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December 2017
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Aftermarket: I do not understand!
By John R. Walker

For over 50 years I have been working with equipment dealers in the various industries of farming, construction, industrial, outdoor power, heavy duty trucks, golf and turf, material handling and the lift truck industry. These dealers run from $500,000 in sales to over $250 million in sales. For the most part, equipment dealers are the salt of the earth; independent business men imbued with thoughts of building an independent business, hiring and growing the business in a particular community. Most all started off living the American dream, focused upon the idea of making a profit by servicing their customers. We have seen and worked with dealers from mediocre to what we refer to as “world-class dealerships.” Equipment dealers are the “true” customers of all these manufacturers and suppliers that they represent. They are dealers who fulfill the challenge of marketing product and/or the tools to their customers to keep our economy productive.

Last month these industries saw the passing of an icon. Ed Walsh was the original consultant and trainer to the equipment dealers of North America. Ed was a friend and close associate. In his later years I had several opportunities to discuss with Ed some of his business frustrations and his contributions to equipment dealers and manufacturers. Several days following his death I picked up his book, which was a compilation of the articles he had written. I once again recognized that some of Ed’s frustrations about equipment dealers were identical to mine, and quite frankly those I have been attempting to deal with over the past four years. Thanks Ed, not only for the help you were to me, but all of the help you gave the dealers who used your services over the years.

I do not understand! Every dealer I have asked as to why they were in business has basically replied: “For the profit we make in moving the equipment from the suppliers we represent to our customers.” This is a noble comment on the part of dealers. But as with everything in a global economy, we have faced dramatic changes over the past 50 years. More and more competitors have moved into our markets, and many of our products have become commodities. There is also no denying most of the manufacturers and suppliers are continuing to demand more and more “market-share.” As this pressure mounts, we see margins declining steadily, to the point where many dealers are seeing equipment margins running in the low, single digits. When this happens, you see more and more dealers throwing up their hands wanting to get out. But then the question becomes: How do you sell a multi-million dollar business that is netting two percent to three percent before taxes? Add to this the fact most manufacturers are not offering relief in this area. In fact, their National Account programs continue to add pressure for dealers to maintain an acceptable profit.

I do not understand why most dealers are missing the answer. It does not take a business degree from a major business college. It takes four or five minutes reviewing your own financial statement and noting the following: 1. Which profit center currently provides your dealership with the highest gross profits and, 2. Which profit center currently provides your dealership with the lowest contribution to total sales? Generally the answer to both these questions is the Service Department.

In the early 1980s Stu MacKay pointed out to both equipment dealers and to the manufacturers of equipment that the customers were basically telling the industry no one is asking the customer for the service business after the sale. In a couple of weeks we will be working with an equipment dealer (farm) who has total sales of $40 million, and his service sales produce a 76.5 percent gross margin. All is well until you discover his service contribution to the dealership’s total sales is an anemic 5.7 percent! It will be our intention before we leave this dealer to show him just how, and what steps he must take, to reach the average service sales contribution within his industry: 7.3 percent. Reaching the average service sales contribution will produce an additional gross profit of dollars in service of $577,585. Remember the movie Tom Cruise stared in? Show them the money! This is exactly what you can do for yourself by analyzing and focusing upon your service profit opportunity!

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