According to at least one industry analyst who studies the distribution part of the farm equipment business, the consolidation of the industry’s dealers is inevitable and necessary.

In a special report produced for investors, Ben Cherniavsky, analyst for Raymond James’ Canada research, says, “Most OEMs still rely on a highly fragmented dealer network to get their product to market. In Canada alone, according to our analysis, there are more than 500 dealers representing over 25 different brands in 1,350 branches across the country,” he says.

“We believe this represents a highly inefficient distribution channel that is bound to consolidate in the future. Some of the contributing forces behind this trend include ageing demographics, increasing capital/technical requirements and a softer macro backdrop that will force the industry to reconsider M&A as a primary growth driver,” he adds.

Ag Equipment Intelligence, a sister publication of Farm Equipment, has been compiling data on the consolidation trends of North American farm equipment dealers since 2009 and began issuing annual “Big Dealer” reports on the subject in 2011. The data shows that in 2009, there were slightly over 150 dealer groups that operated 5 or more retail locations. By early 2015, this number had grown to nearly 190 dealership groups with 5 or more stores.

As for Canadian farm equipment dealers, the “Big Dealer” report shows that in 2011, the 25 dealers with 5 or more locations operated 234 total retail locations, with 206 of these focused on ag machinery sales. By 2015, the “Big Dealer” group grew to 35 dealers operating 359 total locations, 313 of which are farm equipment stores.

Among the major variables that are driving industry consolidation, the Raymond James analyst says, is the increasing benefits related to economies of scale.

Cherniavsky contends that, as farm machinery has grown more complex and sophisticated, increasing demands for more investment in hardware, software and tech training are putting additional capital requirements on dealers. “Amidst these industry trends, it has become increasingly evident that bigger, well-capitalized dealers are generally better dealers,” he says.

“Even though few of them will state it explicitly, most OEMs are beginning to see that the benefits of a more concentrated distribution channel outweigh the drawbacks of putting more power into the hands of fewer dealers.”

He adds, “Any of the OEMs that still resist this trend — in the name of limiting a dealer’s influence and preventing the tail from wagging the dog — will eventually fall into line as they slowly lose market share to the competitors that boast a bigger and better distribution channel.”

Cherniavsky says that a successful dealer roll-up is not a matter of “auspicious timing and good luck,” but requires a great deal of meticulous integration work and solid management practices behind the scenes. Among the factors that contribute to profitable M&As are:

• effective rationalization of overheads and back-office functions;
• systems integration; facility upgrades, where necessary;
• alignment of incentive structures for salespeople and branch managers;
• adopting best practices for service quotes, billing, warranties, etc.;
• marketing and rebranding efforts;
• consolidated parts procurement and inventory management;
• technician training;
• retention of key employees;
• severance of underperformers;
• overall cultural integration.

“In our view,” he says, “when this sort of ‘blocking and tackling’ is done right, there is an opportunity for a dealer consolidator to benefit from economies of scale and prove, over the long-run, that two plus two can equal five.”

From a 30,000 foot view, there’s no doubt that Cherniavsky is correct in his assessment and view of dealer consolidation. But the closer you get to ground level, I can’t help but feel there’s still a place for progressive, well managed, profitable smaller dealers. I also believe that as the majors consolidate their dealers and impose additional “purity” restrictions on them, it will create a rather large vacuum. This will create a place for excellent dealers, left behind by consolidation, to remain excellent dealers who happily retail shortline brands without the baggage of the big name manufacturers.