Editor's Note: This guest blog is in response to the blog ‘Ripped-Up’ Multi-Unit Trade Deals & Viral Videos that digs into a viral video posted by Monticello, Ill., farmer Jake Lieb about a "ripped up" multi-unit dealer purchase order with John Deere dealer AHW.

I am an Iowa farm boy. 44 years ago my dream was to be a farmer. My next wish was to be a John Deere dealer. Since I couldn’t afford either one, we moved to Washington to milk cows for my in-laws.

In between milkings I started buying and selling late model tractors out of the Midwest. We started from scratch in a rented shop fixing the neighbors’ equipment. 35 years ago we were honored to be approved as a Kubota, JCB, Bobcat and AGCO Hesston dealer.

In the mid 1990s Hesston held a dealer meeting for all the dealers in the West. Hesston with its hay line, especially the big square baler, was a big deal in the West. The second morning the execs hosted a Q & A. Most of the dealers there were like us — small and only sold one or two big balers a year. There was a lot of complaining from many about poor margins and the inability to make money when a couple notorious big dealers were bootlegging new iron seemingly below cost wherever they pleased.

After listening to an hour of heated back and forth, I asked for the floor. “Mr. Chairman, there is an easy solution to this issue: Discontinue volume discounts.” Everyone in the room turned to see who made this ridiculous suggestion. A big dealer in the front row jumped up immediately and angrily addressed me and let everyone know he had over 20 balers on order and if there weren't volume discounts would he have to cancel his orders? I responded, “Mr. Chairman therein is the problem.” It got really quiet. It became very evident to me that I wasn’t going to be very popular. Although at the next break I was surprised how many dealers thanked me for what I said.

Fast forward to today. Everyone is still drinking the volume discount Kool Aid. Now instead of having to sell $5 million a year to get a nice volume bonus check you have to sell $100 million plus! Manufacturers have basically forced mergers and acquisitions of dealers, and they control approvals. A new single dealer/owner taking over a neighboring long established single store is unheard of.

Today the top 100 dealers all have 10 stores or more! The top 20 dealers average 36 stores each and average 1,500 employees each! Who do you think waves the big stick at dealer meetings today? 

Sometimes I wonder about anti-trust/monopoly implications. Are these big dealer organizations any different than the grocery store mergers? A single-store dealer who knows all his customers literally can’t compete with the 20-store mega dealer next door who has a 6-7% price advantage. I would argue that in the end it is a lose lose for the average customer.

In the last 40 years there have been over 1,000 individual dealer principals sold out. The CASH is all gone. Let me explain. The original entrepreneur who either started the dealership or took it over from family is nearing retirement. He knows most of his customers personally and has sat at their kitchen tables. A lot of former owners always left their money in the business. They took pride in hearing things like: “You have a lot of inventory!” To them it was a badge of honor to keep stuff on hand and a reason for someone to stop and look at what they had. He believed in having a lot of parts on hand. Having loaners. The dealer was part of the community. He had skin in the game.

But now mother _______ (you fill in the manufacturer) dictates who is going to take over the dealership and who is going to buy him out. The mega dealer agrees to pay cash to the selling dealer for all his accumulated paid inventory, parts and assets. The selling dealer takes the cash out the door with him. The CASH is gone. To fund this purchase, the buying dealer now liquidates/shrinks the inventory. Some stores on the fringe of these huge AORs now look like they are going out of business. Older long-time employees decide to walk away. They change computer systems and lose a lot of valuable history. It is a lose-lose for the small everyday customer.

I couldn’t help but notice in the AHW-Lieb saga I didn’t see anyone at the table with the same color hair that I have. The new young managers are carrying the water for the shareholders. They have no skin in the game and no ability to solve problems.

A lot of times the selling dealer agrees to stay on for a time … help with the transition. That typically doesn’t work out so well and is short lived. He can’t take watching a good customer he has known for 30 years, come in the store and get asked what his name is. Then is subjected to an anal exam at the parts counter to buy a part. The selling dealer has seen enough and leaves. Some were my friends the past 40 plus years.

The former owner knew what used trades were worth. He knew how to sell and market them. His knowledge and management skills are now gone. His CASH is gone. Now college graduates with degrees and computer skills are running the store. There are now very tight windows and limited cash to absorb trades. They do great as long as they can dump stuff on auctions. When the auction market nose dives as it recently has, they panic. How many other AHW-Lieb deals are out there?

It is fascinating to me there is a new small orange tractor line that nobody took seriously 30 years ago, and now is very formidable. They consistently rank near the top in dealer manufacture and customer satisfaction. You know what they don’t have? Volume discounts. I hope they never change that.

Related Content:

Update: October 28, 2024
Read Leo Johnson's response to Scholten's op-ed: "Answer Letter ... More Industry Perspective on ‘Root Cause of the ‘Ripped Up Deal’ — Volume Discounts'"

Update: November 5, 2024
Read Scholten's reply to Johnson's "Answer Letter": The Sacred Cow-Volume Discount or Volume Bonus?