2011 Business Outlook - Toiling Toward Better TimesBy Kim Phelan
Article Date: 01-01-2011
Copyright(C) 2011 Associated Equipment Distributors. All Rights Reserved.
Dealers keep a firm hand on the wheel, but wish that Washington would get a clue.
There's plenty of kick left among construction equipment dealers despite numerous challenges that await the construction industry as a whole in the year ahead. CED magazine's year-end Business Outlook survey confirmed that most member respondents finished 2010 with increased total revenue results and better gross revenues and margins in every facet of their businesses compared to 2009.
They're also widely optimistic that 2011 holds increases above 2010, especially on the rental and product support sides – new equipment sales, dealers seem to have accepted, are no longer the driving force of the dealership and may not return to that position in the foreseeable future. Moving more into the driver's seat, some report, is the product support department.
"If sales is running the company or is the main focus, that's backwards," said Dan Moore, president of RW Moore Co., a John Deere dealer whose territory is southeastern North Carolina. "Sales should be there to support the product support process – if you're going to be in business long term, you've got to have a strong solid foundation that supports the business in good times and bad."
Winners Aren't Whiners
There's a great deal about which to be concerned as 2011 begins, but we get a sense from our survey, as well as telephone interviews and other conversations, that dealers are actually making some money out there – in some cases it's due to some bumped up market activity; for many, however, it's more attributable to taking appropriate action in their operations to remain profitable despite demand, and not because of it.
"There's no silver bullet – everyone is gun shy. The world is going to be a more conservative place," said Larry Glynn, an AED Board Officer and owner CMW Equipment, a road and paving machinery dealer based in St. Louis. "I think I'm going to do good in 2011, but it will be better because I'm in a better position," he said, with regards to operational controls.
Some have also resolved that winners are not whiners.
"If you want the business, go get it – it is there," wrote one dealer. "If you want an excuse, blame the president; it's the fashionable thing to do. Someone else will eat your lunch and take your customers while you gripe. Invest in your company for the long term or quit before you are broke."
Key findings from the November 2010 survey include these additional insights about dealer sentiment as they stood near the threshold of 2011.
It's no surprise that the Top 5 issues that dealers are concerned about, in terms of adverse impact on their companies in 2011, included: (1.) Overall economy; (2.) Long-term weak housing market; (3.) Credit; (4.) Federal highway funding; and (5.) Federal tax, energy and business policy. Additional noteworthy areas of dealer anxiety are: health care for employees, Tier-4 issues, stability of primary manufacturers and availability of qualified service technicians.
For 2011 expected gross revenues – 62% anticipate an increase, 30% flat, and 5.6% expect decrease on new equipment sales; for used equipment the split is 56.6% looking for increase, 33.9% flat, and 3.7% decrease; on rental it goes 66% for increase, 36.4% flat, and 1.8% decrease; for parts sales, 71% expect increase, 24% expect flat, and 1.8% say decrease; and on service sales for 2011, 75% expect increase, 20% flat, and 1.8% decrease
For 2011 new equipment investments – 39% expect to increase 1-10% more, 25% say they'll invest 11-21% more, 23.5% will remain flat to 2010, 1.9% will decrease 1-10%; 3.9% will decrease 11-25%; and 1.9% will decrease their 2011 new equipment investment by more than 50%
For 2011 rental fleet investments – 16% of respondents will increase 1-5%; 28% said they'll increase 6-10%; 16% expect to increase by more than 10%; 22% will hold rental fleet investment flat; 8% expect to decrease 1-10%; 2% say they'll decrease 11-25%; another 2% say they'll decrease 26-50%; and 2% plan to reduce rental fleet investment by more than 50% this year
Excess inventory is far less a problem going into 2011 – 58% said they had less excess compared to the same time in 2009; and another 20% simply said that excess inventory was not a problem. To shed excess inventory during 2010, 72% said they sold equipment through their own used equipment departments; just 10% of respondents indicated they had sold through auction
Workforce numbers varied for dealers in 2010 – 42% said they made no workforce changes; 22% increased new staff; and 34% said they had to lay off employees last year
By and large, respondents did not open locations or make acquisitions in 2010 – 93.8% didn't open a new branch, and 93.8% did not acquire another company in 2010. Fortunately, 81.6% also indicated they did not close any branches last year, and 93.8% do not expect to have to close any locations in 2011. In addition, 83.6% told CED they are not considering selling their dealership in 2011.
Other Evidence and Points of View
Our survey doesn't stand alone as a barometer of cautious optimism among dealers. The 3Q10 Global Construction Dealer Survey Results published by Bank of America Merrill Lynch demonstrated some similar conclusions. The researchers interviewed 135 dealers representing Bobcat, Caterpillar, CNH, Deere, JCB, Komatsu, Liebherr, Terex and Volvo brands. "Sentiment in N.A. has accelerated this quarter, particularly when looking ahead to demand over the next 12 months," the report stated. "The results show that overall, dealers expect demand to continue recovering from low levels and improve. 37% of dealers expect flat growth in the upcoming year (compared to 29% expecting flat growth for 2010 in 2Q10), 52% of dealers expect stronger demand for the upcoming year (vs. 45% in 2Q10), and 10% now expect construction equipment demand to be weaker (vs. 27% in the prior quarter."
