Issue link: http://read.dmtmag.com/i/205815
Margins MHEDA dealers had a surplus profit from parts, service and rental, covering 103.4 percent of expenses, while AED high-profit dealers had an absorption rate of 83.6 percent. The AED dealer's heavy reliance on new equipment sales also stands out. While the median MHEDA dealer relies on new sales to deliver 41.7 percent of revenue, both the highprofit and median AED dealer rely on new equipment sales for nearly 70 percent of revenue. Marks contends that a "myopic focus on market share" by the industry suppliers places significant roadblocks in the path of dealer profitability. In his presentation, he also identified and discussed four behaviors of high-performance dealers that are different from accepted industry practice. Marks cautions that best practices gleaned from interviews should not be intended to be definitive sets of action to follow, but simply observations based on his conversations with high-profit dealers and industry investors. Four Behaviors of Highly (1.) Professional Management versus Lifestyle or Entrepreneurially Led. Many industries are dominated by lifestyle businesses and entrepreneurs. "Owners are not particularly concerned with underperformance, as long as suppliers are not particularly unhappy," explained Marks. Contrast this with a professionally managed organization where growth needs to exceed GDP with a 20 percent return on invested capital. The professionally managed dealership differs in its disciplined approach to risk. According to Marks, professionally managed companies typically have a formal annual planning cycle and use 12-month trailing data sets to understand trends. They believe in ongoing training and participate in Dealer 20 groups. In addition, they routinely receive performance feedback that allows them to take corrective action. "They pay attention to the detail," said Marks. "Doing 138 things right every day." (2.) Full Participation in All Available Revenue Streams. According to Marks, highly profitable dealers don't have the same dependence on new equipment sales as dealers suffering from profitability plight. Rental, used equipment and service are sovereign departments and are not subordinate to sales. Rental fleets are managed by metrics such as age, utilization and average rental rates, with each piece of equipment operating as its own profit center. In high-profit dealerships rental fleets are managed by fleet managers, not sales people. "Rental is not an optional business for an AED dealer if their customers rent equipment from others," advised Marks. Marks reports that in high-profit dealerships product support sales reps often produce more profit than new machine sales reps. He encourages dealers to be "equipment solutions guys" rather than a salesperson walking in with products and services. "Recognize that customers sometimes may want to rent or buy used," added Marks. Panelists Duane Wilder, former president of Liebherr Construction, and Chris Wilmot, chairman, Groff Tractor, concurred that a full, multipronged approach to revenue generation is essential to drive profitability. "The good dealers find a way to participate in all the revenue streams," said Wilder. "You can't do it just on new machine margin. You can't do it by being out of the used equipment business. You have to be in the parts and service business. If you get a good piece of all of that, then it's a pretty decent value proposition. If you are not participating in all of them, it's a challenge." "One of the inherent problems in looking at the distribution side, is we have a low consolidated margin rate of 18-23 percent in this business," added Wilmot. "Generally for a business, that's a low margin. There are some higher margin segments – service, parts – [but] they are generally smaller portions of our business. New equipment is an 8- to 10-percent business. Used equipment MHEDA was chosen due to its asset similarity to AED MHEDA versus AED – 2012 Results Factor Median Performers MHEDA AED 5 High Profit Performers MHEDA AED Report Formats Are Very Different Reflecting Strong Industry Biases Firm Revenue ($millions) $28.6M Return On Assets 7.9% Return On Sales 3.6% $47.5M $28.6M** $47.1M 4.9% 16.9 12.2% 3.5% 6.2% 7.6% Absorption Rate* 91.5% 70.7% 103.4% 83.6% Revenue Share – New 41.7% 68.1% 41.7%** 67.4% Revenue Share - Parts 20.6% 22.3% 20.6%** 20.2% Revenue Share - Service 19.2% 8.6% 19.2%** 8.5% Revenue Share - Rental 11.3% 1.0% 11.3%** 3.9% *Total Aftermarket Gross Profit $ (Parts, Service and Rental) / Total Dealership Expenses $ = Absorption rate ** Not broken out – but similar WWW.IRCG.COM INDIAN RIVER CONSULTING GROUP (continued on page 30) November 2013 | Construction Equipment Distribution | www.cedmag.com | 27