On its website, AGCO Corp., sometimes called the “teenager” of the big four ag equipment mak-ers, boasts “approxi-mately 3,900 independent dealers and distributors around the world.” What it doesn’t say is that about half or more of its dealers are located in the U.S. and Canada alone.

So, between 50 American states and 13 Canadian provinces the com-pany averages about 30 dealers each, not to mention all of the other “colored” stores in the same loca-tions. It can be difficult finding 30 McDonald’s franchises in some of the largest farm states.

So, why so many dealers?

Most industry observers, includ-ing AGCO management, agree that it doesn’t. This is a company borne of acquisitions, each designed to com-plement the others. Today it offers

a complete line of farm equipment and it knows it’s time to take a hard look at how that equipment is sold and serviced.

An Evolving Entity

Jim Walker

While the history of some of AGCO’s brands date back to the mid-1800s, as a corporate entity, the Duluth, Ga.-based AGCO is a mere decade and a half old. Since it was founded with the purchase of Deutz Allis Corp. in 1990, it has grown through some 20 acquisi-tions — from Challenger to Fendt, Massey Ferguson to Gleaner, Hesston to Sunflower — and by 2005, AGCO’s sales reached an esti-mated $5.4 billion.

With each brand acquisition, came another network of dealers. It is no wonder that AGCO’s distribu-tion network appears too large and awkward to manage effectively. The company doesn’t hide the fact that its distribution network needs streamlining and reiterates it imme-diate goal, which is “to focus on strategies and actions to improve our current distribution network.”

In other words, AGCO’s distribu-tion network is a work in progress and, according to Jim Walker, vice president and general manager of AGCO North America, a concen-trated focus on product distribu-tion represents the next stage in the young equipment makers matu-ration process.

Balancing a ‘Relationship’ Business

Ag equipment manufacturers and dealers alike agree that selling ag equipment is a “relationship” busi-ness. “Much more so than buying a car or other products,” says Walker. “From a farmer’s perspective, he would love to have his equipment dealer right next door to him or with-in a reasonable distance when he needs parts or service.”

At the other end of things is the equipment manufacturer for whom each point of distribution is an addi-tional cost. “Anyway you look at it, whether you’re talking about provid-ing product floor planning or techni-cal support for the dealers, it’s a cost for the manufacturer. With very slim margins, it becomes a balancing act.

The manufacturer would like to go to fewer locations but still provide the services to support the farmer. We certainly have a costly distribution system in place right now.”

When the Caterpillar construc-tion equipment model of “one cen-tral location/dealer and mobile dis-patched technicians” is suggested as a possible alternative to the tra-ditional “many small stores” struc-ture of the ag equipment network, Walker isn’t convinced that it will work as well in the farm equipment business.

“Maybe somewhere in between where we are now and where the Cat model is going is probably a logical answer. We’re never going to be able to go to 3 or 4 dealers per state or something like that,” says Walker.

A Place for Both?

AGCO, of course, knows the Caterpillar distribution model well considering its relationship with Cat, the largest construction equipment maker in the world, through the Challenger brand of farm machinery.

Challenger is the 3-year old arrangement between AGCO and Caterpillar in which AGCO provides a full line of private-branded prod-ucts — from tractors to combines, to hay tools and other implements —for sale through Cat construction equipment dealers who want to diversify into the ag market.

As a result, Agco is dealing with two distinct, and as Walker calls them, “complementary” distribution channels for its range of equipment.

“Part of our business is the Challenger brand of farm equip-ment,” explains Walker. “This is a farm equipment organization that has adapted to using the ‘Cat’ model where service people are located in the field, away from the dealership, and travel to customers within their region to service and support Challenger products. This practice has proven to be very cost effective. “

“The other advantage is that it brings the service rep or service tech closer to the customer. So far, this has been a very positive aspect of our Challenger distribution system.”

While Challenger appears to be setting the tone for the future of farm equipment distribution, the model for selling and servicing the AGCO brands has not varied from the decades-old ag equipment model that relies on stores scattered throughout the countryside. And this isn’t all bad either, according to Walker.

From his point of view, there are enough cultural and demographic dif-ferences between the ag and con-struction equipment markets that the new distribution model will not work as effectively for the farming commu-nity as it appears to work for CE.

“We feel that to effectively service the ag equipment market you need to be more closely involved in the com-munity; to have a physical presence. Challenger probably can’t do it as thinly spread out as the construction business is set up today.

“From experience we know that you have to physically engage the ag marketplace. How we do this is going to be a variation of the model that we have right now, but we won’t have all the dealers we [AGCO] have today. Again, I think it will end up some-where in the middle.”

Melding Distribution Resources

The individual strengths of the two major AGCO brands is an inter-esting mix. What the traditional AGCO dealerships bring to the table is their personal contact with the local farming community along with their market saturation.

