Not Your Typical New Equipment Channel - Industry Trends
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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Not Your Typical New Equipment Channel

By Mary Sedor

Article Date: 03-01-2009
Copyright(C) 2009 Associated Equipment Distributors. All Rights Reserved.

Who's selling new models over the Internet and at auction? Apparently plenty of people, but use of these alternative channels creates a host of issues when new machines travel across territory lines.

Editor’s Note: Due to the sensitive nature of the topic, which touches upon antitrust laws, manufacturer and dealer contracts and to encourage candid responses, CED granted anonymity to the sources used in this article. In other words, the sources will not be identified by name, brand, company or location. However, their quotes and comments accurately reflect telephone conversations held with CED Associate Editor Mary Sedor.

While the majority of equipment owners continue to purchase new equipment from independent distributors, a recent AED study found that an increasing number of end users are purchasing new equipment through alternative channels.

In AED’s 2008 Construction Equipment Market Study, which aims to monitor channel-to-market trends, 26 percent of equipment owners indicated that they purchase new equipment at auction. In addition, 8 percent of equipment owners also admit to purchasing new equipment on the Internet – up from 2 percent in 2003.

Although these alternative channels seem counterintuitive to how the industry generally accepts new equipment into the market, manufacturers and dealers surveyed acknowledged that these channels exist and they expect them to continue to grow. In addition, the majority of dealer respondents said that the availability of these new channels is having an impact on price, parts and service volume, and competition.

Equipment sold through alternative channels travels more easily across territory lines, a major faux pas among OEMs and dealers alike. When new equipment makes its way into another dealer’s territory, it creates a variety of issues for both manufacturers and dealers – whether the equipment is sold at auction or via the Internet.

Harsh Penalties for Territory Violators
Dealers who sell outside of their exclusive sales territories earn themselves a bad reputation.
“Poaching into another dealer’s territory is strictly discouraged,” said a dealer west of the Mississippi representing one of the Top 5 manufacturers. “Any [alternative] means [employed] to sell a new machine, whether it’s at auction or directly from the Internet, is frowned upon equally.”
At least one major full-line manufacturer agrees that sales of new equipment through these alternative channels are strictly prohibited.

“We do not allow new equipment to be sold via any Internet sale or Internet or physical auction,” explained the heavy equipment manufacturer. “We police it judiciously.”

Most major full-line equipment manufacturers provide their distribution network with exclusive sales territories. Antitrust laws prohibit manufacturers from restricting dealers in where they sell, but OEMs can and do limit the territory in which dealers can provide service. Manufacturers enforce service territories by imposing harsh fees upon dealers that sell outside of their territories.

Manufacturers define new equipment in terms of the number of hours on the machine and the warranty period.

“Equipment that is still under warranty is not to be sold in any form other than direct sales within the context of a distributor’s trade territory,” said the heavy equipment manufacturer.

Within the manufacturer/dealer contract are migratory policies that aim to ensure that the distributor will service the equipment that flows within the boundaries of his trade territory, said the manufacturer. To handle nonreimbursable warranty costs, distributors typically set apart reserves upon the sale of a new machine to help them cover these warranty expenses.

“If the machine came into a distributor’s territory, whether through auction or the Internet, he still has the responsibility to service it,” said the manufacturer. “When issues are brought to our attention that the distributor didn’t sell the machine, we research where the machine came from and take action.”
Distributors typically have to abide by two rules when selling equipment into another dealer’s territory: 1.) The customer has to have a physical location other than a P.O. box in the selling distributor’s trade territory, and 2.) The dealer has to be able to provide service.

If the distributor cannot provide service because the machine is 1,000 miles away, then there are two options, explained the manufacturer: Either the two distributors have to work out an agreement for service, or the manufacturer imposes a migratory fee on the selling distributor to reimburse the servicing distributor for nonreimbursable warranty costs. Typically the fee is anywhere from a 5 to 10 percent penalty, which most dealers say isn’t worth the price of selling outside their sales territories.
“They charge you a high enough cost that it’s a disincentive to sell outside of your territory,” said the west-of-the Mississippi dealer cited earlier.

The whole point of the migratory fee is protection, says the manufacturer.

“We abide by antitrust laws and we’re not trying to restrict trade,” the manufacturer said. “We’re trying to ensure that the customer’s equipment is properly cared for. We’re trying to protect the distributor and the customer.”

That protection that the manufacturer provides is what’s important, said an Upper Midwest full-line heavy equipment dealer.

