Business Outlook 2008: House of Blues? Or Blue Skies? By Kim Phelan
Article Date: 01-01-2008
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.
Metro markets and machine lines will largely determine the kind of year dealers experience. But don't underestimate the power of tactical thinking, too.
As distributors step gingerly into 2008, you can almost imagine a tall, orange construction fence circling the construction equipment industry - you know the look. It's a barrier you can't quite see through, yes, but it's also a symbol of anticipation. No matter the planning, budgeting, scheduling that precede the first dig, there's something about the orange border that piques our curiosity and stirs a feeling of hopefulness.
Hopeful optimism is, indeed, one of the few generalities that actually applies to a wide number of North American equipment distributors whose outlook for '08, broadly speaking, is favorable - or, in most cases, at least not unfavorable. According to CED magazine's annual business outlook survey of AED dealer members, the majority of respondents expect sales of new equipment to either remain flat or increase this year. A larger percentage also believes that used equipment sales and rental revenues will climb, and still more dealers - nearly 60 percent - predict increases for their parts and service businesses.
A separate survey of dealers co-sponsored by AED and Reed's Construction Equipment magazine mirrors the good - or at least not-too-bad - business mood that dealers are projecting. While only five percent indicated that 2008 will be excellent, 63 percent anticipate a good or very good year. Twenty-nine percent predict a mediocre '08, and 3 percent say it'll be poor.
But geography foils any attempts to draw firm universal conclusions about the U.S. construction market overall - rather, highly regionalized markets create a speckled picture across the country, many grossly discolored by the declining housing sector, and each characterized by diverse segment factors that include highway, commercial, public works and high-rise condos. Depending on the product lines they carry and market-specific conditions, distributors' own business self-portraits range from very positive to borderline despair, with many steady-as-she-goes attitudes in between.
Dealers do seem to almost universally agree that housing's plunge into the proverbial lavatory has a far-reaching impact on a host of other types of construction - not the least of which will be commercial building, which invariably shadows residential by several months. In the case of Nortrax's Fort Myers' branch, a John Deere dealership in southwest Florida, residential's halt is also having a residual impact on heavy iron used for site development, as well as aggregate mining and processing equipment, according to service manager Al George. Much of the region's home development requires aggregate site build-up for septic tanks, George says - the absence of housing work, exacerbated by severe unemployment in Florida, is hurting a number of construction sectors.
Despite a fairly optimistic outlook, dealers reflect a prevailing posture of belt-tightening, watching expenses, monitoring and trimming inventories, and generally treading with nimble caution into 2008. CED's survey results indicate that 46 percent of dealers will invest less in new equipment in '08, while almost 24 percent expect to maintain their investments at 2007 levels - some 28 percent say they will invest more this year. Forty percent indicated that they had more excess inventory at the end of '07 than they did at the end of '06; 28 percent said excess inventory is not a problem, and more than 30 percent said they closed '07 with less excess than they did at the same time in '06.
"Any businessman today, and especially in this industry, is constantly revising," said Bruce Logan, president and CEO of Logan Contractors Supply in Des Moines, Iowa, a light equipment house with two Iowa facilities plus locations in Omaha, Neb., and Olathe, Kan. "It's not as fat as it used to be. If you're not constantly looking for better methods, better people and better processes, then you're going to be left out in the cold - or you're going to succumb to the easy fix, which is selling out to a national or some other large equity firm."
A self-proclaimed optimist, Logan nevertheless recognizes that his Midwest market is not a confident one at present, and he expects to "dig in for 2008," finding ways to trim and better define his business. Meanwhile, customer reluctance to invest in equipment is having the positive effect of driving rental activity up, he says.
As residential and paving segments decline in his markets, he cites the media as having a negative influence on industry mood; he also points to a rash of mergers and acquisitions among OEMs that have created another unsavory predicament. Because of certain M&As, product lines that he has had sole distribution of in his territory have suddenly turned up in four competitor stores, almost overnight.
"So now it's what I refer to as saturated distribution; we're all competing with the exact same product within a given area," he said, "and mainly what that leads to is discount structures. And if you're not the guy giving the deepest discount, you're out of luck."
Tale of Two Territories
The extreme disparity in business outlooks for '08 is nowhere better illustrated than in snapshots from California figuratively held up beside views of the Middle-Atlantic, roughly western Pennsylvania to New England. In a tale of two territories, dealer principals Ron Barlet, Bejac Corp. in southern California just north of Anaheim, and Roy Kern, Equipment Corp. of America, based in Coraopolis, Pa., see two completely different scenarios as they size up the coming six to 12 months.
