Navigating Change: Strategies and Challenges for Growth in the Construction Equipment Dealership Industry

You too. It's funny, leading up to this, we were talking about being in the sun and generation changes and societal changes, etc. Andy, you were pointing out that my generation seemed to be much more risk takers. Is that because today the people aren't as much in the way of risk takers?

You know, that was the other blog post that you put out that, you know, this is a very personal business. I couldn't agree with you more. The customer you've lost, and it is the hardest to get back, but we don't even try to get them back. And the thing that distresses me is customer retention has gone down like a rock. And that precipitous fall has been matched in market share drop. I was talking to the Caterpillar dealers in the Southeast maybe 10,15 years ago, and the head of the United States USCD, US Commercial Division for CAP was in the room. And you know me, I wander around with a mic and a lavalier, and we were talking about market share and how data analytics has become a subject that hardly anybody pays attention to anymore. And when I started in 1969, The market share, and it was measured by Caterpillar every five years up until 1965 with face-to-face interviews with every customer worldwide. In 65, they decided to do it 20% a year, so it was slightly different. But the market share in the early 70s in parts was over 80%,82,83 in that range. So I go up to this gentleman and I put the microphone in his face and I asked him, I said, if you don't mind, could you share with us what the market share is for the parts aspect, parts department at a Caterpillar dealer? And he said, sure, it's 38.3%. And I was a little surprised that he answered so honestly. And I thanked him for that. And then I looked at the room, there was a couple of hundred people in there and said, okay, congratulations. Just to use rough numbers, in 1970, we had 40%,80% market share. And let's put this at 2010, we've got 40% market share. At the rate we're going, another 40 years, we'll be at 20% market share. And you're still okay because you don't know how to measure it. And that gives you a pass on performance. Your performance is terrible. You don't know who to cover. Like you said, we're going to take our top 10 machines. That's what we're going to pay attention to. We're going to take our top... 5% of the customers, top 100 customers, and we're really going to pay attention to them. The business is not with those guys. The business is with the other 90%. Correct. And we never, never go and talk to the guy who has nothing but competitive equipment. We've just got this model and we're continuing to do what we've always done. And just off of Nana land, we've found, like you say, their billion dollars is pretty common anymore because there is such a financial need. This is a balance sheet business now. And if you can't borrow money, you're in trouble. And to add to your woes in the start here, Andy, interest rates have doubled. So now a lot of folks that have large rental fleets, maybe too much used equipment, maybe too much new equipment. are in the situation that they have to sell something to pay for the interest costs, not the interest rate, but how much money it is. And guess what? We're seeing dealers fall by the wave side because they can't afford to make those payments and somebody else gobbles them up and the consolidation continues and the Starbucks model looks pretty damn good because we're comfortable. We're status quo protectors. We're risk averse. And the business is going to help.

But you know, we've got. We were told this was coming. In the 1990s, Don fights when he went around on his fair word to the Caterpillar dealers. He was the CEO of Caterpillar. He said that the dealers were not going to make any money from equipment anymore. Nakedly, you're going to make money from parts, from service, from rental. And he went further. He said in 2014, that's 10 years ago. He didn't say it. Doug Oberhelm, at that time, the chairman. the dealers who do not adapt to this new reality and perform will receive cancellation notices. Quote, that will be the last resort, the last outcome, and certainly not desirable, but he's made that comment. And it's out there. And then another little deal, a guy by the name of Stu Levenick, who was the Caterpillar Group president for dealer relations, said, quote, the average dealer or lower performing dealer. He only knows about 40% of his opportunities. And they don't do anything about it. And data analytics today, we have data coming out the wazoo. We can do all kinds of things, but nobody does anything. Do you know of anybody who's got a chief information officer at a Caterpillar dealer or a Komatsu dealer or a Deer dealer or a Volvo dealer or any of them?

