I’ve always been pretty terrible with numbers. Some people are born with that gene and some aren’t lucky enough to inherit those analytical skills. I’m unfortunately part of the latter group and understanding even simple arithmetic always evaded me.
In college, I failed Accounting 101, twice. Luckily, third time was the charm. Grad school hasn’t been much better, but here’s a simple formula that’s easy enough for even someone like me to understand and seems to stand the test of time. Revenue is vanity. Profit is sanity. Cash flow is reality. It seems simple enough because it is. But that doesn’t mean it’s easy.
I changed my first tire when I was 16 or 17 years old working at a shop in Akron, Ohio, but this tire guy doesn’t come from an agricultural background. I write this column because I enjoy it.
My day job involves meeting and consulting with tire dealers throughout the country. During the past five years, I’ve had a chance to meet some of the biggest and most successful farm tire dealers in the U.S. In other words, I’m no agricultural expert, but I certainly know quite a few of them.
In the past year or so, I’ve noticed a change in tone from many of the dealers who lead the way in the ag tire segment. Never before have I experienced so many tire businesses for sale. If I meet with 10 business owners, it seems at least two of them are publicly for sale and at least another two or three are interested in hearing from potential buyers.
The problem? I don’t see buyer’s knocking down the door. Perhaps it’s that younger businesspeople simply can’t raise the capital, maybe they don’t feel entrepreneurship is for them, or perhaps it’s just too easy to make a buck elsewhere.
One issue I see is the shortage of qualified on-the-farm service techs. I fear this could become a chronic issue in the next several years. For tire dealers, that means more service trucks sitting idle in the parking lot. For farmers, that puts them in a tough spot especially when they’re broken down in the field during planting or harvest.
I think there are plenty of reasons for this shortage of qualified service techs, but the genesis of the problem is that farmers have taken for granted their local tire dealers for so long that it’s become a veritable miracle to keep an on-the-farm service truck profitable.
It’s particularly problematic because farmers aren’t in a great place right now. According to the U.S. Department of Agricultural Economic Research Service (ERS), farm income in 2016 is projected to be down 3%, crop prices are still at historically low levels, and farm asset values are also down another 1.6%. It’s a conundrum because high farm incomes – like the recent peak in 2013 – gave farmers plenty of reasons to buy new iron instead of new rubber. That was tough on farm tire dealers.
Looking ahead, cash strapped farmers have every reason in the world to slash costs and outfit their existing equipment with less expensive tire brands. This is where that simple arithmetic comes into play again. Revenue is vanity. Profit is sanity. Cash flow is reality. Don’t go chasing tire volume at the sake of your gross profit and cash flow.
As we gear up for spring planting and later in the year, harvest, farm tire dealers must take deliberate steps to protect their profit margins and their cash flows. After all, there’s only one factor that ultimately kills a business. It’s not lack of leadership, marketing strategy, or inventory, although all three are certainly contributors. Lack of cash flow is ultimately what kills companies. I fear 2016 will be a perfect storm for farm tire dealers struggling to keep qualified techs in the service trucks while servicing and catering to frugal farmers.
Leading farm tire dealers will capitalize on this opportunity in 2016 to maintain profitability and a strong cash position. There’s an old proverb that seems particularly fitting in times of great struggle. “Before enlightenment, chop wood and carry water. After enlightenment, chop wood and carry water.”
In other words, stick to what you know. Get back to the basics and keep it simple. But recognize that although it sounds simple, it’s not necessarily easy.
So, what are today’s leading farm tire dealers doing to combat deteriorating margins? How can we reverse this downward trend toward insanity and tumbling profit margins?
1. Meet Your Customers Where They Are
Are you the easiest to do business with? Farmers today are more tech savvy than ever before. What does your website look like and is it mobile friendly? Does your site look great on a smartphone? Speaking of the phone, when was the last time you phone shopped your store to hear what your people sound like? World-class customer service is the expectation.
