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From the Deere dealer consolidation post from below...
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DeereMan85
Posted 5/1/2016 15:02 (#5275991 - in reply to #5275631)
Subject: RE: From the Deere dealer consolidation post from below...


Iowa
I highly doubt Deere wants any part of company stores - the dealership carries more risk and generates a smaller return than the manufacturing side of things. Most people don't realize that Deere dealership owners are not personally shielded from risk at the company level. Every owner personally signs as guarantor in the event that the dealership goes under. Dealer owners must maintain a bare minimum of 20% (IIRC) working capital at all times. If they fall below that, cash must be infused to maintain liquidity or the dealer contract is in jeopardy. If they are unable to achieve this, they must take on investors or sell the company to another dealer who meets this standard.

Also, all loans through JD Financial are recourse loans, meaning that the dealer is on the hook if a customer cannot pay and Deere repossesses the machine. The machine is then liquidated and any negative equity is the dealer's responsibility to cover. To help facilitate this, a portion of the loan proceeds are held back on every purchase and placed into a reserve account with Deere - these funds are not disbursed to the dealer until a loan is completely off the books. In the event that loan losses exceed the amount the reserve account can cover, the dealer and its owners are again personally on the hook to pay the difference.

IMO, a big part of the reason the manufacturer-dealer model even exists is to offload risk at the corporate level. What Deere (and every other manufacturer) actually wants is to be the de facto dealership manager without the risk of ownership. This is why dealer agreements for Deere and the other brands are increasingly restrictive to the dealer's ability to operate as an independent business. It goes way deeper than most people realize, and the rules are constantly changing.

For example, Deere really began focusing on dealers' marketshare performance in the "small ag" category about five years ago. This includes a lot of hay tools, tractors under 150hp, things like that. Deere began tying large ag incentives such as volume discount (also known as "dealer holdback" in the car world) to performance in the small ag category. It may have changed by now, but dealers were expected to maintain at least 50% marketshare in small ag or lose a hefty percentage of their volume discount, which in a lot of cases translated to hundreds of thousands of dollars they would miss out on. Most dealers went above and beyond the 50% mark, so Deere then dictated that they must not only maintain 50% overall, but also 50% within each subcategory. This meant that, for example, a dealer couldn't hit 75% in 100-120hp tractors but only 25% in 75-100hp tractors but still make the cut by virtue of their average still coming out to 50% overall. No, they must have 50% minimum in every category. The problem with this is that not every trade area sells many machines in every category. A dealership in Nebraska that I am familiar with had an annual market potential of exactly 1 tractor in the 50-75hp range. This meant that they could lose a large chunk of their volume discount if they didn't sell the single tractor of that size that was sold in a multi-county area over the course of a year. They pointed this out to Deere - the response was that they should just give a couple tractors that size away to good customers every year and they wouldn't have to worry about it. While that might make sense financially for the dealership to do so, it highlights the disconnect that the corporate overlords have with how things work in the real world and how Deere views their dealers. Why would anyone else in that area pay for a tractor that you just give away to others? But that's not Deere's problem to deal with - hitting quarterly sales goals at the corporate level is.

Frankly, Deere's goal is to keep the dealers just profitable enough to stay in business and weather a downturn. They care far more that the dealers follow Deere's guidelines than make a large profit. I think taking on the dealership role would do more to hurt Deere than help them in terms of creating value for investors.
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