Dealers selling to rural lifestylers think 2016 will be another good year, with significant growth forecast for revenue at a time when the production ag equipment market is experiencing declines by as much as 20% or more.
This is according to Rural Lifestyle Dealer’s 2016 Dealer Business Trends & Outlook survey, the magazine’s ninth annual survey and the only one of its kind in the industry.
The market is diverse and includes small acreage farms, hobby farms, large property owners, landscapers and light construction contractors — and production farmers turn to compact equipment as well. This formula of serving the rural equipment buyer is a profitable one as more than 88% of dealers throughout North America expect total revenues to be as good as or better than last year, according to the survey. That optimism follows the 2015 survey when nearly 84% expected total revenues to be as good as 2014. (Jump to the charts below)
Dealers have good reason to be optimistic as the economy overall is sending good signals. For instance, 2015 started and ended with an unemployment rate of about 5%, according to the Bureau of Labor Statistics. Economists consider that level a fully employed economy. The retail and hospitality sector, professional and business services and health care sectors all experienced job gains. Perhaps there is even good news in statistics about the average hours worked, about 34.5 hours. That leaves plenty of time for rural lifestylers to play and work on their properties.
New home construction, another good indicator for the market, is also positive. Over the last few months, builder confidence as measured in the National Assn. of Home Builders/Wells Fargo Housing Market Index has been near 60 with 50 being neutral. NAHB Chief Economist David Crowe said in the December report, “With job creation, economic growth and growing household formations, we anticipate the housing market to continue to pick up traction as we head into 2016.”
Another potential industry barometer, the Green Industry & Equipment Expo (GIE+Expo), a leading trade show for the industry, saw registrations up 11% in 2015 and the number of exhibitors increased 4%.
Here is a closer look at how dealers are defining optimism in their own stores.
Rural lifestyle dealers are strongly positive about 2016. Nearly 46% of responding dealers expect revenues to increase 2-7%, compared with about 39% who expected similar increases for 2015. More than 13% expect revenues to increase by as much as 8% or more in 2016, compared to 2015 when 8% of dealers expressed that high level of optimism. Nearly 30% are expecting this year to be as good as 2015, compared with 37% in last year’s survey.
There are fewer dealers this year than last year who are pessimistic about sales. About 11% expect revenues to decline 2-8% or more, compared with more than 16% who forecast similar declines for 2015.
Another way to view the numbers is to look at the weighted average scale, where the forecast increasing levels of revenue are compared with the decreasing levels of revenue and the “about the same” responses are not considered. This analysis verifies the upward trend as the weighted average for 2016 overall revenues is 2.4% compared with 1.6% for 2015 overall revenues.
Dealers’ optimism extends to aftermarket revenues as well. More dealers than last year are expecting growth in the 2-7% range for service and parts revenues, nearly 54% for 2016 vs. about 46% for 2015. Those who are most optimistic, expecting growth in the 8% or more range, remained about steady at 9% of dealers. There are slightly more dealers expecting aftermarket declines in 2016. About 9% are expecting aftermarket revenue decreases of 2-7%, compared with about 8% in 2015. (Jump to chart "RL Dealers' Change in Aftermarket Revenues 2016 vs. 2015")
The weighted average, only looking at positive and negative forecasts, again bears out the optimism — 2.6% for 2016 compared with 2.4% for 2015.
One factor contributing to the upward trend is the growing customer base. Sixty-eight percent of dealers say their markets have grown 5-20% in the last 5 years, compared with about 64% for 2015, and 16% report market growth of 20% or more, compared with about 13% last year. Fewer dealers reported a shrinking market, 7.3% compared with 10.4% in the 2015 survey. (Refer to the table "Facts & Figures About 2016 Survey Respondents" for more demographic data about the survey respondents.)
In terms of customer makeup, dealers say the hobby farm segment makes up almost as much of their base as production farms, 26% vs. 27%. Turf and landscape contractors make up about 19% of their customer base while municipalities and parks make up 9% and construction contractors make up 7%. A solid 12% of customers fall outside these categories. (Refer to the chart "Dealership Total Revenue Breakdown by Market Segment — 2016".)
The segment has a good share of established dealers, about 57% have served the rural equipment market for more than 16 years. Nearly 13% of dealerships are newer to the market, selling to rural lifestylers for 1-4 years, and are gaining the experience they need to compete.
Products Pushing Revenues
More than 88% of dealers throughout North America expect total revenues to be as good as or better than last year and more than 90% of dealers expect aftermarket revenues to be as good as or better than last year.