“The value of a product line is very much based on that manufacturer’s ability to protect you. A manufacturer that would allow selling equipment online is not attractive to dealers because it lessens the value of the manufacturer/dealer contract,” said the Upper Midwest dealer. “But if you’re constantly bombarded by another dealer selling in your territory, you’re not going to have qualms about selling online.”

Not My Brand
Many equipment dealers who spoke with CED said that lighter equipment is being sold more via alternative channels than heavy equipment. Dealers argue that most customers still want to see the heavy equipment up close before making the commitment to purchase it.

“I think when you slice up the universe of the construction equipment industry, would someone purchase a plate compactor or jumping jack online? Yes,” said a Western region full-line heavy equipment dealer. “Are you going to buy a 40,000 pound excavator online without seeing it first? Probably not.”

That Western region dealer explained that if you are interested in purchasing a Ford you can find the prices online and shop around, but you still have to go to a Ford dealer to purchase a new car. In addition, a South Central region and a Rocky Mountain region dealer agreed that customers would come in to the dealership to purchase the larger heavy equipment.

“I think that most local customers still want to come in and kick the tires. The reason people are on the Internet is because they are shopping price to try to get a better deal,” said a South Central region, full-line heavy equipment dealer.

The Rocky Mountain region heavy equipment dealer said, “I don’t think anyone is naive enough to buy equipment without seeing it. If they are going to invest in something, they are going to kick the tires.”
A light equipment manufacturer addressed this notion and said that their equipment is sold more via these alternative channels because they provide their dealers with nonexclusive sales territories.
“Sales of new equipment through these unconventional channels (auction and Internet) happen primarily with those dealers that do not have agreements with manufacturers for protected territories,” said a light equipment manufacturer, “but with light equipment that’s just the way business is done. We do try to protect our dealers from in-line competition as best we can.”

An increasing number of light equipment dealers are requesting the ability to sell the equipment online, which the manufacturer says the dealers view as a way to expand their sales reach and generate more revenue.

“What dealers are finding is that more and more contractors are using the Internet for certain types of equipment, and they are shopping for the best deal,” said the light equipment manufacturer. “So many dealers are establishing their own Web sites and asking manufacturers to drop-ship the product so they don’t have to stock inventory, and it improves their margin.”

However, warranty and service issues still arise. For example, when a dealer in Florida sells equipment online to California, the end user might have trouble getting the product serviced by the dealer in California because he did not sell it.

“It creates a whole host of issues for the manufacturer, but the dealer is happy because he got the sale,” said the manufacturer. “The brand gets a bad name. We can’t force the authorized dealer in a territory to service the product. All that changes with exclusive distribution territories.”

Dealers Are Selling Online and at Auction
While it’s no secret that many equipment manufacturers sell new equipment at auction, an auction house executive confirmed that equipment dealers, too, are indeed selling new equipment through the auction company. That executive said both light and heavy new equipment have been sold at auction.

“The majority of equipment sold through our auctions is used, but a small percentage – which still equates to hundreds of millions of dollars – is either new or unused,” said the auction executive. “In some instances, dealers might buy quantities of a certain model of equipment or get preferential pricing, and their market might only absorb a certain percentage of it. So they need to expose a percentage of their equipment to other markets outside of the industries they usually sell to. We attract all those different industries and a larger geographic area to our auctions.”

As for new equipment sales online, a quick search on an Internet-based equipment listing company’s Web site for new and used equipment easily yielded hundreds of listings for seemingly new heavy construction equipment. A search for various brands found 2009 model excavators, wheel loaders and other heavy machinery with as low as four hours on it.

CED spoke with a few dealers that have sold or are posting new equipment for sale online. An Upper Midwest region heavy equipment dealer representing a number of manufacturers said that perhaps one in 100 machines that they sell online is new. When this dealer has sold new equipment outside of his territory in the past, they work with the local dealer in the area for service.

“If you sell something 2,000 miles away you obviously can’t be sending service guys and techs out there to take care of it,” said the dealer. “We’re responsible for the warranty. What we end up having to do is hire the local dealer in the area to help us out for service. I think it’s standard that dealers help each other out.”

Another full-line heavy equipment dealer based in the Northeast had several listings for excavators with anywhere from four to 12 hours on the machines – 2009 models. This dealer also said that the majority of their sales online are used, but they do have the occasional new piece of equipment for sale online.
“The sale works out fine online as long as it’s in your territory,” said the dealer. “If it’s outside your territory you have to pay the other dealer a commission or turn over your commission. It all works out as long as you take care of the other dealer. By the time you add in the penalty from the manufacturer there isn’t much room for profit, so sales outside of our territory don’t happen too often.”

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Article Categories:  Management  »  Legal