Management consultant, author and educator Peter Drucker is credited with saying, “What gets measured gets managed.” In his recent webinar, KPIs, OEM Goals or Winging It — What’s Best for Your Dealership, Marc Johnson, market champion for equipment dealerships and distribution at Pinion offered advice on measuring what matters in an ag equipment dealership.
“What are the things that we ought to be measuring and how can we measure those — that's how we have to manage our business going forward,” he says. “Because as you can see over the last few years, winging it might’ve actually worked. I don’t think any of us projected that we’d have the kind of growth that we had, and it happened anyway.”
When reviewing dealership revenue categories over the last 5 years, Johnson says it doesn’t matter the category — new equipment, used equipment, parts or service — all of them “just grew like crazy over the last several years.” Margins also consistently grew since 2019, with the exception of used equipment margins, which did dip in 2020.
“It wasn’t until the mid part of 2020 when we found out, holy cow, people are buying the heck out of our equipment,” he says. “We don't have enough left. That’s when margins really shot through the roof from mid 2020 to now frankly, and those margins have been great during that timeframe. Our service margin also continued to go up, as did our parts margin.”
Johnson offered insight into a variety of KPIs that are appropriate for ag equipment dealerships. You can get in-depth overviews of each by watching the full webinar here. A few of the KPIs Johnson shared are summarized below.
Monitoring Sales Mix
Johnson says that sales mix is something that many dealers tend not to look at very closely. However, when comparing one dealer to another — or even one dealer to itself from a different time period — it is an important key performance indicator (KPI).
For example, Johnson says that looking at the average sales mix of Pinion’s dealer clients over the past 5 years — comparing the mix of wholegoods (new and used equipment) to aftermarket (parts and service) — aftermarket dropped from about 26% of sales in 2018 to 20% as of the end of September 2023.
“As the price of that equipment went up, it’s not like my parts and service sales went down,” he says. “My parts and service sales still went up.”
Johnson adds that the 5-6% may not seem like a big a deal when one considers that, if starting a dealership from scratch, traditional best practice goals are having 30% aftermarket sales and 70% wholegoods sales.
“You might ask, what's the big deal?” he says. “Growth is growth, right? And market share is king anyway, right? We just have to keep selling more wholegoods, particularly new wholegoods, so that we can make the profits we need to make and sell the equipment our manufacturers are asking us to.”
However, sales mix does matter, Johnson says, because of the gross margins associated with different categories of products.
“If your sales mix is 70% wholegoods and your neighbor’s is 30% wholegoods, we can't really look at your profit and compare it to each other, because as my wholegoods goes up and my service mix goes down on my aftermarket, I'm essentially trading what generally averages 42% gross profit on my aftermarket to 4.5% on my wholegoods market.” Thus, Johnson says, the aforementioned decline of 6% is significant because it represents dollars typically sold at a 42% margin being applied instead to sales at only a 4.5% margin.
According to Johnson, he and his team had a revelation regarding expenses and analyzing them as a KPI.
“For the longest time, we always looked at the denominator of our expense analysis as always sales,” he says. “I don't think anybody's different. Everything was expenses as a percent of sales, whether we were looking at fixed or variable, it didn't matter.”
Johnson says that big dealers were always aiming for a range of 10-11% of gross sales for fixed expenses, which for dealerships are general and administrative expenses that are not tied back to revenue. Smaller dealers, by comparison, were focused on a range of 14-16%.
With sales growing dramatically since 2019, however, that approach always made it seem as if expenses were going down. “What happened in 2020-2022 is that number, that 10-11% number, just kept going down,” he says.
The challenge, Johnson says, was determining whether expenses were truly declining. “When I looked at my expenses as a percent of revenue, it wasn't increasing as much as my revenue,” he says. “We knew it wasn't terrible, but we were just wondering where did it land? Did it actually go down or not?”
The traditional expense analysis involved looking at the dealer’s income statement, which could be 14-15 pages long if the dealer has a different category for everything, and grouping expenses into some fairly large, common buckets, regardless of whether they were fixed or variable costs. Looking at dealer expense data for the last 5 years, he says while many of the buckets didn’t change much, overall dealer expenses did decline a full 2.5%.
Looking at specific buckets, one of the largest of which was labor expense, revealed the shortcomings with this approach.
