Thursday, November 23, 2006

Value is in the eye of the customer...

Life is not good for car salespeople. The availability of price information on the Internet - such as - has eroded margins for dealers and commissions for sales staff.
The car salesman became one of the most derided of American archetypes--and provided rich fodder for fiction and film. Think Harry Angstrom, the adulterous Toyota-selling protagonist of John Updike's Rabbit books. Or Jerry Lundegaard, the slimy Oldsmobile dealer played by William H. Macy in Fargo, who in one scene sneaks in a weatherproof sealant to jack up the price.

Now consumers are getting their revenge. By spending half an hour on sites like, buyers can find how much the dealer paid for the car, the cost of options, what consumers are paying in a specific region, and which models are available at various dealerships. Many consumers start negotiations citing the invoice price--what the dealer paid--and offer a few hundred bucks over that. [More]
(Read the comments at the bottom of this article). Despite whether you agree with the salesmen of the customers the crucial point is more fundamental: car sales were built around a business plan that capitalized on asymmetrical information. Or put more bluntly, clueless customers.

We are seeing this pattern repeated famously for travel agents, stockbrokers, and other commission workers. While these jobs arguably do deliver some value, much of it was in the form of convenience, not expertise. Consequently, only those who don't mind paying for convenience like high-end buyers will not begrudge the added cost of a salesman.

Agriculture may not escape this trend. Imagine an "" for farm machinery. Regardless whether this comes to pass, the machinery industry suspects they have too many dealers.

Contrary to my projections, machinery companies are not optimistic about 2007.

But many analysts said Deere was being too cautious in its outlook. Ann Duignan, an analyst at Bear Stearns, said in a note to investors that "worldwide farm-economic conditions remain quite promising."

"Prices for farm commodities have surged in recent weeks and worldwide carry-over stocks for wheat and corn are at 30-year lows in relation to consumption," Duignan wrote.

David Raso, an analyst at Citigroup, agreed.

"Deere is not yet willing to bake in ... recent strength in farmer fundamentals," he wrote in a note to investors. He predicted the company's 2007 forecast, which anticipates a 22 percent drop in net profit, "will prove too conservative." [More]

Personally, I think farmers will be anticipating $3.50 corn profits and trading up to bigger and better starting yesterday. Those who remember the early '70's can testify to this.

The profit windfall will last until we bid up inputs (like machines and rent) to levels that leave us with about the same net per acre as before. It is in this 2-4 year lag time that aggressive expanders will rewarded, and be prepared for the inevitable contraction with a larger operation to spread costs.

But for the meantime, maybe some of those disgruntled car salesmen will show up in tractor showrooms.

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