Risk, Consolidation, and Slow Recovery – Somebody Pass Me the RolaidsBy Garry Bartecki
Article Date: 03-01-2010
Copyright(C) 2010 Associated Equipment Distributors. All Rights Reserved.
Trends came into view at Summit, and one thing is clear:
If you want business growth, you’ll have to make it yourself.
Thirty-one percent. That is the percentage of cost reduction required to compensate for every dollar of revenue lost – an interesting stat that needs investigating to see if it works for an equipment distributor. More on that later.
The “new normal” is a lot lower than the old normal.
Both of these statements are attributed to John Hoffecker, managing director of AlixPartners, who was a keynote speaker at the AED Summit in San Antonio. John made these comments as he was reviewing his firm’s Heavy Equipment Industry Study during one of AED’s general sessions. John offered up many other industry and economic comments for consideration backed up by research compiled by AlixPartners (and you know how I like stats), all of which point to a long haul before recovery in the residential and nonresidential construction markets.
Let me summarize Hoffecker’s conclusions:
And that’s the good news!
It’s going to be a long haul. 2008 levels will be five to seven years out.
Balance sheets govern in a downturn.
2010 is expected to be the same as 2009. No real recovery until 2012.
The equipment industry needs to consolidate both in terms of dealer networks and product lines.
Distributors also need to:
Maintain pricing discipline
Optimize their network
Establish regional inventory depots
Use online configuration tools
Decide if they are buyers or sellers
Create incremental profit opportunities from highest profit centers (which may not be your sales department)
This was all pretty good stuff – realistic considerations to think about, especially the buyer or seller decision, that every dealer has to make. Whew, pass me the Rolaids.
The manufacturer panel at Summit was also pretty straightforward. As you may recall, the Summit kicked off with a candid discussion among four OEM executives, moderated by Mike Marks – this group included: Ron DeFeo from Terex, Jim Hasler from CNH, Göran Lindgren from Volvo, and Jim Parker from Caterpillar.
Some of the highlights I caught from their remarks were:
1. The used equipment market defines 2010.
2. If you expect improvement in your business results you will have to produce them – because no help is on the way.
3. Consolidation is a must. (Sound familiar?)
Long-term trends I interpret from that panel:
Customers will shed risk, meaning more rental.
Customers must rebuild balance sheets, meaning more rental.
Customers have a lack of backlogs, meaning more rental.
Customers are looking for partners who can provide solutions.
When you look at this closely you conclude that both the manufacturers and analysts are pointing in the same direction.
More risk. Slow recovery. And, yes, more risk.
Now, of course, you all know that more risk calls for higher returns. Thus product support is a must. Otherwise returns can be increased by increasing pricing or reducing assets, which you can easily visualize by reviewing the AED profit-planning model.
If this doesn’t get your juices flowing I don’t know what will. You have to take control of the business and make it work. Waiting around for the recovery is not going to work. If you don’t have the desire to push ahead then maybe you are one of those sellers, because it is better to get out in one piece than to get out with nothing at all.
I will play with the 31 percent formula and report back to you next month.
By the way, you will be receiving 2010’s Cost of Doing Business template and instructions to fill in and return by May 15. Want to see how you did in 2009 against your peers? This is the way to do it. CEOs: Get your CFO to complete the survey. It will only take them 90 minutes. Have them call me with questions at 630-574-0650 ext. 323.
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