Dire Days for Distributors

Rod Sutton, Editor in Chief | September 28, 2010

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E-mail: rsutton@reedbusiness.com

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Mail: 2000 Clearwater Drive, Oak Brook, IL 60523

Name the market where 94 percent of the businesses reported sales declines last year. Yes, it's the construction-equipment distribution market.

The past decade brings Dickens to mind when considering the ups and downs of the equipment dealer. Today, equipment dealers are in a serious trough.

According to our Annual Report & Forecast, which we'll publish next month, distributors carry little expectation of a return to normalcy, at least for the immediate future. Although 43 percent say sales will increase next year, 27 percent foresee further declines.

Five business conditions have created the perfect storm that threatens distributors. Any single condition would dampen forecasts, but when all five hit at once, it is dire indeed.

  1. Declining machine sales. New machines are not moving because the construction markets are not moving. The used market is hot, but much of the iron moving through auction houses is from distributor and rental fleets. There's no indication that trend is abating.
  2. Recession. Toby Mack, president and CEO of AED, says, "While the broader economy may have begun to recover from the great recession, our industry is still in a depression." Our industry faces high unemployment, and industry analysts fear it will continue to rise.
  3. Tight credit. Equipment distribution is a highly capitalized game to play. Unsold inventory eats up capital, leveraged dealerships find it harder to borrow, and equipment buyers find similar credit problems constrain their purchasing plans.
  4. Poor margins. Prices follow demand, and they are heading south. Although 20 percent of distributors said they were able to maintain margins this year, 31 percent said margins were "much lower" than in 2008. Only so much overhead can be cut before declining prices eat up slim dealer margins.
  5. Declining construction markets. Markets are not forecast to rebound until late 2010. No projects, no machines at work, no new machines needed.

We've generated a lot of conversation with this topic at our Big Iron blog.