The BofA Merrill Lynch research reflected positive signs on dealer purchasing plans over the next six months, with the majority expecting flat to stronger purchasing. Analysts stated that Caterpillar and Volvo dealers gave the most positive indications on this projection, and Case and JCB dealers "presented the most bearish results."
For rental, the BofA Merrill Lynch survey summed up North American dealer sentiment about rental as well – rental activity in the third quarter was characterized as respectable, but rates were still low. The feeling overall was that as customers continue to lack "visibility into future projects…[they] will continue to use rental equipment."
Customer confidence is certainly something preying upon dealers' minds. And there's a direct correlation between the absence of equipment buyers' confidence, dealers say, and the turmoil the industry observes in the nation's capital. "Customers remain very uncertain about 2011 and are unwilling to commit to taking on any additional debt," was the bleak statement from an anonymous CED dealer survey respondent, which was echoed more than once.
"Nobody wants to make any kind of commitment when you literally don't have a clue what's coming out of Washington minute by minute," said Moore.
As a result of the uncertainty concerning federal policy, including infrastructure funding, Moore agrees that rental will continue to do well. "We're up about 200 percent for rentals, so rental is already having a big effect and I expect that to increase in 2011," Moore told CED in December. "We expect rentals to get stronger – everybody's balance sheet is impaired, and rental is a way to use my balance sheet to do their jobs. Now whether that translates into machine sales later in the year – I don't know."
At Roland Machinery in Illinois, Chairman Ray Roland reported that his Komatsu dealership experienced unexpectedly higher-than-budgeted results in November as a sizeable number of machine rentals were converted into purchases. The company had seen rentals fall alongside the decline of equipment sales in '09, but Roland says he anticipates a good rental year in 2011.
As far as the doings of Capitol Hill and the White House go: "What I anticipate we're going to have is gridlock," Roland said. "And gridlock might not get anything done, but it might slow down some of the social programs I don't agree with." As if on cue with that remark, Moore added, "The best political system we could have is gridlock – if they don't do anything and just leave us alone, we can go back to work…They're going to sit and squabble and complain at each other for the next two years, and that's probably the best thing we do for this country right now," he said, laughing.
Writing in comments with his completed CED survey, mixed-line dealer Jamie Cowin, owner of Cowin Equipment Co., Birmingham, Ala., said: "The economy is healing, albeit slowly. It is absolutely critical that a highway bill gets reauthorized soon. AED needs to work with the Republicans on this! Our normal friends are the party that is most obstructionist on this issue. We also need to impress upon new ‘Tea Party' [politicians] that dollars spent on infrastructure are not a waste! They create jobs."
Adding to that call for help, dealers from the Western portions of the U.S. chorused that business conditions are horrific, a fact that was well documented throughout 2010. Rampant unemployment, failing businesses, state government deficits, onerous regulations, and a continued arid credit landscape for the construction industry all plague California and Nevada, in particular. Of course, many of those problems can also still be found in states all over the country.
Don't Do Stupid Deals
Dealers we spoke with talk of hard and expensive lessons that have come with the far-from-ordinary recession, from which the U.S. is still trying recover. When things were well on their way south in 2009, Glynn at CMW Equipment recalls thinking it was just a temporary situation, business as usual, and he didn't take any special corrective action other than "cranking down expenses wherever we could," he said.
One of the scars he incurred from '09 was extending credit to customers who wound up defaulting.
"I've been very cautious in 2010 about making sure that whoever's buying from me can pay for what they're buying," Glynn said. "A big portion of my loss in 2009 was writing off bad debt, and I've been very, very cautious on my credit end of things to make sure I didn't get burned again this year. I tightened down my credit so people deserved the credit they were getting – I got paid on every project and did not do stupid deals."
About the Survey Respondents
(Totals are rounded and do not reflect percentages of those who did not provide an answer.)
Size of company in annual revenues: 30.6% $10 million to < $25 million; 20.4 % $25 million to < $50 million; 16.3% $5 million to < $10 million; 12% $50 million to < $100 million; 12% $100 million plus; 6% under $5 million
Number of employees: 28.6% 51-100; 20% 100-300; 20% 25-50; 18% 11-25; 6% more than 300; 4% 10 or fewer
Type of dealership by inventory sold: 50% majority of equipment sold is 100 hp plus; 38% majority of equipment sold is less than 100 hp; 6% majority of annual revenue from equipment rental; 4% specialized equipment dealer
Regional location of company headquarters: 25% Upper Midwest; 25% Northeast; 16% Southeast; 12% West; 10% South Central; 8% Rocky Mountain; 4% Canada (west of Ontario)
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