Caterpillar Intensifies Focus On Dealer Performance To Drive Results In A Tough Macro

Caterpillar (NYSE:CAT) dealer sales fell by 8% annually in January revealing an extended period of weakness in the company’s end markets, particularly mining. ^[1] The company sells its products to its dealers who in turn sell them to end users like construction and mining companies. During the month, Caterpillar (CAT) dealers’ sales of construction machinery and power equipment rose in single digits, but this was more than offset by a 37% year-over-year decline in their mining equipment sales. These latest statistics confirm that the weak end user demand for CAT’s mining products continues to offset the marginal growth in its construction and power systems businesses. Faced with such a challenging macro environment, CAT is working to grow its results by improving its dealer performance.

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Aligning Dealer Network With Changing Demand Environment

CAT currently has 178 independent dealers around the world that distribute its products, which include construction equipment, mining machines and equipment, diesel and natural gas engines, turbines and locomotives. The company initially built its distribution network for traditional customers who purchased machines for local use. However, increasingly CAT dealers are not selling machines but renting them. Separately, many of the company’s mobile customers such as  pipeline contractors are purchasing equipment from one dealer, but operating them across multiple territories. Marine industry customers are also purchasing equipment from their base region but operating them globally. Then, many original equipment customers are purchasing machine parts from CAT to build their own machines that are then sold to other customers. These original equipment manufacturers are looking to service their customers by involving CAT’s dealer network. So, CAT has a situation where its dealer network designed for the traditional customer needs to be realigned with the changing demand environment.

Improving Dealer Performance To Drive Results

In response, beginning in 2010, CAT launched multiple initiatives towards addressing this changing nature of demand. But at its analyst meet held earlier this month, the company confirmed that it is doubling its efforts on this front, likely in response to the extended weakness in its macro environment which is impacting its top line. In an initiative, called Across The Table, CAT is working to improve its dealer performance and collaboration. The company, in consultation with its top 20 dealers and customers, has mapped many gaps in its delivery network. For instance, large customers who currently deal with multiple CAT dealers, due to the global nature of their operations, see significant variation in service experience across dealers. To address this, CAT is working towards institutionalizing best practices across its entire dealership network. The company figures that if through best practices and other initiatives it is able to bring all its dealers to the top quartile performance, then that would add around $18 billion to its sales. And if not to the top quartile, even if the company is able to bring its poorly performing dealers to at least median performance then that would add $9 billion to its sales. ^[2]

Apart from driving best practices, these dealer performance initiatives include building a globally-aligned rental equipment business model, greater data sharing between CAT and its dealers to identify and build novel solutions for customers and improving parts logistics. We figure, these initiatives around improving the distribution network will add growth to CAT’s results, as infrastructure customers look for strong relationships and parts services while making their machine and equipment purchases. An improved and standardized equipment renting model will also take advantage of the increasing shift in customer demand from the outright purchase of equipment to renting. Additionally, greater alignment of CAT’s dealer network with the changing demand environment will enable it to maintain its leadership position as it faces increasing competition from new players that expertise in niche segments.

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1. CAT monthly retail statistics, March 11 2014, www.caterpillar.com [↩]
2. CAT 2014 analyst meet presentation & transcript, March 4 2014, www.caterpillar.com [↩]