we have dealer demand over and above that. We measure our inventory on what the dealer still has. We count that as inventory. If we’re wrong, we’re stuck with inventory we have to discount.
  • We saw the upturn; we saw it in 2001, 2002, 2003 and finally got it right in 2004. We never don’t see it coming. We’re always optimistic. We tend to be conservative on the uptake and optimistic on the downturn. I don’t know the solution. We need to listen to our dealers, and make sure we’re asking the right questions. Dealers are better positioned to give insight on what is happening in their markets.
  • If we had more confidence in the information we get from dealers, we’d do a better job.
Dealers reply:

  • Even with the size of the upturn, there is still little pricing power. It’s very disappointing. Even with shortages, we can’t increase prices.
  • I’ve been around this industry for 40 years and this pricing pressure is the toughest it’s ever been.
  • Distributors made more money in 2004 than they have in 20 years, and they’re very robust about the future. They have stronger balance sheets than they’ve had in a long time.
  • There are a lot of good distributors who give good signals to manufacturers. The manufacturer reps at the local level don’t want to hear the market’s going down.
  • If we could do an operating statement on the true cost of selling, it would be ugly. Some distributor’s average 9½ percent or 10 percent on new machine sales. When you start divvying up the numbers, you forget to include the golf tournaments and stuff it takes to support the business. There is no money in the sales business to pay for inventory.
  • If I say we’re not going to sell that machine for 10 percent and it’s going to sit on the yard until I can get 14 percent, my dealer rep will walk in the next day and complain that my market share is dropping. We may not do a good job of selling ourselves, but there is a lot of pressure from manufacturers to get market share. If manufacturers said, “Build your value proposition,” and gave us a reprieve, we could get that 14 percent margin. It’s got to be a real partnership, and I’m not sure a partnership really exists.
Manufacturers respond:

  • Dealers have a victim’s mindset, “Manufacturers raise their prices and I can’t.” Dealers need to step up and say, “Am I the driver or the passenger?” It’s time to become the driver of the bus. I’ve been in this business 26 years and dealers don’t sell themselves well. The simple truth is, as manufacturers’ costs go up, prices are going to go up. Your value as dealers is not just in the machines; it’s about the value of what you do with parts, service, and manpower. If you can’t sell it, what do you want manufacturers to do, sell it for you?
  • In our dealer focus groups, we have ongoing conversations on how to grow margins. How many dealers actually do market-based pricing, or do they take cost and add 10 percent and sell it? The inability to get customers to pay for services is a fundamental problem.
Dealers respond:

  • Our basic forecasting model is broken. We’ve never had a world economy like this one with a free flow of goods. I don’t think we have forecasting models based on a free flow of goods.
  • Our customers have figured out they don’t have to play in the channel. One of our customers orders machines from Europe, because it’s 5 percent cheaper.
At what point does the manufacturer's investment in alternative channels negate the dealer's ability to extract a competitive ROI?

Manufacturers respond:

  • The rental industry was created because there was a need in the marketplace that dealers didn't fulfill. Someone stepped in to rent to customers. Now that represents 35 percent of the total market and has the potential to grow to 60 percent. 
  • The rental business began because contractors needed short-term rentals. Distributors decided they didn't want to get in that business. 
  • If customers prefer to rent from a dealer, why not capitalize on that?
Dealers reply:

  • Dealers only have a certain amount of resources, service trucks, rental fleets, etc. It's a resource allocation issue. Home Depot can take $500 million and put it where they get the greatest return. 
  • As rental has become a greater portion of the contractor's fleet mix, dealers have had to respond to that demand. Consequently, they've taken resources that would have gone into one area and moved them to another. 
  • If manufacturers used the same financial criteria to sell to dealers that they use for rental companies, dealers would be in the rental business. 
  • There's been no new money on the distributor's side. The influx of capital came outside of the traditional AED distributor model. When we talk about the sweeping change rental companies brought, it's because they made good strategic decisions. Most distributors are living in a tactical world - what are they doing tomorrow to make sure they're here the day after, as opposed to what are we doing now so we're here three years from now.
Manufacturers respond:

