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Changing face of your dealer (Second in a series, Golden age of the buyer)

Life is tough for dealers struggling to service large, more sophisticated farms. Here's how seed, chemical and equipment dealers are coping.

If you think it's difficult to make money at farming today, consider the plight of dealers and distributors.

Local seed dealers face competition from retail stores where seed is bundled with chemicals to entice buyers. New competition is coming from Internet sites that hawk low-priced seed.

Equipment dealers are saddled with too much used inventory and too few customers to buy it. Co-ops must deal with farmers who expect to buy chemicals at rock-bottom prices quoted on the Internet. And customers expect top service with no added cost.

The job of selling to farmers at the dealer and distributor level has gotten tough, and dealers and distributors are reinventing themselves to survive. They must change to meet the needs of farm customers.

Farmers drive change "It is all driven by the changing needs of farmers," reports Dave Downey, director of Purdue University's Center for Agricultural Business. "More and more production is being done by fewer, more businesslike, more demanding producers."

In addition, dealers and distributors face more expectations from their product sources. "The manufacturers on the other end are changing their strategy, looking for higher-tech dealers and distributors that they can work with," Downey continues. Some traditional dealers resist these changes, often because they lack the technical ability to meet manufacturer expectations.

"So if a traditional dealer is not willing, capable or able to provide the local service, the manufacturer has to find some other way of doing it," Downey says.

Behold the arrival of professional seed salespeople, co-ops equipped with agronomic experts, and equipment dealers poised with diagnostic laptops. Now a grower may buy seed, fertilizer and chemicals from one store. An equipment dealer may be teamed with an agronomist for seed advice. And an equipment manufacturer may customize machinery for a grower with a large number of acres, bypassing the dealer.

"It is a blurring of options," explains Jay Akridge, associate director of Purdue's Center for Agricultural Business. "The innovators [dealers and distributors] are opening themselves up to different ways of doing business. Lots of dealers I consider innovators are saying there are different things to do. In the end, it means more options for farmers, but a more intensive environment in which dealers must compete."

More information and service Industry observers agree that dealers and distributors are setting their sights on more service and information to pull in and keep customers.

"There is an increased push on [dealer and distributors] to become as full service as they can, with respect to information, service and products," Akridge says. This way companies can work with customers in more areas and possibly gain more business.

But even increased attention to service and information does not guarantee sales. "Farmers always expect the most and expect to pay the least for it," reports Mike Abildtrup, CEO, Farmers Cooperative, Iowa Falls, IA. "A producer wants the best talent, best advice, best products. But if someone down the road will do it a little cheaper, sometimes that's where he will head. So it comes down to providing the most for the least."

Farmers Cooperative tries to take the emphasis off price by providing farmers with information to help them make more money. "We never wanted to play that low-ball cost-cutting game," Abildtrup says. "We put money into facilities, equipment and really good people, which has to be paid for. That comes from doing a better job servicing the customer than someone else."

When the farm marketplace finishes sorting itself out, industry experts expect a complex buying environment. "It will be a mixed web of alternatives for the farmer, and different alternatives will fit different producers in different parts of the country better," predicts Downey.

Seed dealers Steve Webb used to sell seed corn to neighbors from his farm. Today, the Needham, IN, seed dealer only sells to himself and family members.

"Seed companies want to go to a single-input organization, one-stop shopping," he explains. "That's one reason I quit. I'm confident enough of that and I saw no reason to fight it. I don't think the farmer dealer has a future."

Webb's observations are more bearish than most industry experts report. But there's no disputing that the farmer dealer for seed is losing ground as retail stores and companies add highly trained and experienced sales forces.

Purdue's Akridge agrees. He says that the practice of selling direct or in retail stores is growing and that the use of a professional sales force, such as Pioneer Hi-Bred's group of sales reps, continues to be strong. But farmer dealers face an uncertain future.

"I think there is more pressure on the traditional farmer dealer, especially if he has a limited set of products and services to offer and treats it as a part-time occupation," Akridge adds.

Garst Seed uses dealers and retail stores to market its seed to customers. And the company continues to recruit both types of marketers, reports David Witherspoon, vice president of Garst.

He's noticed two trends in these new recruits.