"Realistically, I think '08 is going to be just as bad as '07," Barlet asserted, whose heavy equipment lines include Doosan, Link-Belt, and Kawasaki. His product mix also includes light equipment from Wacker and Atlas Copco, as well as paving lines from Dynapac.
The decline of the housing market, coupled with the credit crunch, he says, have delivered crippling blows to contractors all over California. The foreclosure rate is approximately 56 percent higher today than in 1990, he reads from a local newspaper - property values in the state, which tend to escalate very rapidly year over year with double digits have now sunk by double digits.
"The housing situation here is pretty significant, and it's not over by any stretch of the imagination because these loans are still adjusting," said Barlet. "In some states where you don't have the volatility in the pricing, you lose some equity, but you're not losing hundreds of thousands of dollars of equity, and that's what, in my opinion, is convoluting the problem here in California."
On Kern's business planet, the mood is a polar opposite.
"Business is good and we see it remaining good for next year," Kern said, "especially the first half because we already know we have a lot of business in pocket. Because of that, 2008 has to be a strong year for us - I just can't imagine it dropping off. And my crystal ball says 2009, because of the heavy infrastructure bent that we specialize in, should be decent." Kern's main equipment lines are foundation installation equipment including drilling, large pile hammers, and hoisting and rigging equipment.
In California, Barlet also blames poor business conditions on a clot in public works projects. A sizeable cluster of bond measures have been approved by voters, he says, but due to the government's self-induced shortage of engineers, the jobs are currently clogged in the bureaucratic system instead of being offered at the contractor level.
"Just when we could really benefit from having those jobs available - at least we'd have something to do - the state doesn't have them out to bid," Barlet said.
He says a friend from the Associated General Contractors (AGC) of California estimates some of the public works jobs may start coming out by Q2 of '08, but even that won't save the day, in Barlet's mind. "The problem will be that homebuilding contractors will be bidding on the public works jobs, so instead of having five bidders on a job, you'll have 17. And of course pricing then gets deflated, which means dealers aren't going to sell equipment."
Consequently, Barlet says one of his company's primary strategies for '08 is to aggressively pursue less visible jobs such as opportunities in recycling, waste transfer, and industrial applications where excavators and wheel loaders are used.
"We're absolutely turning over every stone," he said.
But he's not stopping there. Barlet's company is braced for a fight to make the most of what he's calling the worst year in at least the last 10. His strategy is multipronged, beginning with renewed emphasis on product support, and a recharged approach to internal training. He says he is keen on making sure every employee is cross-selling all the company's products and services.
"We're looking at the kind of training in which everybody in the organization is talking about parts, everybody is talking about service and about our rental - getting our whole organization to recognize that there is business out there, but we have to talk about it at every interface we have with the customer," he said.
Barlet's strategy also includes the recent revamping of his computer system. He invested in PFW's Intellidealer business solution that, he says, gives any employee an instant view of all the customer's business activity with the dealership, from parts and service to sales and rental.
"I've been to a bunch of computer-related conferences and the problem is that most dealers use their business systems as glorified invoicing systems," Barlet said. "They don't realize the power that really exists to see everything your customer is doing, to monitor who your top customers are, and if you haven't done business with somebody for a while, to find out why not. There's so much power in the system, but I think a lot of people don't dig into them as much as they should."
Cashing in on Casinos and More
Meanwhile for Kern, heavy highway and bridge work in the eastern part of the U.S., fueled by the highway bill and additional new funding for bridge work following the Minneapolis bridge collapse, are keeping all five of his locations busy and profitable, with as much as a six-month backlog on some equipment orders.
The only weed in his rose garden is a drop-off in high-rise condos. Commercial building in his markets - which includes an eastern slice of the Midwest from the Pittsburgh, Pa., branch, the Philadelphia metro area and New Jersey, New York City, Washington, D.C., and New England near Boston - could drop somewhat in '08, Kern believes, due to a decline in corporate profits that may adversely affect corporate construction spending.
But the prognosis for all his facilities is otherwise excellent.
Kern cites some $20 billion in Ground Zero-related projects in New York City, along with neighboring subway work. In D.C., work is constant - his firm is involved in a number of government contracts as well as work on the Capitol building. He says that MGM recently announced it plans to build the world's largest casino in Atlantic City, a $5 billion project that could start in '08 or as late as '09 - his company will benefit from the foundation work that structure will require, as well as the competing casino projects that are expected to crop up, too. Kern predicts an upswing in the Atlantic City casino market that could last as long as four years.