  • If an AED dealer isn't completely focused on absorption, how are you going to deliver services cost-effectively? We need to look beyond the traditional structure. Maytag has a major service initiative to compete against Sears - clearly that's where they see a big part of profitability. They use a minivan and a service technician who works out of his home with a hand-held. When he turns it on, he knows what customers he needs to see and he has the parts he needs.
Dealers reply:

  • AED dealers are not only focused on absorption, they're focused on competition. 
  • If you become more profitable, you don't have to go out and get capital, you generate capital and you're returning your investment year after year. That's how we build our businesses.
Manufacturers respond:

  • When I came into this business 20 years ago, it took me three years to understand what people meant by rental. I wasn't sure what they were talking about. It's a very real issue - how national rental companies changed the business. It was a huge opportunity for dealers to improve business by getting good at rental.
Dealers reply:

  • When a dealer makes a bet in the wrong area, manufacturers are going to run from him a lot faster than they will from a national rental company, because dealers don't have the capital to recover. We look at the business more defensively. It's our money.
  • Most of my business is rent-to-rent. When I got into rent-to-rent, my father asked, "What do you think you're doing? We don't want this on our lot, we want it on our customer's lot." Dealerships are based on transfer of ownership, and that's not what the business is anymore.
  • We fell asleep and let the rental guys knock us in the head. So, what's the next opportunity? If it's product support, then why do we shy away from servicing smaller equipment? 
  • The metrics by which we are measured as dealers need to be modified so we can be more malleable to service the markets our competitors are servicing.
  • What rental house is penalized for not having a certain stocking level of parts?
  • We talk market share because we can measure it. We can't measure market share on parts. Here's the end game challenge - give up making money on new machines. It's headed down that path. And yet that's not our business model. It's radical thinking for distributors. 
  • Product support is where you build relationships. Third-party suppliers aren't doing $29 oil changes; they're building relationships. My concern is losing contact with the customer. If you let him, the customer will take high-risk business one place and regular business someplace else. 
  • Some manufacturers are selling parts directly to rental companies like they do whole goods.
Manufacturers respond:

  • In the mid to late 90s, it was clear how our dealers saw rental - it was the enemy, out to kill and eat their children and destroy their businesses. Over time, many dealers developed good relationships with rental companies. At the end of the day, rental companies would just as soon buy parts from a local dealer. 
  • Rental companies want consistent pricing. What we see is some dealers selling at list, some at list plus, and some at list plus-plus-plus. Rental companies say list should be the price.
Dealers reply:

  • The customers believe if they go to an authorized factory dealer for parts, it's going to cost more. If we have the parts on the shelf, he doesn't argue about price; if not, he argues.
  • Product support is the hallmark the manufacturer is going to have to hang his hat on. After a piece of equipment is sold, I still don't know of a better method of handling parts than the local dealership, unless manufacturers do it nationally.
How can manufacturers help dealers realize higher margins from parts and service?

Dealers reply:

  • I hesitate to say this, but in our dealership, we don't need higher margins from parts and service. We're at risk if we get much higher margins. 
  • Product support gets done; someone fixes the machine - it's who fixes it that matters to us. 
  • One of the areas we'd like to see manufacturers address is parts commonality. No one works on their own copier; it's OEM all the way. The copier industry made sure of that.
Manufacturers respond:

  • Parts commonality also benefits manufacturers. Forecasting and stocking parts are easier.
  • We are one of the manufacturers that has chosen to build more than one brand. We'd love to have commonality of parts, but some dealers say they don't want everything the same. Where is the competitive advantage if all the parts are the same?
Dealers reply:

  • It's working in the auto business. They're making money and making a push to recapture the tire business. The local GM dealer is tired of customers going to Goodyear. They're using their buying power to push the tire business through the distribution model and they'll have a better price on tires than Goodyear. It's an integrated effort by the manufacturers and dealers.
Manufacturers respond:

  • Extended warranties allow distributors to stay in close contact with the customer. For extended warranty work, we pay regular daytime rates for labor plus the dealer gets the parts income. It's an incentive for him to continue to do work for that customer and follow that customer through the whole life of the machine. PSSRs should be out there seeing what's wrong with that machine. If PSSRs are not out there touching the machine, the customer will find an alternative source. And if he leaves, it's harder to bring him back.
Dealers reply:

