Hard-Hit San Diego Market Awaits Economic Turn-Around - Local Conditions
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SECTION: Local Conditions

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Hard-Hit San Diego Market Awaits Economic Turn-Around

By G.C. Skipper

Article Date: 01-01-2009
Copyright(C) 2009 Associated Equipment Distributors. All Rights Reserved.

Three local dealers are seeking and unleashing every new opportunity available until better days return.

When the U. S. economy slammed into the ditch, it sent a jarring blow to construction equipment distributors nationwide.

San Diego is no exception. But despite the slump, many distributors are moving into uncharted waters to find new business that will help them weather the storm.

“We are probably the hardest hit region in Southern California,” said Steven Branson, general manager of H&E Equipment Services, El Cajon. The company, established in 1961, is ranked in the top 10 of RER’s top 100 equipment rental companies and is a leading supplier of equipment for construction, earthmoving, compaction, paving and material handling.

“Because residential business, which is a measurable factor for us, is down considerably, we are not quoting as much as we typically would,” Branson said. “A lot of investors are skittish right now when it comes to new developments and projects like that. We’re not seeing near the jobs put out to bid or new projects on the board that we normally would.”

The market is highly competitive, Branson noted, and currently his sales are definitely off across the board. When compared to the national picture, California is always the last state to feel the pinch, according to Branson, but it is also the last to come out of it.

“I’ve talked to other branch managers in other regions, and they haven’t been hit nearly as hard as California has,” he said. “Granted, we are holding our own, but we’re not seeing the margins that we’ve grown accustomed to over the last few years. The margins have definitely gotten skinnier,” he said.

Most of Branson’s business now is either industrial or retail construction, he said. “There are very little residential and very little public works projects right now.” Not only are there few projects put out for bid by the state, Branson commented, but bid requests from local municipalities also have dried up.

In San Diego, Ron Zagami, president of Clairemont Equipment Company, a Komatsu dealer that is one of the few family-owned dealerships left, said 40 percent of his business historically has been in the housing market. Today, that business is all but stopped, he said. “We are down about 30 percent of volume compared to a year-and-a-half ago. This year, we will be down about 12 to 14 percent in sales volume. That includes actual rental and retail sales,” Zagami said.

Clairemont Equipment has been a Komatsu dealer for about 20 years and has been a rental company since 1970, says Zagami. The rental business started out as general rental, “and, boy, do I wish I was back in that,” he said. “General retail is healthy. Since 1970, rentals have provided a pretty good living for my brother and me. It’s been a good way to make a living, but it’s a little tough now.”

Another San Diego dealer, Chris Denardi, president of D3 Equipment, described the local market as “extremely depressed.” Denardi’s company is the Case Construction Equipment dealer for Southern California, handling sales, rentals, parts and service.

“The housing market is off 70 percent compared to 2006, nonresidential is off about 30 or 35 percent,” he said. “I would suggest that the national market, by comparison, is not off to that extent over the same time period.”

The CARB Factor
Not only do California equipment dealers and distributors have to contend with a crippled economy, they and their customers have to confront and comply with increasingly rigid regulations from the California Air Resources Board (CARB).

Denardi said the regulations “are depressing the value of existing fleets and trade-ins.”

Zagami assessed it this way: “The new regulations are going to have an impact on everybody. After the first of the year – in March or April – you have to have nothing but Tier 3 engines. More and more contractors are requiring that the equipment we rent must be Tier 3 because developers are getting mandates from the lenders,” Zagami said. “It’s going to become a pretty big issue. It’s a recession on top of a recession for California. If you look at the auction business, people are trying to dispose and change engines to comply with CARB regulations,” Zagami said.

“For example,” he said, “the guys who move the big dirt have been working for the last three years, trying to convert their fleets. Some of them are probably half way done with the conversion, but there is still no work out there. It’s kind of a moot point. They are hurt by the economy, not necessarily CARB.”

Ironically, because the construction market has tripped over the economy, there is now about 75 percent less emissions in California, said Zagami. “That’s because of the lack of work,” he commented.
As for his own company, Zagami said, most of his equipment is Tier 1 and above. “Tier 1 is good until 2012 or 2014. The newer equipment is Tier 3.”

