Strategic Moves: The Thinking Behind Company StoresBy Loretta Hall
Article Date: 04-01-2009
Copyright(C) 2009 Associated Equipment Distributors. All Rights Reserved.
It happens with enough frequency to merit the question: Is factory-owned distribution a trend?
When Illinois-based Quincy Compressor, an EnPro Industries company, acquired Air Perfection Inc. in May 2008, it wasn’t a matter of increasing its manufacturing capabilities. Air Perfection was a small, private distributorship in Dixon, Calif.
“That is a new direction for Quincy,” said Don Washington, EnPro’s director of investor relations and corporate communications. “It is part of Quincy’s growth strategy to expand their sales opportunities into new areas. It gave them access to parts of the market and customers in that West Coast region.”
Is that just an isolated case of a manufacturer moving into the distribution side of the industry? Not really. During the past few years, several manufacturers have followed that route. For example:
Is there a trend here? It’s hard to tell. For instance, since 2004 when John Deere and Company gained full ownership of its distribution group Nortrax, it has been selling off bits and pieces:
- In October 2008, Case Construction Equipment acquired Western Power and Equipment of Vancouver, Wash., which had eight dealerships in California, Nevada, Oregon, and Washington.
- In January 2008, Volvo Construction Equipment acquired Mathews Machinery, Inc., which had been its dealer for the state of California, with locations in six cities.
- In January 2009, Liebherr Construction Equipment Company announced it was establishing a new dealership in Houston, expanding its company-owned dealership territory into southeast Texas.
Manufacturers Who Distribute
- Its Michigan dealerships to JDE Equipment in 2004
- Eight Nevada and northern California dealers to Pape Machinery Inc. in 2005
- Three Mississippi, western Tennessee, and eastern Arkansas distributors to Stribling Equipment LLC in 2007
- Eleven dealerships in Louisiana and east Texas to WL Doggett LLC in 2007
Equipment makers move into the distribution business for various reasons. One is to establish or preserve a committed outlet for its product line. As Washington said about the acquisition of Air Perfection, “This offers Quincy a dedicated channel that allows it to get its products to market that it didn’t have previously.”
Another benefit of manufacturers being involved with distribution is closer interaction with customers. In January 2008, Genie Industries, a subsidiary of Terex Aerial Work Platforms (AWP), purchased Phoenix Equipment Company, a refurbishing business in Waco, Texas. “With customers’ needs constantly evolving, the addition of these facilities to our business allows us to be a more full-service partner,” said Siva Balakrishnan, Terex AWP’s vice president and general manager for global services. “The acquisition of Phoenix Equipment stemmed from a strong business relationship with Phoenix and an increased customer need for refurbishment services. Both factors provided Terex AWP the opportunity to naturally enter the reconditioning service industry with a strong staff and solid customer base.”
Some manufacturers get involved with distribution as part of their overall business strategy. Atlas Copco Compressors acquired four distributors in Florida, North Carolina, Georgia, and Maryland in 2007 and 2008. “Our compressor division has had that [owning dealerships] as a strategy,” said Torbjorn Redaelli, president and general manager of Atlas Copco Construction Mining Technique USA.
However, Redaelli pointed out that the strategy for the compressor division, which serves a more industrial market, is different from the company’s strategy for other equipment types.
“In the mining and construction side, it’s not our strategy to acquire independent distributors. We do about 50-50, direct sales and independent distribution.”
The company-owned stores operate in certain territories, while the independent distributors operate in others, so they never compete directly. Redaelli explained that Atlas Copco inherited the combination of company-owned and independent distributors when it acquired the Ingersoll-Rand Drilling Solutions business. “We prefer, in mining and construction, to have a blend of direct sales and independent distribution,” he said. “Then you can also benchmark against each other and help each other become better at what we do.”
Even if dealer acquisition is not part of a manufacturer’s strategy, circumstances may call for exceptions.
“In the mining and construction side, it’s only been exceptionally that [Atlas Copco] has acquired distributors, mostly because it’s been specialized distributors where their succession was an issue.”
Succession could be problematic, for instance, if the founder of an independent business decided to retire, and family members or employees were not interested in assuming ownership or couldn’t afford to buy out the retiring owner.
Keeping a distribution line alive is another reason for a manufacturer to purchase an independent dealership.
“I’ve seen some [cases] where they’ve had to go in and acquire a dealer that was going to go under. There wasn’t any question that they were going to lose that dealership and that dealership wouldn’t exist,” said Brian Barlow, president and CEO of BMG (Barlow Marketing Group). “We’re seeing some of that kind of movement with some manufacturers that have no choice. It’s better to buy an existing organization and keep it alive than it is to say, ‘all right, you go under and tomorrow we’ll have to start all over again.’”
Effects on Manufacturers
A manufacturer can establish a company-owned store either by acquiring an existing distributor or by starting up a new dealership. Either approach imposes additional costs on the manufacturer.
“When you acquire a distributor, you add to your cost structure,” Redaelli said. “That’s why we, and all manufacturers, typically allow the dealer a margin. Obviously, the dealer margin is there to cover the additional costs.”
