Manufacturers and Dealers will have to make hard decisions in 2024
December has arrived and as we close the books on another great year, there is again uncertainty for what is to come in 2024. At the end of last year, I wrote that most likely your business strategies for 2023 might have included contemplating aspects such as consolidation and engaging in merger and acquisition endeavors as this was indeed a noteworthy trend highlighted by MHEDA for 2023. The growing significance of business valuation and succession planning, particularly as business owners weigh retirement options with consolidation remains a prevalent theme. The delicate balance between the manufacturer and dealer relationship remains relevant as our industry experiences a surge in mergers and acquisitions among forklift dealerships.
Consolidation of dealers and rental companies purchasing dealers looking to quickly acquire equipment has led to manufacturers on a quest looking for new dealers to grow in different markets or shifting to factory stores. This will continue to be a challenge for leaders of both dealer and manufacturers in the pursuit of growth in the coming year.
This is one reason why there is uncertainty for what 2024 will bring. Another dynamic currently going on is that dealers are mostly flush with inventory of new equipment. The manufacturers want to know what the dealer’s plan is for the coming year as it relates to their new equipment orders. The manufacturers want more orders to keep the factory floor busy but the interest rates of the inventory currently on the dealer floor plan are high. Increased depreciation expense of those assets is certainly impacting dealer’s profitability. Dealers must practice careful financial management to optimize profitability while accounting for all of these factors. That fine line between the dealer and manufacturer relationship becomes delicate as noted, especially as new equipment pricing is beginning to come down on new orders and manufacturers are catching up with recent demand. In many cases the price of a new forklift today from the factory is less than the purchase price of the forklift the dealer purchased that is currently sitting in inventory at their dealership.
If you keep up with MHEDA’s Material Handling Business Trends, one of the trends that has been noted for 2024 states, “There is a correlation occurring as it relates to forklift inventory. Orders are declining, used equipment pricing and rental utilization are decreasing and there are increased requirements to order new equipment. This is placing pressure on the forklift distributor and cash flow.”
Dealer truck inventory levels are at an all-time high with more on order. This combined with the drop in the market is a ‘perfect storm’ leading to the end result of the manufacturer (factory) not receiving many new orders. Simultaneously, the factory inventory levels continue to rise as well, albeit varying based on specific models, as the supply chain has normalized, and the manufacturers are catching up with previous demand. The factory is finally shipping the new truck orders that have been previously sitting on extended lead times. Therefore, dealers are placing less ‘fill the pipeline’ orders’, until they have clear visibility of what they will sell from the inventory they have now and into 2024. The dealer discounting has already begun.
New truck inventory at a factory store (manufacturer owned dealer) is also interesting to note. The factory controls the distribution and the orders placed for inventory are kept on the floor of the factory store. The rise of the factory store model has been a result of independent dealer owners not having a succession plan in place, coupled with the manufacturer not able to find a suitable buyer to buy said dealership, so the manufacturer buys the dealer and converts it to a factory store. This leads to the question of what will it look like 5-10 years from now as the manufacturer continues to consolidate and buy up independent dealers and continues to have increased new truck inventory levels at their factory owned stores while there is a lessened end-customer demand? Do the factory stores have the proper controls in place to manage these inventory fluctuations? Interesting indeed.
The recent decline of consumer spending certainly has an impact on the demand for new truck orders. Consumer spending makes up about 70% of the U.S. GDP according to the National Retail Federation. In one of their recent economic reviews, it was noted by NRF Chief Economist, Jack Kelinhenz, “There are ongoing economic challenges and questions, and the pace of consumer spending growth is becoming incrementally slower.” He goes on to state, “Consumers are still spending but are under financial pressure and have been adjusting how much they buy while also shifting from goods to services, while job and wage gains have counterbalanced inflation, the stockpile of savings accumulated during the pandemic is dwindling and is no longer providing as much spending power as previously available.” Less retail goods being purchased by consumers certainly creates a domino effect on our industry as it impacts the demand for new lift truck orders.
Some of the same economic challenges and inventory gluts that the dealer and manufacturer are facing are also true to the end-customer. Wages are high, their customers are reaching their threshold for cost increases, and capital is expensive. Consequently, the end-customers are resorting to traditional cost management tools. Such cost management tactics they are practicing include delaying capital expenditures (i.e., new forklifts) and renegotiating prices with their suppliers (dealers) all which impact the demand for new lift trucks.
The pricing on the used equipment market is beginning to soften and more used equipment will hit the market for sale. As noted, the manufacturers have caught up with recent demand, new truck shipments are up significantly. The shipment of these new trucks replacing older trucks or trucks coming off lease, causes an increase in used equipment inventory for the dealer. When a dealer has excess used equipment inventory of a specific type of truck, this leads to a reduced market sale price.
When lead times on new trucks were at record levels and dealers were forced to maintain their customer’s forklifts well past the traditional life of the lease, the effect was an increase in service and replacement parts for that forklift. During this same time, the OEMs were facing supply shortage of their replacement parts and consumables offering (i.e. oils, fluids). With this variability in the supply chain, dealers were forced to invest more cash into their parts inventory with ‘fear buying’, buying more than needed in fear they wouldn’t know when they’d be able to get more, or search for alternative suppliers. The delicate line between the manufacturer and the dealer is now forecasting goals for the dealer as it pertains to the purchase of genuine parts and consumables from their manufacturer. Subsequently, the manufacturer has also caught up with demand and now flushed with inventory as the supply chain has normalized.
Dealers remain the crucial link between the manufacturer and the end customer, serving as indispensable intermediaries who facilitate connecting the manufacturer’s products and the end customer. As supply chain stress diminishes into 2024, barring disruptors, and this period of slowdown in the demand for new equipment persists for 2024, the dealer and manufacturer must collaborate and support one another while capitalizing on their strengths to meet the needs of the end customer.
About the Author:
Chris Aiello is the Business Development Manager at TVH Parts Co. He has been in the equipment business for 16-plus years as a service manager, quality assurance manager, and business development manager. Chris now manages a national outside sales team selling replacement parts and accessories in various equipment markets such as material handling, equipment rental, and construction/earthmoving dealerships.