Still more casino jobs will emerge by 2009 in Massachusetts, he says, where new legislation has opened the floodgates for casino work. A new law building at Harvard, among other New England projects, contributes to Kern's belief that education and health care commercial business will continue to be strong in '08. Rental in New England which had been slow for a few years, has picked up considerably of late, with an influx of bridge and heavy infrastructure work. He says bridges have quadrupled in 2007 and the pattern will continue for the foreseeable future. In the Midwest, he says work is not spectacular, but it is steady, and he expects that to remain so in the year ahead, as well.
From a national perspective, an overwhelming majority of dealers depict the competitive arena as either very or intensely competitive, according to the AED/Construction Equipment magazine survey, 61 and 31 percent respectively. And while that same research shows that 52 percent of respondents expect sales volume to increase in 2008, their underlying stress buttons reveal the harsh obstacles they're going to have to overcome to meet those expectations.
The No. 1 pressing business concern weighing on dealers' minds is the risk of economic recession. But several other serious concerns are also at the forefront as dealers head into 2008. Many responded that poor profit margins on machine sales is a burning issue - CED's survey results concur, showing that while nearly 50 percent of dealers expect gross margins on new equipment to remain flat, 37 percent expect a decrease. The majority of dealers call for flat '08 gross margins on used equipment and rental sides of the business.
Dealers are also concerned about: decline in sales volume of machines, increasing competition, declining construction markets and - tied for the next highest ranking business concern - rising interest rates and competitive position of the brands they sell.
For St. Louis-based Larry Glynn, president of CMW Equipment, mental attitude among customers - not dealers - has played an adverse role in what Glynn would call an otherwise benign economy. A highway paving equipment dealership specializing in construction and production equipment for the concrete, asphalt and aggregate industries, CMW is remaining optimistic for '08 even though Glynn says most of his customers - ready-mix concrete producers and quarry operators - were down 25 percent, on average, in 2007.
The mystery, he says, is that the economy is not bad, and yet contractors are hedging - he, like Logan, attributes some of the apprehension to the press.
"On the highway side, there's so much talk about the Perfect Storm that we're facing in 2009 and how we're all going to run out of money," said Glynn. "That has some of my customers sitting on their haunches wondering what they should do. My salesmen are extremely busy quoting, but getting people to commit is a whole different thing. They're not placing orders in advance like they were two years ago."
Glynn says he's not sure where exactly the $41 billion in federal highway funding is going because he hasn't seen much of it. There's work in Missouri, he notes, but when those projects are let, he says contractors come from two states away to bid. And as for the '09-scheduled reauthorization of federal highway funding, Glynn says he's somewhat skeptical that politicians will have the backbone to raise the gas tax to adequately fund infrastructure nationally.
Product Support Opportunities
A majority of surveyed dealers, as referenced earlier, expect product support sales to climb in 2008 - 57 percent believe their parts business will grow and 58 percent expect growth in service sales/revenues. But it's not merely a foreshadowing among dealers who may wish to compensate for possible declines caused by the residential slowdown this year. Even in regional anomalies that have been untouched by the housing plummet, product support is identified as a beacon of opportunity.
That's Steve Jester's story. He operates J&B Underground/Ditch Witch of South Louisiana based in Baton Rouge, a territory he says, ironically, has been insulated -this time around - from the housing market woes due to the infrastructure rebuild associated with Hurricanes Katrina and Rita. According to a business analysis from theadvocate.com in October, Louisiana will be spared the brunt of the housing slump because it was not an overpriced market and because it's receiving an infusion of construction dollars. In fact, the article states, "an estimated $15 billion worth of construction projects are under way or planned in New Orleans in the next two years."
With federal dollars aplenty in the state, Jester says equipment sales have been and should remain strong. The icing on that cake is that product support is, too - but the increased need also brings its own set of dilemmas.
"Our primary challenge in '08 will be to cope with the increased service demands associated with the increased equipment sales we have enjoyed for the past three years and continue to see," said Jester. "Our business is very focused on service after the sale, and this has contributed greatly to our success. Our product support sales, both parts and service, have grown proportionately with the equipment sales. An added benefit resulting from our service reputation is that contractors are asking us to repair other brands of equipment as well. We love the opportunity to be a one-stop service center."
A stone's throw over the Gulf of Mexico back in Tampa, Al George at Nortrax says his struggling region is not even proving to be a haven for product support business - instead, he says customers have become more selective about the repairs they have the dealer's service department perform, and opting more often to have their own mechanics do more work.
"Last year this time we were going and going - everybody was making money, but not anymore," said George. "The work isn't out there like it used to be, so everybody is obviously watching their pocketbook." n
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