Losing a dealership chain creates distance between manufacturer and customer. As farmers get more sophisticated, the companies are exploring new strategies to bridge that divide
“Claas to open corporate dealership chain,” the headline above the brief news item said in a European farm magazine this spring. But beneath that simple announcement lay a difficult marketing decision with broad implications for Claas and the farmers who run its machinery.
Reportedly, an independent 19-store dealer network in northern Germany had suddenly discontinued its relationship with the farm equipment manufacturer. In response Claas revealed it would establish its own chain of 14 corporate stores to service the region.
For Claas, it was a case of deja vu. In North America, it had recently experienced a similar situation. A Caterpillar dealer chain that had retailed the company’s Lexion combines dropped out of the ag equipment business leaving Claas unrepresented in Nebraska, a major market area for its combines and the heartland of its North American presence (its corporate headquarters and combine assembly plant are in Omaha). In response, the German company again took over retailing in that area with its own multi-store outlet.
“We didn’t want to leave anyone without good service,” explains John Schofield, Claas North
America’s marketing co-ordinator. “We decided to buy out the dealerships Cat was getting out of. It wasn’t necessarily part of a large focus to start buying out dealerships as much as it was to support good customers. As it turns out, we’ve done really well with it.”
Claas has done so well, in fact, its number of Nebraska locations is set to grow. “We have three outlets and we have plans for a fourth,” confirms Schofield.
Yet the Claas experience also raises a question. In today’s multi-outlet dealership environment, what options does a manufacturer have if it suddenly ends a relationship with a retail chain?
It’s a problem that could leave a very large geographic area without any product support for farmers who already own that brand’s machines, not to mention a lot of lost sales.
If an independent dealer can’t be found quickly to take on a brand, could the best alternative be for the manufacturer to set up its own dealership chain to cover a regional marketing gap in the short term, particularly if it requires building up an entirely new group of stores?
“I’m reluctant to say it’s the best answer,” says Robert Currie, president of Massachusetts-based Currie Management Consultants Inc., whose firm regularly helps manufacturers and independent dealers grapple with all types of distribution dilemas. “It isan answer. One of the others is that they buy another private distribution organization (dealer network) that’s representing Brand X. They kick out Brand X and put their own brand in. That gives them instant coverage,” Currie says. The trouble with creating their own distribution organization is it takes a little bit of time. It’s a classic make-or-buy decision.”
But if a company can’t purchase an existing dealer network to convert, building one from the ground up becomes just about the only alternative to abandoning a territory — at least temporarily.
“I can tell you,” says Currie, “from our experience there is nothing more difficult than going into a green field organization, starting from scratch, getting a phone number, getting a building, hiring people. It takes a lot of strong management. It takes capital. It takes time. In the end, though, you may end up with an organization that better meets your distribution needs.”
Today, there is also a new factor emerging that could add additional value to manufacturer-owned dealerships. As farm consolidation continues, a few industry observers suggest there are a growing number of commercial farming operations in Canada and the U.S. whose equipment needs might be best served by dealing directly with manufacturers. But so far few of the majors seem willing to seriously tackle the retail end of their businesses.
“It’s not axiomatic that manufacturers can’t run their own distribution (over the long term),” says Currie. Still, he believes ag equipment manufacturers need first to clearly understand who their customers are before deciding how they can provide buyers with the kind of service they need and what retail model does that best.
“The centrepiece of business strategy, to a great degree, is profiling your business’s customer,” Currie explains. “What does our target customer look like and how do we get those target customers?”
“There are roughly 2.2 million farmers,” Currie adds, “57,000 of the 2.2 million account for 60 per cent of (overall) farm income. So one of the first questions that gets raised with the manufacturer is, do you see your future in the 57,000 large (A level) farmers, or do you see your future as partly there in the large producer but also in the 2.2 million B, C and D level farmers?”
Manufacturers need to establish that before deciding if there is an advantage to one long-term retail model over another. But even settling that question won’t provide a clear-cut answer as to whether or not a manufacturer-owned outlet can outperform an independent. In the end, meeting the customers’ needs is still the key.
“I don’t know that there’s an inherent advantage in the entrepreneur or in the company-owned operation,” Currie says. “The (real) advantage is in high-quality management and operational excellence.”
That excellence could come from either model.
“Now we get into a scale issue,” Currie says. “A large company might be able to run a $100-million dealer or multi-location dealership where they were unsuccessful running a $6- or $8-million location. But by the same token, the $6- or $8-million entrepreneur may die in a $100-million operation. So I don’t think there’s a clear answer that all company-owned operations don’t prosper, because I know a bunch of them in a lot of different industries that do. And I know a whole group of them that don’t.”
The difference between success and failure for a manufacturer-owned outlet lies in what goals it’s trying to achieve and how it goes about it.
“In a couple of cases I know of, distribution (dealerships) reports to the financial vice-president, not to the sales department,” Currie says. “That sends a clear message to company-owned distribution: your job is to make profit, create cash flow, act as a dealer and primarily to perform. When they report to a sales department, their function may be to increase sales — or create the appearance of increasing sales by taking on more inventory. So there are a number of factors that yield a high-performing manufacturer-owned distribution organization. And those factors aren’t any different than a good privately owned dealership.”
But as a short-term solution to filling a temporary dealership gap, the reasons a manufacturer may want to consider establishing its own stores remain unique.
Not moving in to cover the sudden loss of distribution through a local dealership chain would stifle new equipment sales there in the short term. However, manufacturers need to assess whether that temporary loss of revenue is enough to offset the investment needed to establish a corporate dealership. The right answer for each firm will often be different, depending on a wide variety of factors. In some cases, simply allowing the gap to remain until an independent retailer steps forward to pick up the slack may actually be the best and least costly option.
“The fact is, life goes on,” says Currie. “We may end up with less (sales) volume in the short term. But we’re able to figure out who the customers are. We’re able to go out and make contact with those customers. In the end, we just have to be disciplined about running the business correctly. We can’t just try stuff.”
– Scott Garvey is machinery editor for Country Guide. This article appeared in the August 2013 edition. Scott can be followed @machineryeditor on Twitter.