So we get to the situation where we've got, take some of the larger dealers, and I don't care the brand. Caterpillar, Comatsu, John Deere probably have between 75% and 80% market share, the three of them combined, in any given geography. And if you look at the territories across the United States, the people I've worked with for the last 50 years, There's only two that are prominent in any territory. It's either cat and deer or it's cat and komatsu or it's deer and komatsu. But two out of the three do really well. And the third one kind of is figuring out what to do with it. And then you look inside, and this is true generally for America, not just America, but the, quote, the developed world. We've put profits over people for about 20 years now. And just look at a basic like GDP. You know, we're driving interest rates on GDP policy, on unemployment policy, etc. And GDP is a function of goods and services producers compared to the number of people working. So that number is going to go up if I have fewer people working. And it isn't because we've increased productivity in the last 20 years. We did in the previous 20 from 40 years ago to 20 years ago. And that justified the reduction of staff. But over the last 20 years, we haven't improved productivity anywhere. We've had technology advantages. We've had production advantages, machine design and operational advantages. We've got sensors everywhere now. Hardly anybody's doing any of this stuff. Nobody's taking advantage of it. We're in a world where subscription services are the future, if they aren't the past, where you don't buy a machine anymore. A dealer doesn't sell a machine anymore. He gives the guy a machine. And it's going to be for the next three years, five years or whatever. And I'm going to give you a bill every month for the hours of consumption you had. And when the life cycle statistics get to the point that your consumption per operating hour hits above the graph, I'm going to give you a new machine, take that one back and put it into the used market. Who's doing that today? We're doing it in cars. We're doing it in other capital goods areas. What the heck's the matter with us? We haven't looked at, there's nobody out there that's doing anything radical. We have, I counted them this morning, we have 68 contributors like you do for our blogs and podcasts, et cetera. I call them thought leaders, experienced executives, and revolutionary reformers. There are not very many revolutionary reformers today.

People don't want to take a risk. You know, I'm asking this guy. You know, it's a famous line in the classroom for me. What would you do if you weren't afraid? You see something that's wrong. Do you speak up? No, because you don't want to get whacked across the side of your head. I was fired five times at the Caterpillar I first started with. And I love the guy. If he called me today, if he was still alive and said he was in trouble, I'd be, where are you? I'm on my way. I don't see many people like that anymore. Of course, that's rare too. It's a tough time. But what a huge freaking opportunity we have here.

Tell me about it.

It's really interesting. You know, a guy who's a really good friend and worked through the manufacturer, the executive letter, went to a dealership and worked in executive level. He'd worked around me for a long time and heard a lot of, you know, my quote, quote, theory. And he started subscribing to one of them, which was hire somebody in the parts department. And in the next three to six months, your sales are going to go up. And what would you do if that happened? And I suggested hire another person. So I started executing that. And he said, it's remarkable. I've done this 10 times now. And each time the sales are continuing to go up, I said, well, what are you going to do? He says, I'm going to keep doing it until the sales stop going up. I said, congratulations. You're thinking now. And again, it's market touches. Strong computing power. I started in the 60s at university taking computer science as a minor. That was unit record equipment where I had to learn machine language to program a machine. You had to define every single position on 132 position print characters to get a report out. Today, I can talk to the computer and have it do something for me. Artificial intelligence, machine learning. So we get all of that stuff and I can go back 20 years. longer with many, but say 20 years. Let's change that. We'll go to 2,000. I can take every transaction of every customer by month, by sale type, new, used, parts, service, finance. And I can give you graphs on what the hell is going on. And the revenue numbers are going up because pricing has gone up. And I used to bitch back in the 70s, my favorite manufacturer, increase the consumer list price less. Then you increase the dealer net price. And in those days, computer systems just measured price changes on the basis of your inventory value. So your inventory is going up 3% because of the price change. Congratulations. Nobody looked at the margin change except for me. Wow. I looked at a lot of other things. And the margin dropped by three points over five years. I said, you guys are sneaky. You're devious. And you're crooks. We used to call them the printing press for money. It was so easy. But we've got ourselves in a situation where nobody's dying those analytics anymore. And so I want to see all of that. I want to, you know, Steve Clegg, who's a contributor with us as well, has a company called Zimtoro. And he does data analytics on many different industries. AT &T is one of his clients, as an example. Very sharp guy. Graduate of the Air Force Academy, got his MBA with... Our famous economist, Milton Friedman in Chicago, very smart guy. He does analytics on dealer transactions and finds that there's a direct correlation between the retention of customers and the distance the customer's job site is from the dealer location. Intuitively, we know that's true, but he's got statistics that hardcore prove it. So we start talking about... you know, distribution channels and how we should do it. And let's talk about Dropboxes. Why don't I have a Dropbox right at the customer site? And I'll put inventory in there. And the dealers look at me like I'm growing a fourth horn on my head. You want to put inventory out in the field on consignment? Well, it's not consignment. It's theirs. I'll tell them what. I'll put the inventory out there, but you pay the interest. So it's not costing me anything. Go away. And I've got people that do that. And you should see the results. It's stunning. It's not mysterious, Andy. We know what we need to do, but the people inside the dealership are so risk averse, they're not going anywhere. Territorial position. We can talk about any single aspect of the market and market coverage, and the dealers are not doing anywhere near what they need to do.

