Despite a strong farm economy and robust equipment sales in most areas, there seems to be a growing used equipment problem causing concern. Some dealers see it as inevitable.
Not that long ago, used equipment problems arose when dealers traded in bad equipment that sat on their lots, sometimes for years. This came mainly from salespeople who bought equipment at inflated prices with little or no prospect of reselling it.
I called this "astronaut equipment" because it took up space; dealers called it "lot rot." Some were old or in poor condition. This equipment often ended up on the auction block. This problem seems almost benign when compared to the used problem today.
Today’s problem. Today, the problem is not "astronaut equipment." It is the almost-new piece the farmer trades in on a new one. Large tractors fall into this category, although the biggest
headache seems to be combines. These trades are not in poor condition, and many are only a year old. They are the result of roll programs where the original owner rolls into a new piece every year or every two years. Several factors contribute to this:
1. Manufacturer pressure to grow market share by selling new equipment. To do this, dealers must take trades.
2. The price paid for the trade. Dealers often have to pay a premium price because of pressure from the manufacturer, as well as competition.
3. The price of new equipment. In their zeal to gain market share, manufacturers provide generous programs on new equipment. They make it more economically advantageous for the farmer to roll from trade into new, shrinking the price difference between the two. Farmers who would normally buy used can get a new piece for almost the same amount with the new warranty.
4. Growth of a dealer’s stake in the trade, limiting the ability to make a reasonable profit.
5. The shrinking tertiary market. More farmers prefer to buy new, and can afford to do so. Those who do buy that first trade will also trade in something. Finding a market for this tertiary trade is becoming more and more difficult as this market shrinks.
Thin margins and short on time. Dealer margins are thin and under pressure to fall further. The marketplace, along with competition and the manufacturer, contribute to the problem.
Manufacturers are tying dealer incentives to market share, which is measured by the sale of new, not used, equipment. One mistake in the trade chain can wipe out profit for that dealer or reduce washout margins drastically.
Dealers and salespeople need to become better at evaluating trades, more conscious about finding a home for it before they take it, and more proficient at identifying and growing their used markets in a profitable way.
While there is no simple answer, two things have to occur for the used problem to disappear—buy it right, and have a home for it before you trade.
A dealer recently told me that his company’s website that morning showed seven combines for sale, but he knew they had several more on their lots. The salespeople told him they had not yet taken photos because the equipment had not yet been cleaned. Also, the web person had not yet received information on the other trades. Many dealers neglect simple things they can and should control. They have all kinds of excuses—most commonly, lack of time.
Something else that often comes up is that many times, a salesperson makes a mistake when evaluating the trade, estimating the cost of reconditioning or both. This is something that has to be addressed. When dealing in hundreds of thousands of dollars, it is inexcusable to evaluate and estimate like amateurs.
One time, a salesperson told me he looks at every customer as a potential roll candidate—not for new but for used. He wants to develop the rest of the dominos. Smart fella! But it is probably easier said than done.
The answer? If manufacturers would suspend incentive programs on new equipment for two to three years, it would help dealers move trades at a profit. This is not likely to happen, however. And even if it did, it would only be a matter of time before we were back in the same situation.
The answer is to look realistically at the situation and identify a way to make money within those parameters. Do what got you there in the first place—be smarter business people.
Frank Lee is an author and sales trainer who specializes in the ag equipment industry. You can subscribe to his free monthly Ezine for Managers, a newsletter sent via e-mail. To receive it, e-mail firstname.lastname@example.org and put "subscribe" in the subject line.