Another issue arises due to the fact that the Tier II dealer is carrying more lines than he ever has before. This dealer’s inventory investment is spread across several suppliers. Thus, in many instances, he’s likely to be buying in a lower bracket, often giving him a 13-15% margin. That’s simply not good enough, especially when you consider the fact that the Tier II dealer’s overhead is typically 18-22%, with 22% being the more likely scenario.
To minimize the impact of this staunch reality and keep their businesses going, many dealers have made a few “tricks” somewhat common. First, they subsidize their money-losing lines with profits from their other lines. They may even subsidize with profits from the parts and/or service departments. Dealers who do this are about a half a bad season away from bankruptcy.
Secondly, some dealers stop paying their two or three “least important” suppliers. Dealers are supposed to sell and pay. But many don’t. Many sell and count it as cash flow. They pay back “some” manufacturers at a time. Eventually, they lose a line or two because they don’t pay. They don’t care, because they can go pick up another line if they absolutely have to in order to fill a product category. And they justify this in their minds because, “the manufacturer got me into this in the first place.”
A third way dealers minimize the impact of money-losing lines is by cutting out certain expenses in order to reduce their overhead, making that 13-15% wholegoods margin more feasible. For instance, they stop paying their wife’s salary. They don’t pay themselves rent because they own the building their dad started paying off 30 years ago. It looks like they’re making it. But they’re not. If you’re not paying yourself rent you’re not fully utilizing your assets. And if you’re not paying your wife you’re restricting your household income. She could go work somewhere else and actually earn a paycheck.
In order to escape Tier II the right way, dealers need to work like mad, which is something many of you are probably all too familiar with. You need to put in extremely long hours. You need to run lean with a staff of three to five people. You need to fight the temptation to over-expand your brand offering. You need to maintain a firm grip on your expenses. And you need to move through Tier II as quickly as possible—preferably in one season. If you can get to $1.5 million in one year, you’re out of the woods. Then, you can hunker down the next season and grow comfortably from $1.5 million.
Climbing to the top
There is no magic formula that will allow you to make this dramatic jump. A lot of it has to do with market conditions. How you market yourself also makes a difference. You will likely have to pursue business more aggressively and hire an outside salesperson to call on municipalities, institutions, businesses and contractors. Better yet, if you’re running a lean staff and carrying a more manageable number of lines, you’ll have time to be the outside salesperson yourself. Then, once you secure the additional commercial business, you can hire someone to manage those accounts while you focus on even more ways to grow your business.
Remember, Tier II brings a lot of added overhead to the table. You don’t want to increase your payroll too much and make this problem worse while the sales increase you’d hoped for is lagging. Grow the sales base yourself, and then hire someone to manage it.
Speaking of overhead, it doesn’t change all that much when you make the jump from Tier II to Tier III. You’re functioning with the same employees. You’re in the same building. Sometimes, however, the dealer will move from a B location (rent $3,000/month) to an A location (rent $4,000/month). That increased overhead is well worth it to some Tier III dealers, especially when you consider the boost in productivity and customer traffic the new location provides.
The biggest difference between Tier II and Tier III is that you can spread your overhead costs over a much broader base of revenue in Tier III. The Tier III dealer, in many instances, has learned how to shift his focus. Service and parts are high margin. Many have added a high-margin rental department. Used equipment is being managed properly and has become a nice profit center.