“It may be more difficult to handle the ups and downs of the market,” Redaelli added. “The rule of thumb seems to be that in an upturn, manufacturers tend to want to go more direct [sales], and in a downturn manufacturers tend to go more towards independent distribution. That’s why it’s our strategy to be 50-50. Then we’re hedged against both upturns and downturns.”
Barlow said that although some manufacturers do start new company stores, the practice is not widespread.
“Just imagine if you started a business and had to go out and find land, had to find buildings, had to deal with the tax structure. You have all of these local issues, the labor force, the sales force, everything,” Barlow said. “It is very, very time consuming but also extremely expensive [in a way] that is not typically budgeted for within a manufacturer’s scope of business.”
For example, support for customer development and training for sales and service personnel are expenses that manufacturers might overlook when planning a new dealership.
In addition to the expense, Barlow pointed out that the return on investment for establishing a new dealership is long term.
“It does require that capital be put into that distribution location for two or three years, probably not looking at a payback for at least two to five years,” he said. “That’s one of the reasons why I think most of them agree they’re better at manufacturing the product and supporting an independent network.”
Effects on Dealers
Manufacturers moving into distribution can affect dealers directly or indirectly. The effect is most direct for a dealer that is acquired. For example, a manufacturer might require different types of financial reports than those a local dealer would typically generate. How dramatic the effects are depends on the manufacturer’s operating strategy.
“Some of them will look at the management and see if they can help restructure the company a little bit but still lead it by the management group that was there,” Barlow said. “Some of them will have to come in and start with all new management.”
“I think there’s more pressure from above to make sure that that distribution group is paying off,” Barlow added. “But I don’t see them typically coming in and changing the entire way a distributor works.”
Acquisition or creation of a company-owned store may indirectly affect other independent dealers, even if they operate in noncompeting market territories. The manufacturer may have had no choice but to buy a failing dealership or open a store in a territory where it could find no other means of distribution. Regardless of the motive, however, Barlow said, “It still sets the tone in many dealers’ minds that you’re willing to go direct and set up your own operations. So, naturally, they get a little nervous that maybe someday that business model will land on their doorstep.”
“What the dealers do, then, is they start shifting their attention,” Barlow said. “They start looking at other product lines, and things they may have to do to change their business model or their approach.”
They might focus more of their efforts to selling other brands of noncompeting products, or they may even drop the acquiring manufacturer’s products and start carrying a competing line of equipment. To reassure dealers and keep them enthusiastic about a product line, it is important for the manufacturer to explain what it is doing and why, and to reassure the independent dealers that increasing acquisitions is not the company’s overall business model, Barlow said.
Effects on Customers
If the manufacturer can retain at least part of the staff of an acquired dealership, the noticeable effects to the customers will be minimal. If the store was purchased because it was financially troubled, the unseen possibility of it ceasing to exist may be eliminated without customers even realizing it. In fact, service may even improve because of the increased economic stability.
Since the manufacturer assumes the costs associated with operating a dealership, its pricing structure may change. Instead of selling equipment at a discounted price to a dealer, who then sells it to customers at a markup, the manufacturer offsets its additional costs by selling it directly to customers at a higher price than it would have charged a dealer. “So theoretically,” Redaelli said, “whether you sell through a dealer or direct doesn’t make any [cost] difference to the end user.”
Importance of Independents
Smaller manufacturers that serve niche markets, such as pavement maintenance or aggregate equipment, have a better chance of cost-effective direct sales strategies because their markets are very definable, Barlow said. Manufacturers that are not labor intensive might also be good candidates.
“It’s not like the general construction market, where there are hundreds of thousands of customers,” he said. “That’s what [independent] distribution is really good at, making sure that you have somebody there penetrating as much of the business as possible.”
So, Is There a Trend?
“There are a few manufacturers that go the opposite way, but the general trend is to work through independent distributors,” Redaelli said.
But the current economic downturn may have an impact.
“I know several manufacturers that have actually had to buy out distributors, and that was the last thing they wanted to do,” Barlow said. “If you see a real up-tick [in manufacturer-owned distribution], I think it’s because of that.”
There may be other economic consequences as well. With customers unable to buy new equipment, it is especially important to keep their existing equipment operating effectively.
“Terex AWP will continue expanding its reconditioning service offerings to customers,” Balakrishnan said. “We recognize the challenging economic environment and are committed to adjusting our priorities based on customer needs. We know it is critical for our customers’ equipment to be up, and we are establishing ourselves as a resource that can provide excellent reconditioning services at an affordable price.”
“I think, more than ever, nobody wants to change a business model right now, because there isn’t enough business to support what they’re doing today,” Barlow said. “I think it’s imperative that both the dealers as well as the manufacturers work extremely closely together. There are so few customers out there today that if they can work jointly together, they stand a lot better chance of finding those people who are buying.”
That may mean taking a new look at old assumptions and practices.
“The people who are buying today are not your mass-market contractors,” Barlow said. “They are pretty much in specific niches, and probably not who the dealer has been calling on aggressively the last five years. I think the manufacturer can find where those niches are just as well as the distributor, and then they need to go after them together.”
More than ever, in this tight economy, cooperation and collaboration are key.
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