Challenger, on the other hand, with its connection to the Caterpillar dealer network, has the capital resources and long-estab-lished asset of the Caterpillar rep-utation to work with.

“With those capital resources and the ability to invest in distribution, together with the standing of the Cat dealer network, Challenger brings another dimension to our distribution channels. But Challenger is just now scratching the surface of what it takes to be in the ag busi-ness,” says Walker.

“Whereas on our side of the busi-ness, where you have the traditional AGCO distribution system that is made up of the many acquisitions we’ve made in the past 15 years, we need to consolidate the various distri-bution channels that exist now.

“Ultimately this will mean fewer overall dealers that are more volume oriented and more stable so as to complement the Challenger business.

“There’s a place for both of us,” Walker adds. “One has the capital capability. The other has the estab-lished relationship with the farm community and the range of individ-ual products from all of the acquisi-tions we’ve made.

“Our goal is use the best of both of these to service the entire farm market.”

Parts and Service

Despite the perception that hav-ing a dealership next door or nearby automatically translates into improved service and better parts availability, this isn’t always the case in the real world of the ag equipment dealer.

Operating on slim margins, many dealers, particularly the smaller ones, maintain minimal inventories of spares and repair parts.

“This has become inherent in many distribution systems today,” says Walker. “The lack of parts avail-ability at a dealerships is a function of controlling the cost of overhead and rightfully so when you consider the dollars tied up and sitting idle in the back room.”

From his perspective, fewer yet higher-volume dealers will actually improve the parts distribution and availability situation. “What’s hap-pening here is because of the slim margins, dealers are stocking fewer and fewer parts because of the capi-tal cost involved.

“So if you can get a little larger dealer covering more market area, then he’s probably in a better posi-tion in terms of available capital to cover the overhead involved with stocking more parts and providing better service. Fewer but larger dealerships will actually help improve the whole situation.”

Consolidating the Dealer Network

It is no secret that the AGCO needs to streamline its dealer base. With each of the nearly 20 acquisi-tions during the past 15 years, its dis-tribution channels were modified to assimilate the menagerie of product lines that today make up AGCO Corp.

How the equipment maker shrinks its North American distribu-tion network remains the question.

“We have no intention whatsoev-er of running off the existing AGCO dealers we have now,” says Walker. “From our end of it, a lot will have to do with dealers making their own choices whether they go for-ward or not.

“Certainly with franchise laws and usury protection laws, dealers are protected pretty well. But many of the dealers who came along with the products we’ve acquired are dealers who, on their own, will exit the mar-ketplace. Our long-term focus is on dealers we know can go forward with us, and who can pick up all of our product lines.”

Walker insists that “We are not actively encouraging our larger deal-ers to buy out the smaller ones. From the AGCO North America end of it, we necessarily want to build volume at the dealerships that will be around for the long term.

“Two ways will increase the vol-ume at our dealerships. The first is natural attrition. As the smaller ones go out, those around them will pick up the lines. The second one is giv-ing the surviving dealers as many of the product lines that we have that don’t have like-brands distribution in their area. But where they’re all together in the same are, we will have wait for attrition to do that.”

Distribution Strategies

In light of the shifting demo-graphics of agribusiness in North America,  AGCO looks at having both the AGCO and Challenger brands as presenting a significant advantage in the marketplace.

Whereas AGCO finds its core strengths in serving the smaller, medium-sized and “smaller” large farm operations, Challenger is well positioned to take on the equipment, service and technology needs of the growing number of very large row-crop farms of the Midwest and Plains states.

As Walker sees it, this gives AGCO the product variety it needs to work through the inevitable economic cycles of the agribusiness world.

“Right now, we’re trying to focus on giving the long-term dealers as many of the products that we can to give us coverage of the entire mar-ket,” Walker explains. “We are also focusing on trying to build what we call our ‘two cornerstones of familiar-ity’ in the marketplace.

“We want all of our long-term deal-ers to carry either the Massey tractor line or the AGCO tractor line because when you look at the other full-line manufacturers, they really start with a combine and a tractor — that’s the cornerstone of the business.

“So we want to make sure that our dealers at least carry a combine, whether it is a Gleaner or a Massey, and that they have either the Massey or AGCO tractor. This forms the foundation for adding all of our other product lines in a natural fashion.”

Longer-Term Trends

Many of the the longer-term trends that will shape ag equip-ment business are already under-way. Fewer, but larger farms and the growing number of large prop-erty owners or hobby farmers, are two distinct trends that all farm machinery producers are watch-ing. But while looking at these longer-term trends, Walker isn’t losing sight of what is available to AGCO today.

“There is still a tremendous vol-ume of business in the beef and dairy sectors that will eat up a lot of machinery in terms of sheer volume. So while we see some softening with row-crop type commodities and equipment, we still see some very strong markets in ’06 and beyond.”