You're absolutely true. Absolutely right. And, you know, I say this to every executive. I talk about the top five,10 jobs in the company. I want you to have breakfast, breakfast, not lunch or dinner, breakfast with a customer three days a week. I just want you to go have a chat. So I haven't got time for that. And I said, between six and eight o 'clock in the morning, tell me what you're doing. I used to do that in Alberta when I was working with a competitor. I was doing a consulting job. with a guy who was the largest broker of Caterpillar equipment in the world. His name was Ronnie Miller. And Ronnie, all he wanted to do was become a dealer, and Cat wouldn't give him a territory in Alberta, which is what he wanted. And Sasha Angus, who'd been there since the beginning of time, was the dealer at the time. So we'd go out to customers and give them a computer terminal. Any customer that had a... computer terminal connected to the Caterpillar dealer. We put a terminal in the same room, right beside it. The Caterpillar terminal, you could never get a price. You could place an order. You could never get availability. You could place an order. We put on the screen price and availability before anything. You could also place an order with us. And guess what happened? I met with the vice president of product support in a bathroom in a bar. He wasn't allowed to be seen with me for fear of being fired. He said, you're screwing me up. I said, why? He said, well, you put a computer in every one of our large customers. I said, yes. Doesn't that make sense? He said, yeah, but Ron, you're showing them your price. We don't show them our price. I said, I know that because my price is lower than your price. And he said, well, that's forcing us to bring our price down. And I said, well, I'm going to go down again. And if you want to keep playing this game, I buy it at a lower price than you do. How do you think this is going to work out for you? He said, it's not fair. Fair as in what? It's an interesting world. So here's three, two, actually, major dealership profit drivers. One is the gross margin percentage of sales, and the other is the operating excess for sales. Very simple, very obvious, intuitively, it's factually true. And then from there, earning before interest and taxes, debt to EBIT, and that kind of stuff. It's all financial stuff. It's nothing to do with customer retention. It's nothing to do with relationships. It's all to do with financial. So guess what? We've become a financial industry. And what you do with the dealers, November, I mean, that's a fool's game. What I do is the last 12 months, and it's every bloody month. It's not once a year. It's too late. It's all gone. And why are we talking about the fall? So you can place an order for the manufacturer. That's what we've always done. Do it in March. Do it in July. Oh, can't do that. We're on vacation. This is a really, and it's not just our world, Andy. This is a lot of worlds. Look at what's happening in automotive, where Ford makes a statement last year that the electric vehicle contract was going to change. There's a new contract. And the dealers were not allowed to sell from inventory. The inventory was going to be shipped from the factory, every single case. And the factory was going to have a model online that would compete directly with the dealers. What do you think that's saying to the distribution channel?

Well, and, you know, it's never been a good answer. It's, you know, lithium batteries. Lithium as a material is harder to get rid of than uranium. So what the hell are we doing? Adding more of these things all over the place. There's, you know, in the Palm Springs area where I used to live, there's a thing on the east end of that valley called the Sultan Sea. And it's a high source for lithium. Right. So, okay, what are we going to do? This is an area that was underwater for millennia. You can still find shells on the valley floor. So there was an earthquake a couple of years ago. Now particulate matter in the air is stuff that was underground for several thousands of years. And it's not a healthy environment anymore. We've got so many things that are around that get us into different places. Your business should be offering a service every month. based on data you get from the dealers that's the last 12 to 24 months, and that can help them. It can act on something that's within 30 days. But if you're meeting in November and we're looking at the last 12 months, shit, that stuff's a year old.