“It actually went down, as well, 3.21% down to 2.38%,” he says. “That's how you know your revenue is growing a lot — when it says that we're spending less on labor now than we were a few years ago. Everybody knows that's not the case.”
The better analysis, Johnson says, is separating fixed and variable expenses and analyzing each as a percentage of gross profit. That removes the enormous increases in sales over the past several years and sees what happened to expenses.
According to Johnson, removing the effect of dramatic sales increases revealed that “from our dealers on average, that [expenses] has still gone down.”
He found that fixed expense as a percent of margin is 65.57% as of the end of September 2023, which is down from about 67.8% the year before and down significantly from what he describes as the first good year of 2019, when it was 79.87%. This reveals a pattern that he doesn’t believe is sustainable moving forward.
“Your rent and utilities have gone up, everything has gone up,” he says. “It's kind of the theory of everything. Everything has gone up. So to think we're going to manage for the next 5 years at this 65% as a percent of gross profit as our goal is probably not realistic. Somewhere back at that 79.87% or somewhere between that and the 65% where we're at now is probably more realistic. Our sales probably aren't going to go backward.”
Refocusing on Used Inventory
In recent years, used inventory was not a KPI that many dealers paid attention to, so “winging it” was the approach most dealers took to measuring the impact of used inventory on their business.
“You didn't have enough used inventory,” Johnson says. “You'd have enough new inventory. And so we were out there buying extra stuff, even before COVID hit, we had dealers out there buying a bunch of used inventory at auction and things like that to bring into their store and essentially flip.”
Today, dealer lots are getting much more full, which means KPIs related to used inventory are more important.
“Our goal would be used inventory as a percent of total assets — that goal has always been about 30%,” Johnson says, adding that among the dealers Pinion works with, the percentage is in the range of 23-34%.
Johnson says another KPI he finds valuable is used inventory as a percent of equity. “What's my goal of used inventory as a percent of equity? It's a lot higher than the 30% of total assets — it’s 70%. And I've got dealers here right now onSept. 30 that are averaging 92-114% of their equity tied up in inventory. Now, we hate it when that number goes over 100% for obvious reasons, but right now it's a cycle. That number is pretty high, and our best dealer right now, on Sept. 30, was at 92% as a percent of equity.”
Finally, Johnson says it’s important to measure used inventory as a percent of total wholegood sales. The goal for that KPI, he says, is about 20%.
“That's kind of been recovering a little bit, and now that's up to 12-17%,” he says, adding that he’s seeing many dealers take equipment to auction. “Right now, the aggressive ones already have 2-3 auctions scheduled. What's interesting is a lot of them are staggering those out, saying I'm not going to have one big $15 million auction. I'm going to stagger that out. I'm going to have 3-4 $3-$5 million auctions and maybe the equipment pricing comes back, maybe interest rates go down, maybe I catch a better weather day. Whatever that is, they're spreading that risk out of trying to have better results than having one big auction.”
Looking at Used Production Rate
Johnson says that many large OEMs have economists on staff that make recommendations about the rate of production for new equipment. He adds that dealers are also producing something: used equipment.
“Every time you sell a piece of new, you bring in a piece of used,” Johnson says. “Oftentimes back in the bad days, you didn't really have anybody looking at that.”
According to Johnson, few dealers ever looked at the rate by which they were “producing” used equipment to determine what was sustainable.
“We did kind of look at that and say there is a number that, algebraically, we can come up with and say we are either making too much or too little inventory. So that's where the concept of 74% came from.” Johnson says that if a dealership produces more than 74% of our percentage of new equipment gross profit, it’s going to have too much used equipment on its lot that it will have to sell for less that it would like.
“But if we produce 73% instead of 74%, or we produce 50% or whatever we produced, then that's too little,” he says, “and we're not going to be able to put as much inventory on our lot to keep our lots full enough to sell it over the course of the next year to produce the same kind of results that we got from you as the year before.”
Johnson says that for the dealers he works with, the used production rate is too low at 71.67%, although it is an improvement over the average of 68% they had in 2022. NAEDA’s 2022 average was also too low at 61%.
For 2024, Johnson expects the number to be over 74%, even approaching the 80-90% range. “When I know it's terrible is when we get to those times where we're producing 110-120% numbers, and that's usually from guys that have big multi-unit discount deals,” he says. “They sell $10 million worth of equipment to a farmer, and they bring back $5 million worth of used, and they don't have any plan to get rid of it.”
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