  • Five years ago, 80 percent of our revenue was warranty. It's now 20 percent. That's a huge shift in five years. We have more technicians today than we did five years ago. Now, we're big in the motor home repair business; we go after it and it's our highest gross margin in service. We do it all: plumbing, water systems, full service for motor homes. And we get a letter every month from some motor home owner singing our praises. 
  • I'm not particularly interested in changing oil, it's a low-tech job. I want the high-dollar pump motors, transmission differentials, etc. My focus is on marketing that capability. What I need from manufacturers is a resource for rebuilt transmissions and engines, which are in short supply. In the auto industry, if they want rebuilt parts, they can find them. We don't want to be in the Jiffy-Lube business; there's not enough return. Customers can have the oil changed somewhere else, but when they need a fuel pump or engine work, they'll come see me because I have trained technicians. I want to be focused on what I do best.
  • When manufacturers entered the compact utility business, you didn't establish a product support model that would work for distributors. There's a big difference in warranty expectations.
Manufacturers respond: 

  • What kind of product process or tool would you like? We want more customers to come back to you. Many dealers are struggling with how to use one cost structure for heavy equipment and another for compact utility.
Dealers reply:

  • You went to the same distribution channel to sell compact equipment, and you let the distributors figure it out. I have X amount of capital, I want X return. Why am I going to retool to make incremental margins on the lines I have? You have to say, "Here's how you do the thing so all the investment burden is not sitting on the dealer."
  • There are things manufacturers need to look at. Look at water pumps; we can hardly find anyone to build a mid-size water pump. The skill set to rebuild water pumps is about gone. The same goes for grinding valves, etc. Over time the efficiencies of manufacturing drove everyone away from that. It's enhanced the warranty - you get a whole new engine if it cracks.
  • OEM's can do the same thing, bring out a 40-hp piece of equipment and not sell parts - say "We don't work on engines but we'll put a rebuilt engine in." Whether it's cheaper to put in new or rebuilt needs to be a joint effort between the manufacturer and the dealer. Is it worth it to rebuild parts on a hand tamper. It needs to be thought about when you launch the product.
Is there a future for task-based pricing in product support? Can manufacturers help dealers produce realistic flat-rate data?

Dealers reply: 

  • We can't charge the same amount for shoveling tracks out and rebuilding an engine; it drives the customer somewhere else.
Manufacturers respond:

  • We need a step between pay by hour and full maintenance agreements.
  • If you have experience and time, flat rate is the way to go. It confuses the customer. 
  • The best flat rate data comes from distributors. Manufacturers can't produce it. Realistically it's done in
    the field.
Dealers reply:

  • If a customer feels he is getting value-added, he will give you the job. Sophisticated guys who run their own shops buy a part and put it in. 
  • Manufacturers can help us by doing what GM and Ford are doing with Mr. GoodWrench - promoting factory- authorized repairs through dealers. Then manufacturers can find a way to warrant those repairs in a way the mom and pops can't, i.e. if we're going to rebuild your engine with our factory-trained mechanics and factory parts, we're going to stand behind it for 90 days. That's where manufacturers can help: product support advertising and a back-up warranty.
  • If I have a guy I've sent to your school and he's passed the test, he's authorized to do the work, he's going to do the repairs, and I'm using your parts, why aren't we marketing that benefit. That's how we market our product support services: "You come to us and if we do a bad job we'll redo it."
Manufacturers respond: 

  • When you start to put a percentage to it, customer retention gets people's attention.
Dealers reply: 

  • Unless the dealer principal is committed to parts and service nothing happens. That's what's going to turn product support around in this industry: Commitment. 
  • Most dealers are not committed to the service organization. In that dealership, they will be the lowest paid. We have to change the paradigm. The only way we're going to approach change is to have information as to how someone does it better than we do. We had our parts guys start to make calls into the PSSR's territory to customers that were under $1,000 in business. We have a little commission program that has made a huge difference in the number of parts sold. It's the same with service and service techs. 
  • I don't know how to measure, promote or pay PSSRs, even though we recognize that rebuilding an engine is more profitable than chasing down a used excavator. 
  • The manufacturer understands the product support business less than we do. We need to work together.
Manufacturers respond:

  • It would help if dealers knew total parts sales in their territories.
Dealers reply:

  • You can know every OEM machine sold, but parts? How do you know if it was an OEM part or a NAPA part? We'd love to have that information.
Machines produce a rich data stream, but there are no industry standards and there's little or no compatibility between brands. How will this change?