You know, it's interesting. As you know, we're in the education business now because I didn't want to.

that's true. I started teaching at university a long time ago. But a lot of people, I did all the parts and service training, management training for. the associated equipment distributors between 1994 and 2015. And in 93, everybody stopped doing training. Manufacturers, associations, they stopped because it was too expensive and the market was a little goosey in those days. And they said, training's too expensive. So Marlene, my wife, and I sat down and said, you know, we can do this. It's just we're going to do it in a different way. So I sat in front of a computer with a voice recognition product called via voice from IBM. And I talked to my computer all summer. I talked for an hour. I'd go away for two hours and let the computer catch up with me. And then I'd edit it and I'd keep on going. We created six books in that period, three for parts, three for service. And it was three-day classes. And then I bring in consulting clients to Palm Springs. Everybody wanted to come in there. They were grateful enough to come in and critique the program. And it led us to two-day classes. somebody in front of a classroom, a teacher. I call that the sage on the stage. Teachers don't like that comment, but that's what it is. And, you know, I did that a long time. And I wandered around, and people still talk about it. I would have round tables, six to eight people at a table, four to six tables in a room,24 to 32 students at a time. And I'd start with three questions. Can anybody here give me a definition of, ignorance. And at that time, they didn't know me. And who is this jerk? We've got to be careful. I don't know what he means. So I would tell them the definition of ignorance is not knowing what to do. Pretty simple, right, guys? Yeah, okay, we'll get the drift. I said, okay, the next question is, what's the definition of stupidity? And some of them were smarter. They were able to stick their hand up and take a risk. Well, stupidity is knowing what to do, but not doing it. I said, bingo. And then the last one is, what's the definition of insanity? And almost everybody's heard it's either Mark Twain or Albert Einstein that says insanity is continue to do what you've always done expecting different results. So this is the first 15 minutes of every class. And I would say, OK, I'm going to give every single one of you a choice when you leave here. You're going to know what to do because I'm going to tell you what to do. And we're going to debate that. And you'll end up agreeing with me before you leave, which is a fundamental of management. I'm looking for everybody to understand what we're trying to do. I'm looking for everybody to agree that what we're trying to do is the right thing to do. And then everybody will be committed to getting it done. So I'm going to leave you the choice at the end of two days when you leave here. You're either going to be stupid or you're going to be insane. And looking around the room, I don't see many of you that need to be in a padded room. So how many of you do you want me to call you stupid? And they don't. But they leave, and guess what, Andy? It always happened. They left work for two days. They get home. Nobody did their job, so they're loaded. Say the class is Monday, Tuesday. They go into work Wednesday morning. It takes them until Thursday to catch up with what they missed on Monday, Tuesday. What do you mean making changes? And I would always ask them, give me three things you're going to do when you go back home. And guess what? In the early days, I called them all. How'd you do? Almost nothing. I can tell you who the stars were. They're the people that started. And boy, have they had careers because there's very few people. So I split the population down as businesses into 10% are fine. They're going to be able to figure everything out. They're smart. They'll adapt. They'll adjust. They're going to succeed, period. 70% of the people are working and they're right on the precipice of disaster. They haven't given themselves the opportunity to think about what they'd like to do. They just got a job. which is what my parents' generation, your parents' generation went through. They were in the Depression. They were in the war. They'd go to school. They'd either leave and go to vocational school, university, or go get a job. They'd get a job. They'd get married. They have children. They're stuck. And away we go. That's the 70%. Then there's 20% in the middle that don't know which way to go because there's no guidance. If they were given the right leadership and guidance, they might become part of the top 10%. So we've got 10% of the world that are thinkers. 70% of the world that are doers and 20% don't know which way they are. And one of our contributors is Ed Gordon, who's got a PhD in economics and a PhD in history. And he says to me,50% of the American workforce by 2030 will not have the skills to be employable. And he comes, he lives in Chicago. He comes down to the desert in the summer. We have lunch in the winter. We have lunch or dinner and catch up. And I say, okay, let's say it's not 2030, it's 2040. I said the workforce is about 170 million people in America. Let's just say 50 million don't have a job because they don't have the skills. Nobody is trying to reskill them, which is what we're trying to do with Learning Without Scars. And if you look at the average family of three people, husband, wife, and child, that's 150 million people that are going to be getting income from the government. And then I go up and ratchet it and say, okay, over the last 20 years, my lifetime,50 years, We spent hundreds of trillions of dollars on technology and virtually nothing on sociology.