On the other hand, you probably won’t see AGCO brand products at the far reaches of the ag equipment business.

In other words, don’t look for them to go after the lawn and gar-den business, and it’s the Challenger line of equipment that will earn for AGCO’s share of the really large equipment.

“We aren’t looking to dabble in the consumer products end of things. There’s a high cost of entry into that business. The start-up costs are huge to try to reach those consumers who live just outside of the metropolitan areas and who are looking for lawn and garden prod-ucts. And I don’t see us going in that direction,” says Walker.

“What I see us doing is turning the hourglass upside down and say-ing ‘OK, if you take the part of the farm sector that involves the people who are moving out and buying more acreage, and need a 50 or 60 hp tractor, we can deal in that kind of business. That’s still a large num-ber of tractors and implements.

“I see us dealing with the sun-downer who isn’t quite at the far-thest side of the ag sector, and also concentrating on the mid- and large -sized farms. We are well positioned to service this entire range of farm operations.”

When it comes to the behemoth farming operations where “the big-ger is best” and cutting-edge tech-nology is a given, this is where the AGCO-Caterpillar alliance steps up.

According to Walker, “It’s a diffi-cult business when you look at the large farm operations that everyone is talking about. Some of our com-petitors are pretty entrenched there.

“There’s a lot of technology, a lot of support services, and we’ll be going in that direction, somewhat, but we’re shooting for somewhere below the very high technology and high support end of the largest farm operations.

“Challenger, on the other hand, has that capability to deal with the high-tech farmers. I think this is certainly a focus of their market drive,” says Walker.

“So, as a corporation, our overall thrust is to deal with the entire farm base, that’s why I think we —AGCO and Challenger — have com-plementary product lines and distri-bution systems.”

Growing in a Stable Market

For the most part, AGCO doesn’t anticipate the size of the overall farm market to grow dramatically in the next few years.

“You can’t really look out any fur-ther than the next 2 or 3 years because so much of it is driven by outside competition,” Walker says.

So, how does a company like AGCO grow in a stable market?

“By taking away business,” he says. “There’s nothing else you can do,” he says.

“In the past, as part of our opera-tion, it was the acquisition of compa-nies and taking these various com-ponents and utilizing economies of scale and combining those to reduce overhead. This is how the company has gained profitability, growth and revenue.

“Looking forward, it has to be technology driven. What we’re look-ing at again is trying to reduce over-head as much as possible, free up cash and, instead of buying compa-nies, it is to aggressively invest in research and development.

“We really started seeing this starting in 2004. We’ve increased our R&D budgets more in the last 2 years than we did in the first 14 years.

“I’m not saying we’re not going to acquire more business, but it won’t be AGCO’s principal model for future growth.

“For the first 15 years that was certainly how we got here, but now we’ve reached a point where in order to continue participating in the industry, we have to concentrate on our distribution system.

“We’ve picked up a lot of product and a lot of sales growth through the existing distribution systems that we’ve acquired along the way, but we know many of those aren’t for the long term. Not the way this industry is going.

“So we’re looking more toward streamlining all of our distribution channels,” says Walker.

“In the long term, our growth will come from challenging the competition by solidifying a fewer number of individual dealers and helping them grow their volumes.”

The Dealer is Key

In summing up the current and ongoing focus of the company, to Walker, the strategy is pretty straightforward.

“Challenger is aggressively trying to expand its business and the AGCO brand is focusing on consolidating our distribution network into higher volume dealers.

“Since AGCO was founded, we’ve grown the business every year. In fact, our business has out-paced the market and we’re gaining marketshare and it’s working for us. So I think we’re going in the right direction.”

Walker is quick to admit that despite the ungainly size of his dealer network, the dealers have and will continue to be the focus of AGCO’s growth strategy.

“We’ve done it with strong dealers. I don’t think it will ever change.

“I look at our dealers as our part-ners. We’re in this together. The dealer is the primary interface with the customer. In our distribution system, he is AGCO — he is Challenger.

“As the manufacturer, our role is to make our customer the farmer as profitable as possible so he will be there long term.

“We need to offer products and services that will make the farmer more profitable, whether it’s through advanced technology or lower cost of ownership.

“The dealer is right in the middle of the whole process. We can’t do business without our dealers.”

The following “Special Report” was put together to give Farm Equipment readers the manufacturer’s perspective on these and other issues con-fronting ag machinery dealers.

How the ‘Big Four’ are Dealing with Dealer Issues

AGCO’s Dealer Network Heading for ‘Somewhere in Between’

Case IH’s Frank Anglin Brings Analytical Approach to Dealer Management

Ag Industry Keeps Close Eye on Deere Distribution Moves

‘One Size Fits All’ Approach Isn’t a Fit for New Holland