Branson said many of his customers are inquiring about CARB regulations, “They’re asking about the new compliances, about upgrades and certifications. They’re also asking about how to get rid of their older equipment.”

Although CARB may suddenly be on his customers’ minds, Branson said, many of them simply do not have the resources or the capital available to do what they need to do right now.

“It’s a situation where many of them are going to be caught with their pants down,” Branson said.
In an effort to help customers, numerous calls are fielded by his service department, answering questions about whether the customer’s equipment is Tier 2 or Tier 3, discussing in detail where their equipment is in the cycle, what they are going to be required to do, and other clarifications.
“A lot of this stuff isn’t laid out in laymen’s terms,” Branson remarked. “It’s complicated, and contractors like things that are simple to understand.”

Denardi also is answering numerous questions from customers. In addition, he said, he is trying to suggest more than one alternative solution beyond just replacing the unit. One such suggestion is the use of after treatment, such as particulate filters, and other aftermarket emissions strategies.

“We’ve sold several units in the past 60 days that were replacements for low-tier engines,” he said. “We’ve also equipped a similar number of units with after-treatment systems.”

However, all is not doom and gloom. One of the bright spots for Branson is the parts and service business.

“We’re doing well here,” he said. “Many of our customers are not looking to buy new equipment, so they are refurbishing what they have, trying to get a few more miles or a few more hours out of their existing fleet. As a result,” said Branson, “we have seen a major increase in parts and service.”

Although he declined to say how much of an increase, Branson commented, “I’ll just say it is substantial. We’ve been very pleased at the way we’ve gone ahead and had increases in a down market.”
By comparison, Zagami said his parts and service business this year will more than likely be down 40 percent. “That’s because of the lack of equipment being used,” he explained.

Denardi said his parts business is down about 15 percent, and service has declined about 40 percent. The reason, he explained, is that operating hours in the marketplace are down.

“People aren’t using their equipment, and they are doing the repairs themselves,” said Denardi. “That’s why our service is off more than parts.”

However, when it comes to rentals versus new equipment sales, Zagami commented, “We are unique in this area. I’ve hired three new sales guys who became available and they brought customers aboard that we would not have had. Because of that, our retail sales business compared to a year ago is about the same. Our rental business, however, is still suffering.”

Rentals for D3 Equipment have been relatively stable, Denardi pointed out, but new equipment sales are down dramatically. “That is a reflection of the confidence in the marketplace,” he said.

Go Where the Money Is
Economic storm clouds can gather as they may, but veteran equipment dealers and distributors, such as Zagami, Branson and Denardi, know a simple market truism: If one business segment is in a slump, focus on expanding into new markets.

“We’re looking at government business, looking where the guys who print the money are focused,” said Zagami. “In San Diego, commercial business is still going at a pretty good pace, although it looks as if it will slow down. What we’re doing, therefore, is focusing on the government and military projects. We’ve always been involved in that segment, but we’ve never really focused on it before. We are now because that’s where the money is.”

As for Branson, he is continuing to tap into new markets, he said. “We’re going after manufacturing companies, industrial accounts, golf courses, park and recreation centers, navel and marine bases, SGA contracts – we’re very proactive in trying to get our equipment out as far as possible.”
And Denardi commented, “We’re trying to diversify our customer base. We were primarily in housing, but now we’ve been soliciting business in any and all other applications, such as municipalities, heavy engineering, material handling, scrap and recycling.”

Each of these Southern California dealers has a different take when it comes to predicting the end to current economic ills.

“I don’t see it picking up until the first quarter of 2010,” Branson remarked. “This year is going to be a horrible retail season and will cause manufacturers to slow production and do a lot of lay-offs in the first and second quarters of 2009. That means higher unemployment that creates a further hardship on the real estate market. We are going to see a lot more foreclosures in the third and fourth quarters of 2009 and that, along with the weak retail season, won’t pick up until the first quarter of 2010.”
Zagami believes recovery will take about two years. “This is what everybody around San Diego is saying.”

Branson added, “We definitely will weather this economic slowdown, but you are going to see a lot of changes. A lot of things will be stripped out in 2009. The companies barely hanging on right now will definitely fall off the map in 2009. It will test who is on top of their game and who isn’t.
“Our industry as a whole,” he concluded, “will recover. It’s not a matter of if, but a matter of when.”

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