Manufacturers respond:

  • One of the opportunities for a higher return for dealers is in that information stream. It has to do with what kind of information you can get off a machine that can be used to reduce customer cost. That's where there is growth opportunity. I know all manufacturers are investing in this. I'm not sure anyone has it right yet. 
  • The agricultural industry set out to use this type of information and found the information is useful to customers. That's what's going to happen. We're going to have customers say, "I need that kind of information. I need it and I'll pay for it." Doing it through the distributor network is an advantage. 
  • The good news is, it's really difficult.
Dealers reply:

  • I used to think I had a competitive advantage over other brands in parts. I went to an AED-accredited school at Texas A&M and learned I don't have the advantage I thought I did; Federal Express is my biggest competitor. I'm afraid the same thing could happen with this data stream. Instead of it making us stronger partners, someone will figure out how to steal the information out of the customer's machine and offer it at a cheap rate.
  • The biggest problem we may have is oil prices and how they affect equipment usage. Fifty dollars per barrel could be cheap. What if it's $100? We might be talking about customers who say they're only going to run their equipment in the most efficient way. This may be the industry's Holy Grail - something that will cement the partnership between manufacturers, dealers and customers. But the information stream and who captures and uses it is also a huge risk. 
  • I'll second that. It's the rental business all over again. We have a service our customer base wants. Look at trucking: If a long-haul trucker is a half gallon off his mileage, he's not going to be driving. They'll stop him because his fuel consumption is off, or they dock his pay for running too much fuel. It's changed the whole industry. They used to employ x number of coordinators to keep the trucks on the road. Now it's one guy handling 500 trucks, and he doesn't have to wait for the phone to ring. 
  • We put backhoe-loaders on a tracking system and the swimming pool contractors fell in love with the information. The average swimming pool contractor in Phoenix digs three pools in a day, and he needs to get the dump truck to where the equipment is. This guy is telling dump trucks where to take the dirt and he's tracking fuel trucks - it's a coordinated effort. He now gets eight more pools dug per week. We only charged $80 per month for that and we should have charged $800. 
  • The data stream will be critical. If we don't manage it as an industry, someone will manage it for us. I don't know who it will be. Machine theft, almost by itself, makes it worth equiping your fleet.
Manufacturers respond: 

  • Earlier we talked about forecasting problems. We have a GPS system doing a good job in China, and it's a forecasting device. It's helping with forecasting utilization. Right now we're thinking that's going to be one of the biggest benefits. 
  • In the forestry business in Finland, the use of information and the integration through the supply chain is unbelievable. They get orders based on what happened with the prices every hour. "Cut 8-foot lengths. Stop. Go cut another type of tree." And when the guy comes out at the end of the day, he knows where the logs are going. That kind of information integration is important for our industry.
Dealers reply: 

  • Most dealers don't have systems that can take that technology and integrate it. We have an IT manager, not a tech person who understands integration.
  • I don't know if any of you have machines with Tier 3 engines, but working on them is different. We're an emissions technology business; we measure the pounds of CO2 NOX generated. We are assessing an economic value on the dollar per pounds of NOX and particulate matter, and putting it into a formula for building. California is going to regulate off-highway. We don't know what it will mean for fleet upgrades. I don't know if you'll be able to run Tier 0 machines 24 months from now. As an adviser to the Air Board, we sell after-treatment. It's a real challenge, it could change the whole landscape. They're putting people in prison for bypassing the exhaust, they're ready to fine the distributor out of business or put him in jail for changing emissions on gen sets. 
  • Customers aren't going to want to touch Tier 3 engines. 
  • Our largest customer markets itself as a "green" company. They didn't buy until they could get the lowest emissions trucks. They put aftermarket on machines that are not regulated because they thought it was a good idea. They want a green fleet. If we could offer them all Tier 3 today, they'd take them.
  • We have a program in California; we're paying millions to people to replace their Tier 0 machines with Tier 2. We're re-powering old cranes, ag tractors, some earthmoving machines, and stationary engines. Our position is how much of that work can we get. Every air district has its own budget and its own set of rules. We have to knock a hole in the Tier 0 engine, take a picture, sign it and have it notarized.
Will the upturn accelerate or slow consolidation among manufacturers and/or dealers?