We don't have a clue of what we're going to do. I remember one of my first jobs, my great grandfather started a place for what was called wayward youth, delinquent children. So I went and worked in there as a control figure for six months before I almost lost my mind. One of the hardest things I've ever done. But in the process, I was taught how to do personality profiling, which is... You know, for criminals, it made me really good at what I do in the construction business. But you've got to find a hole. So we do the Teams meeting. We do the Zoom meeting, Andy. A lot of people, schools, tell me, can you have a face-to-face aspect of your training? I said, sure. What do you want that to be? Well, let's have it be a Q &A. I said, that's fine. We'll do that. But if I'm going to do that, I want you to start something else. They say, okay, what's that? I want you to start a book club. What? A book club. I want you to select a book once a month, and the same people are going to be on these Zoom or Teams meetings. I want them to read the book, and I want you to chat about it, and that can be a subject that we talk about. Say, well, when was the last book you read? I don't know. Nobody reads anymore. Nobody looks at the research that's out there. Look at in schools. We've got three schools right now. We'll have another two in the next 30 days. That's about 80,000 students that we're touching every single month. And the schools tell me, you're using technology that we haven't even dreamt of. We do audio tracks on everything, quizzes. We proctor all exams. We use avatars for lectures. It's different genders, different ages, different nationalities so that we cover everybody. And the schools say, how do you do that? You use technology, damn it. Well, that's a lot of work. Of course it's a lot of work. I had a school tell me that they could create a class in an hour. I said, congratulations, I'm going to give you a subject matter and I'll pay you a thousand bucks for giving me that class in an hour. Because it takes me two weeks to put together a class of 80 solid hours after 50 years of experience. And they no longer communicate with me. The school does, but those people are no longer involved in the discussions. It's amazing, Andy. What your dad did was breaking ice. Nobody was doing what he did when he started, right? Right. You're picking it up. You're making it better. But the audience that you're dealing with are not like your father where they were prepared to listen and take a chance. Now they think they're as smart as you are and maybe smarter.

But that requires activity, action. And you're not optimistic. You're just optimistic about what they're prepared to do. And they're not prepared to do anymore.

Or even better, Microsoft is reviving Three Mile Island. because that's a place they were going to get the source of power that they can't have access to anywhere else on the grid.

Nuclear's been one of the cleanest three-mile island, blew everybody, and then what was in Europe, that was the Russian plant. You know, a good friend of mine says, you know, I don't understand. Canada uses heavy water. Yeah, the Can-Do nuclear reactor was the safest in the world, but America sells things better than Canadians do. We're too shy. So America's power plant became the plant of the standard. All of this stuff is interesting. It's societal. We've got air, we've got sun, we've got nuclear. They're all clean. Guess what? We have natural gas coming out the wazoo. Canada had, when I was up there at Finning in 1979, I was at a natural gas field. that was capped, that had enough capacity to satisfy the world's natural gas needs, the world's needs, for a thousand years. T-Bow was going to build natural gas filling stations across the country if on-highway trucks would convert to natural gas.

Well, and one of the courts in the country just continued to accept that Biden's regulation on methane emission, that would essentially shut down any future natural gas wells because they blow it. They burn it off.

Well, here's a statistic for you from a guy who took mathematics and physics. From the point of entry from a power plant into the transmission network, by the time it gets to the end user,50% of the power is lost. Right. Have you heard of anybody doing anything to make that 40%,30% to make it better?

It's an interesting conundrum. And those two blogs, I'd love to have you have put more out there. I'd like you to concentrate on the economic metric models that you're using. and help you promote the business and get more with it. And I'm going to transcribe some of this into blogs, et cetera, over the next week or so. You know, before we start whining too much, I think we should cut it off. But I think we've covered a lot of really good ground. Is there anything that we've missed that you'd like to bring up?

Yeah, it's a terrible circumstance. The other thing that's happening about the housing sites and large tracts of land. You know, nobody's paying attention to that. You're right. It's, you know, what happened to us? That used to be the core of our business. If your population was growing, your business was growing. If your population wasn't, you better get more territory.

Yeah. It's really funny. Over the last couple of years, when anybody asks me for anything, I've gotten into the habits just saying yes confuses the hell out of them. And that allows me to get into a dialogue with them. I said, okay, why is it that you need that? Why is it you want that? And it's very shallow. So that single family home, people have lost sight of. Maybe that's something you want to write about. What does the development of single family homes mean for the equipment industry? It means nothing but growth. And the disaster in Florida, what do you think is going to happen to insurance rates? The last two to three years, insurance has gone up between 20% and 30% across the country because of disasters. It's an interesting world, Andy. And, you know, that used to be a Chinese curse. May you live in interesting times. Well, these times are interesting. That's for damn sure. I'm going to close it up there, I think. And thank you very much, Andy, for the time. And thank everybody who's been listening to this candid conversation. We look forward to having you with us at the next one.

Thank you, sir. Bye now.