As Equipment-Consuming Segments Shrink, Northeast Dealers Must Right-Size, Right Away - Business Outlook 2008
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SECTION: Business Outlook 2008

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As Equipment-Consuming Segments Shrink, Northeast Dealers Must Right-Size, Right Away

By Tim Watters

Article Date: 01-01-2008
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.

Northeast Region
Hoffman Equipment Co., Piscataway, N.J.

In the Northeast, equipment distributors are struggling to cope with the new economic model that has developed over the past six to 10 months where residential construction work has become practically nonexistent. As a result, dealers' sales are off significantly, and with that all of the issues that generally arise in a slower market are beginning to reveal themselves: slower receivable collections, stagnant inventories, inventory growth and valuation problems, and cash shortages. Now is the time for dealers to grapple with how they will turn ‘08 into a profitable year in spite of the economy.

The residential construction market is very, very quiet and dealers are not expecting it to rebound anytime soon. The Wall Street Journal reported in late November that sitting, unsold homes are at an all time high, requiring 500,000 existing new homes to be sold only to return to historically normal levels. The Journal recommended in the same article that home builders "take off until Spring;" and this sentiment is beginning to pervade within the industry - that things aren't going to get better, and will probably get worse, at least through spring and into summer.

In this environment, we face two distinct challenges - first to find market segments that are still consuming equipment, and at the same time to ‘right-size' our businesses to the new economic reality that we will face in the coming year.
Finding active markets is easy right now if you happen to be a crane dealer. The crane market continues to produce sales numbers that are at historic highs, and this will continue at least through next year. Fueling the ‘boom' in crane sales are commercial construction, large infrastructure projects, and investment in the energy producing industry.

Earthmoving distributors should look to these same markets for sales activity: commercial construction remains strong, as do municipal markets, scrap and industrial markets, and the energy industry is enjoying profitability of historic proportion. All of these segments offer the Northeast dealer opportunities to grow sales.

'Right-sizing' our businesses can be more challenging, especially reducing inventory into a shrinking market. Many dealers are comfortable with their gross inventory levels, but their mix has become out of step with what is currently selling, making it very difficult to sell off that equipment that isn't selling to make room for equipment that still brings demand.

Export sales are a big market opportunity for dealers to sell unwanted inventory. The collapsing dollar makes our U.S.-priced equipment very attractive to foreign buyers, and this sales activity has increased dramatically. Buyers from all Europe, Australia, and the Middle East have become much more visible and active in dealers' yards over the past several months, and ships leaving the U.S. are so full it is difficult to book space.

In general, rental activity has decreased in step with the equipment sales. Many dealers report that rental activity is reasonable, but this activity has been at the expense of equipment sales, as customers who would typically buy outright or convert to purchase in a stronger economy are unwilling to commit capital to equipment purchases and are using short-term rentals to meet equipment needs.

The horrible residential market has even impacted dealers' parts sales negatively, with large customers having so little work that they even do not need to repair their existing fleets. This defies traditional logic, where you would expect parts sales to increase in an off market as contractors repair equipment instead of purchase.

Good news, however: The ‘credit crisis' that has been reported in the news over the past few months has yet to have much direct impact on our industry. Northeast dealers report that their own access to credit has yet to be constrained due to changes in bank lending practices, and retail transactions are still being approved without any discernible change in bank approval criteria or practices.

In summary, 2008 will be a very challenging year for our industry; now is the time to get prepared.

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Article Categories:  Business Outlooks  »  Economic Outlooks