Manufacturers respond:

  • Historically distribution consolidation happens in a downturn rather than in an upturn. Where there is no succession plan it will happen, but I think it will slow down compared to the last two years.
    n Is that desirable to manufacturers? It depends on the quality of the ones that are left. From the standpoint of fewer touch points with customers, it could be a benefit. If you had one dealer cover all of the world, as a manufacturer you'd have more leverage with him and vice versa. 
  • Distribution is so much better than it was 15 years ago and it probably needs some shake out every year. In an upturn, the rising tide will cover mistakes, but when the pool dries out the bones of the bad ones are left on the beach.
  • If the economics of distribution don't change, expect more consolidation. But a lot of the issues we've talked about will change the economics of our dealers, and it probably means a few larger dealers, not more small ones.
  • At what point do professional managers start running dealerships? The biggest change I've seen in the last 20 years is more public money in distribution. What's going to happen with public money in a private dealership?
Dealers reply:

  • Talk about unprecedented. The 10 year T-bill is less than it was a year and a half ago. I don't see the 30-year T bill rising in the down economy. The point is the expectations of return in the stock market are going to moderate over the next five years. I see more people investing in distribution than ever before.
As a dealer, if the manufacturer you represent brands and markets the machines you sell through another channel or dealer, how do you respond?

Dealers reply: 

  • We schedule a meeting, and sit down and talk about those things. 
  • The branding challenge goes beyond building equipment. The big box stores and national rental companies wanted their own brands.
  • They could go to China and get that done tomorrow. Just because the local manufacturer base said it's not a good idea doesn't mean China wouldn't want to build 1000 of anything.
Manufacturers respond: 

  • I saw one national rental company that peeled off the manufacturer logo and put their logo on. When they liquidated, they put the manufacturer's logo back on. We've had a request to build with no brands. We don't sell much to that customer for that reason. 
  • Manufacturers and dealers spend a lot protecting, supporting and growing their brands. The customer has certain expectations; it means something to them. At some point, someone is going to build an XYZ machine and if there is support for it, it will be another brand in the market.
Dealers reply:

  • A brand is a promise. 
  • Generac just recently crossed the threshold, they build more Generac than branded products. Before, 70 percent was branded product. They were sold as Craftsman, Powermate, etc. 
  • One manufacturer took logos off equipment to sell them new at auction.
Manufacturers respond:

  • That defines gray market.
Dealers reply:

  • That doesn't mean someone isn't going to do it. We, as distributors, undersell our brand; we don't attach a big enough value proposition to it. 
  • There's always going to be a place for the brand the distributor represents, if you take care of the customer and stand behind it. The problem with the machines from China is they're not comfortable supporting the product. 
  • Our brand is very powerful. It means something in the marketplace if the right name is on it. 
  • The dealer's brand can be just as powerful as the product brand.
Manufacturers respond: 

  • We refused to allow dealers to associate our name with the dealer name. It was a bad decision. It boils down to this: If the dealer feels confident in the brand, it's a huge benefit to link the dealership and the brand name together. But it can be dangerous if either party slips in that equation. On the manufacturer side we believe in the brand we represent, otherwise we wouldn't be here. 
  • We're proud of our brand, but as good as our name is, we have to have a good distributor in every market in North America. We have to have qualified, strong, aggressive distribution to add to our brand to make it worthwhile. You can spend all kinds of money on advertising but if you don't have the distributors to back it up, it doesn't matter. We're only as good as our distributors.
Dealers reply: 

  • We're only as good as our manufacturers. 
  • It takes more than a product and a price to establish a brand; it takes reputation, consistency and more.

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