About 70% of dealers expect unit sales of zero-turn mowers to increase 2-8% or more. About 46% expect to add utility vehicles to their product lineups in 2016.
Dealers are most concerned about finding good employees, followed by low sales margins and healthcare programs and costs.
About 68% of dealers say their markets have grown 5-20% in the last 5 years.
The survey asked dealers to define their optimism even further, rating revenue increases based on 26 categories — products that are typical for a rural lifestyle dealership. Zero-turn mowers captured the top spot, with more than 70% of dealers expecting increases of 2-8% or more. Chain saws hold the number two spot, with nearly 54% of dealers expecting similar increases. The products rounding out the top 5, based on percentage of dealers expecting increases of 2-8% or more, are utility vehicles (about 50% of dealers); tractors less than 40 horsepower (about 48% of dealers); and lawn tractors (about 43%) of dealers. (See the table "Product Lines with Most Potential to Increase Revenues in 2016")
Zero-turn mowers also held the top spot in the 2015 survey for growth in the 2-8% or more range. However, dealers are expressing some shifts regarding other top products. Last year, tractors under 40 horsepower, tractors 40-100 horsepower, rotary cutters and utility vehicles made up the top 5.
Bucking the Trend
The Rural Mainstreet Index, a barometer of the rural economy, was at 43.7 in the December report, below the growth neutral level of 50. This is the fourth straight month the index was below 50. The index ranges between 0 and 100.
The downturn is related to lower ag commodity and energy prices and from downturns in manufacturing, according to Ernie Goss, Ph.D., MacAllister Chair and professor of economics at Creighton University. Goss surveys community bank presidents and chief executive officers in rural areas of a 10-state region dependent on agriculture and/or energy.
The rural equipment market has been insulated from this downturn. “The consumer is buying, while the farmer is not,” says Goss. “I would have expected to see some spillover, such as in cities like Omaha, Neb., where the farm economy is much closer, but I haven’t seen it yet. We may see some in the months ahead, but it looks limited and will be offset by job gains in the healthcare and professional and business services sector.”
Goss watches job growth figures as one of the indicators of how the economy is faring. The U.S. economy added 211,000 jobs in November, according to the Bureau of Labor Statistics. That’s lower than the 298,000 jobs that were added in October.
He says dealers should watch the Federal Reserve. “If interest rates are raised more dramatically than expected, it would push up the value of the dollar even more and could increase borrowing costs for equipment.”
Goss adds, “In the interview after the December hike, Janet Yellen, head of the Federal Reserve, indicated that 2016 rate hikes would likely be measured and driven by changes in economic data.”
He’s also watching President Barack Obama’s actions regarding the economy. For instance, the president approved the Trans-Pacific Partnership Agreement (TPP), the trade agreement between the U.S. and 11 other countries, including Canada, Mexico and Japan.
“The TPP is a game changer for rural areas,” says Goss.
Zero-turn mowers also topped the list in terms of the category offering the highest level of optimism with nearly 23% of dealers expecting growth of 8% or more.
In looking at optimism for some of the lesser categories on the list, seeders/drills, ATVs, manure spreaders, feed and fencing rounded out the bottom of the product list.
In looking at products with negative forecasts for 2016, declines of 2-8% or more, dealers showed some split opinions regarding lawn tractors. The category made both the top 5 for revenue increases of 2-8% or more and led the categories for declines of 2-8%, with about 19% of dealers forecasting that drop. Seeders/drills, tillers, snow removal equipment and manure spreaders made the top 5 list for which dealers expect declines of 2-8% or more.
The weighted average perspective — positive vs. negative forecasts — further supports the positive outlook for all of the top 5 products with the most sales potential. For instance, zero-turn mowers and chain saws are up nearly 1% or more on the weighted average scale from last year’s forecast. (Jump to chart "Weighted Average Perspective".)
Dealers feel sales will be about the same or slightly less for those categories on the lower end of the potential list, including seeders/drills, ATVs, manure spreaders, feed and fencing.
Renting equipment is another revenue driver for about 38% of dealers. This is down from the 45% of dealers who said they offered rental in the 2015 survey. Last year was the first year we asked about rental, so we’ll continue to watch for trends.
Products that ranked in the top 5 for rental include skid steer loaders, zero-turn mowers, tillers, tractors under 40 horsepower and tractors 40-100 horsepower. (View the complete list here.)
Last year, tractors in both ranges and skid steer loaders made the top 5 for rental, along with backhoes and post-hole diggers.