"We've been seeing a transition where we're getting a lot more dealers who are larger and more successful," Witherspoon says. He's also seeing more store fronts interested in selling seed.

"The seed dealers of the future have to be more professional, whether they are independent or working for a retail store," he says. "They need to be able to discuss seed in terms of herbicides and insecticides as well as bringing all the basic agronomics to the job."

He believes top independent dealers and retail stores will do this and sell seed well into the future.

Seed boosts sales Because some of the new biotech seeds respond to fewer and cheaper herbicides, retailer profits from chemicals have been reduced. "So retailers are trying to move into seed," reports Tray Thomas with the management consulting firm Context Network, Des Moines, IA. "And seed companies see the retail system is a lot more efficient than a farmer dealer network."

But the switch for retailers isn't easy. Seed companies are afraid to move to retailers and make farmer dealers mad, fearing they will switch to competitors, Thomas explains. Plus, retailers worry about selling seed that may compete with their ag chemical customers who also sell seed.

"This creates nervousness for everybody," he adds. "What typically happens is retailers will pick up seed to have it on the shelf but won't push it. When retailers do push seed, they tend to do very well."

Professional sales rep Creating a category all its own is Pioneer with a force of independent sales representatives. Some 3,000 reps sell Pioneer seed, most of them exclusively. Pioneer, in turn, provides the reps with training, new technology and an information system that rivals any competitor's. A rep sitting by a grower's field can type on a laptop and search special computer programs on CDs for answers about crop diseases. If stumped, the rep only needs to get online and immediately access Pioneer's massive computer system and group of experts to pinpoint the problem.

Not just anyone can become a sales rep for Pioneer. A careful selection process is used to spot the best candidates for selling seed and running a business. Pioneer even works with the Gallup organization to develop a questionnaire that will help indicate if a person is likely to succeed in the job.

Many of the Pioneer reps are involved in farming but treat the sales job as their career, reports Jeff Johnson, with Pioneer's sales training staff. All reps receive a straight commission so they don't set seed price.

Because Pioneer wants to maintain a top sales force, it works to enhance a rep's business. This means helping the rep find ways to add value to the seed service, Johnson explains. Pioneer encourages and helps reps earn certified crop advisor status through special training.

It also helps reps provide other services like calibrating yield monitors, running weigh wagons and even providing grain drills. These services provideopportunities for the rep to work with customers and help make the customers mor e successful.

While Pioneer's sales force is becoming better informed, it is shrinking in size. Since 1993, 1,500 reps have dropped from Pioneer's force, according to Johnson. As the number of farmers continues to drop, the number of sales reps needed to handle these customers also will decline.

But the company is committed to its league of professional sales representatives. It does not plan to sell seed any other way in the Midwest and risk undermining the reps.

Chemical dealers and distributors The profit margins for chemical dealers and distributors in this mature industry are pretty thin, according to industry experts. Manufacturer consolidations, biotechnology and the Internet all exert heavy pressure on these retailers (see "Mature and Shrinking Fast," December 1999, page 4).

"Chemical retailers are getting stretched," reports Thomas, Context Network. "They have to provide more and better service to compete, yet their margins are down and life is getting tight for them. There are several causes for this including generic chemistry and seed tolerant to less expensive herbicides."

Price leverage The problems are compounded by the new Web sites that offer cut-rate chemicals. Although the amount of chemicals moved through these sites is still small, farmers use the prices as leverage at the retail store.

"They are using the Internet as a leverage to beat upon the ag retailers," Thomas says. "The impact of leverage from Internet sites will be a significant issue in forcing prices down. That puts further pressure on the ag retailers and now they're getting hit from all sides."

It won't be long, though, before Internet sales of chemicals catch up to retail store levels. "My expectation is that significant amounts of chemicals will move over the Internet," Thomas predicts. Many chemicals are Internet friendly because farmers are familiar with them, know how they work and can purchase them in advance. Plus, cheaper generic versions make Internet purchasing attractive.

Although Internet chemical sales today occur on e-commerce sites, Thomas expects chemical manufacturers to join in soon with company sites to sell chemicals. "There won't be very many sales lost over the Internet before the large companies jump in," he says. "They are all looking at the Internet now but don't know what to do yet."

Chemical manufacturers also are expected to sell more and more products directly to farmers with a large number of acres, bypassing distributors and dealers.

Paying the price Going through the Internet for chemical sales or buying directly from the manufacturer will cost farmers in the end, though. "Retail stores will need to start charging for services they provide pretty much for free today," Thomas says. Farmers may have to pay full price for services such as custom chemical applications and technical advice, which come at discounted rates today.

In fact, retail stores will need to shift more business to services as they lose chemical sales. It may be their only way to make money in chemicals.

Purdue's Downey says that while future chemical sales may bypass distributors and dealers, chemical manufacturers will still need those businesses to handle their service needs. The dealers and distributors will provide the logistics for handling the products, such as physically storing them, and will also handle complaints from the field.

Meanwhile, the manufacturer will provide more technical support directly to larger producers, Downey suggests. "But I continue to see the strong presence of a local dealer of business providing a lot of support and service for local farmers."

Equipment dealers These dealers went through some harsh restructuring in the past two decades, and industry watchers believe more is ahead.

"Whatever happens to farmers in agriculture is mirrored by the dealers and equipment industry," reports Bill Fogarty, executive editor of Farm Equipment. "So along with the decline in number of farms, there's been and will continue to be a decline in the number of dealers."

Fogarty watched the number of North American equipment dealers drop from 28,000 in 1958 to an estimated 5,000 dealers today. "The surviving farmers will have to travel farther for parts and service," he adds. "But that's been going on already."

Many dealerships operate multiple sites. "They used to be independent dealers, but now have four, five or 10 sites owned by one business entity," according to Purdue's Downey. "This means one accounting department instead of five. They can share the parts inventory more conveniently. All of this can result in better service for a farmer, not necessarily poorer."

But a dealer in Minnesota believes that the equipment industry will see some of the multiple-site stores close soon. "From 1993, we've had a 38% decline in farmer units in Minnesota," says Paul Matejcek, Matejcek Implement Company, Faribault, MN. "But we've had a zero percent decline in dealer locations. While there's been consolidation, you still don't need all that real estate out there servicing farmers who aren't there."

Too much used equipment Another problem plaguing many equipment dealers is too much used equipment. "In the '90s, this business was pretty good," Fogarty says. "A whole lot of equipment got sold. But dealers accumulated a lot of used equipment in the process."

Looking at an equipment dealers' survey from 1989, used equipment accounted for an average 45% of a dealer's net worth, Fogarty relates. In 1998, used equipment grew to 85% of a dealer's net worth. "This is going to squeeze a lot of them out or down," he adds.

The problem is that too few farmers are left to purchase the older used equipment. "I'm sure I can go out and sell a one- or two-year-old combine," Matejcek says. "But the eight-year-old combine with 2,000 to 3,000 hours is unmarketable. The farmer in that segment is not buying.

He's looking at retirement." Dealers fighting this problem held many sales and auctions this winter, trying to lower used equipment inventories.

Survival for the dealers does not rest in new equipment sales, either. "Generally, margins for new equipment are getting smaller," Fogarty says. "So dealer profitability has been weak while the demands of customers are going to do nothing but increase. It will be too much for some dealers."

Service and parts The solution is to build service and parts divisions. Matejcek's Case dealership, for example, expects service and parts to cover 100% of overhead.

"Service can be wonderfully profitable if properly managed," Fogarty says. "Most dealers lose money every year in their servicing organizations, though. A lot of them don't have a background in service. They look at it as a necessary evil. But it is the exact opposite. It is your servicing organization that is going to pull you through."

Service will also be the tie to the manufacturers. "Equipment manufacturers will have more direct communications with farmers," Downey says, "but the middle person will play a much more important role in the industry. There are a lot of repairs on equipment that must be done on-site by local people. But we can't support as many small dealers as we once had."

When Caterpillar entered the agricultural equipment business, the company showed how parts and service can help business. Cat dealers operate service trucks that sit ready to answer any farm calls. Now John Deere is helping its dealer network focus on service (see "Dealer at your service," page 34).

In the end, the farm customer will demand top service. "This is a service-driven business," Fogarty relates. "The better farmers are the tougher customers, and they are tougher than ever. But they also understand they need to buy the dealership with the product. So the dealers who are more consistent in servicing are the ones who will make it."

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