2. Be the Warren Buffett of Your Inventory Investment
This one is tough because striking an effective balance is so elusive. Carry too much inventory and you just may disrupt your healthy cash flow, the life blood of your business. Carry too little inventory and you’re stuck trying to sell from an empty cupboard. That’s not an ideal scenario for anyone.
According to Bobby Little, general manager for El Campo, Texas-based Rice Farmers Coop, an effective countermeasure to price shopping farmers is to find out if your lowballing competitor actually has the right tire in stock to do the job. “In those situations, we first make sure [our competitor] actually has the tire in stock,” said Little. “We reinforce that we know what we’re doing and we’ve been around for a long time. There’s still some loyalty out there, but it sure gets pretty thin sometimes.”
Available now beats lowest price.
3. The Negotiators Dilemma
Your most powerful negotiation tool is the ability to walk away. To say no. Consumers, including farmers want to know they’re getting a good value for their hard-earned dollar and that they’re not being taken advantage of. That’s often why they push so hard on your pricing.
Help them to understand that your expertise is worth something. How long have you been in business? I bet they’ll understand that you haven’t been around that long by giving things away for free. Your trust and the value of their time beat price alone.
4.Good Common Sense Trumps New Technology
What do tire manufacturers and the government have in common? Both are masters at creating acronyms. In the same way that our government spawned organizations like the CIA, FBI, and NSA, tire manufacturers created IF, VF, LSW, and CFO. They’re all important and they all represent impressive product evolutions.
Millions of dollars went into the R&D of these new technologies for plenty of reasons so it’s important to understand what they can and cannot do. But no new technology can replace your skill and expertise at spotting a misapplication or a field hazard. These are opportunities to educate and inform your farmers. Be the expert.
5. Your People Make the Difference
Who is your customer? It seems like an incredibly basic question and it is. Until you recognize that in every single interaction, a sale is made. You either sell someone on what you’re telling them or they sell you on why you’re wrong. In that sense, you’d do well to look inward as well and focus on your internal customers: your employees.
According to Wayne Milarski, general manager of Illinois-based Tredroc Tire Service’s Antioch location, “The products are commodities, but we are not. That’s us. My people and I are the differentiators.”
Can you reasonably expect to make your customer the most important person in your business without first taking care of your own people?
The rubber industry has been around for more than 170 years.
Tire manufacturers talk about disruption and innovation and compare themselves to actual innovators like Apple and Google. The simple reality is that the tire industry is about as mature as it gets. In the ag segment, technologies like IF and VF are about as close as we get to actual innovation. Even then, these are really just evolutions of existing technology.
In tough times like these, nothing can replace good common sense. Take care of your people and they’ll take good care of you. A $1 million business with a 10% net profit is superior to a $5 million business at a 1% net profit. Don’t chase volume at the expense of profits or cash.
And don’t forget to diversify. That means customer service and servicing your customers’ vehicles. Both are fundamental and equally important to the success of your business.
I had a chance recently to talk with one of the largest cooperatives in the country and they’ve long advocated to their local member coops the importance of expanding their service offerings. That means alignment work, brake service, oil changes (and not the $19.99 kind), and having a strong preventative maintenance program.
“Those who have done nothing to expand their service work, their days are numbered,” the coop warned.
Know the technology, but trust what you see. Trust your experience. You know a misapplication or a field hazard when you see one. Don’t get caught up in the hype of the next new acronym or the next new technology.
The only brand that matters is yours. Your farmers aren’t buying a Michelin or a Firestone. They’re buying you first, then the tire you recommend. You are the expert and your words will always be worth more than some fine print warranty written by a team of faceless lawyers.
Remember when your handshake was the only agreement that mattered? That hasn’t fundamentally changed. Be a person of your word, a person of excellence. And don’t be afraid to put a price on that. Your good word is worth its weight in gold.
Focus on what’s most important. The basics. Protect your profit margins, your cash flow, and your people. Things have a way of taking care of themselves from there.