Editor's Note: This guest blog is a response to Leo Johnson's Answer Letter ... More Industry Perspective on ‘Root Cause of the ‘Ripped Up Deal’ — Volume Discounts.’ Johnson wrote his blog based on Duane Scholten's commentary about 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 have to give Mr. Johnson credit. He is the first written response from a top 100 big dealer group. His letter is in response to my initial blog Root Cause of the ‘Ripped Up Deal’ — Volume Discounts. Mr. Johnson’s first concern was that I correctly describe the term as Volume Bonus not Volume Discount. Ok, how about Volume Bonus/Discount?

His second concern was that maybe I should have referred to the MUDs (multiple unit discounts) instead of blaming the Volume Bonus/Discounts. No, my sole focus was/is the Volume Bonus/Discount. MUDs are typically always passed on the customer. Customers are made aware of MUDs because the salesman is trying to get him to buy several new units at one time. Great deal for big farmers and corporate farms.

It is my opinion the Volume Bonus/Discount is the still the root cause for the ripped up deal, for all the reasons I already mentioned in my first response. Mr. Johnson is correct, it didn’t just start at the AHW-Lieb Ripped Up Deal, but it has been behind the scenes. It has been brewing for a long time.

Nothing has really changed from 30 years ago when I brought this issue up at the Hesston meeting. With the big dealers it touches the same nerve. It is kind of like a secret they like to keep that way? They have been nursing on this Sacred Cow a long time. The Big Boys now think it is their “right.” Mr. Johnson wants to make sure I call it a “Bonus,” yet his defense is like they have earned it. What has the small single store dealer earned who is in the trenches everyday?

Let me see if I can put some perspective on this Volume Bonus/Discount issue. AHW is in the $400 million plus total revenue category. Let’s assume they meet all the requirements of Volume Bonus requirements and they qualify for 6% Volume Bonus/Discount on $400 million of settlements. That is $24 million check! That is a lot of money! To a single store dealer, that is a pile of money! Sometimes I think we lose sight of how much money that is. A lot of single stores don’t have that much revenue (total sales), not to mention do they hardly ever qualify for a bonus check? Most single stores can be bought for less than $24 million. This Sacred Cow is now funding acquisitions. So how does a neighboring single store compete with that?

Let’s make another assumption: (I have talked to nobody and I have only seen the video on social media so I am guessing here to make a point.) Let’s assume Lieb Farms made a deal for a minimum 2 new big combines with heads and 2 new big tractors. 4 new units and 4 trades. Let’s assume it is a $3 million deal. Let’s also assume AHW 2 months later thinks the market has changed and they over allowed $150,000 a piece on the combine trades and $75,000 a piece on the tractors. That is a $450,000 haircut? This is all speculation. This deal alone would have potentially generated a $180,000 Volume Bonus check. So that lowers the exposure to $270,000. What about the original profit calculation 5% on $3 million possible? Now the exposure is $120,000. Couldn’t tap into the $24 million Volume Bonus/Discount? Is it that much of a Sacred Cow to the owners? The equipment business has been pretty good the last 4 years. Used iron was easy to sell. So the first sign things are declining, we panic? Dumping stuff at auctions and walking away from deals?

A store with skin in the game would have been at the kitchen table of the Lieb’s trying to work out a compromise and a solution before it came to this. I am pretty sure Mr. Johnson would agree with me on this.

So, where does the Liebs go now? They are obviously John Deere people. Is it possible that these mega store dealerships know that their customers don’t have a lot of options to shop elsewhere because they tied up all the surrounding dealerships? New equipment today is constantly needing software updates, emission updates and warranty. So, is it assumed they can’t go elsewhere. What if AHW buys a neighboring 20-plus store dealer? This issue compounds itself. Who out there is capable of buying a 20-store dealer…besides another 20-store dealer? Is that where we are going?

A small single-store dealer can’t come close to the Lieb deal. In my example, the small dealer starts out with $180,000 higher cost. My opinion is that the Volume Bonus/Discounts are not good for the industry. How about another example on a $400,000 tractor sale. The small single store dealer has a $24,000 higher cost because he doesn’t qualify for a Volume Bonus/Discount like the mega dealer would. Ironically, if you carry this further, the small dealer is helping fund the manufacturer to pay the Volume Bonus/Discount to the big dealer because the small dealer is paying a higher cost. Does that seem right?

Related Content: