Dave Baiocchi Inflation – OMG!
In December of 1980, I left college and got my first full-time job. We had just elected Ronald Reagan in a landslide election, but Jimmy Carter was still the President. The hostages in Iran had been held captive for over 400 days. The unemployment rate was eight percent. Our economy was facing runaway inflation. Nobody knew quite what to do, or what to expect next.
In 1976, the inflation rate was 4.6%. Four years later it had skyrocketed to 12.5%. The Federal Reserve uses interest rates as their primary tool to stem the tide of dollars flowing into the marketplace and bring inflation back under control. In the six-month period from June to December of 1980, the federal funds rate was raised six consecutive times, starting at 8.5% and topping out at 20%. The prime rate in December was an astronomical 21.5%.
It was a portentous moment to start a career. The standing joke of the day was: “I dozed off for a moment…. did the prime rate go up while I was asleep?” We only laughed to keep ourselves from crying.
Only people born before 1960 were affected by (or even remember) this near-catastrophic economic upheaval. Ronald Reagan re-ignited the economy using tax cuts, deregulation, and incentives. Life went on…prosperity returned.
That was 40 years ago. 40 years is a long time. How quickly we forget the tenuous economic legs on which we stand. For the rest of the ’80s and most of the 1990s, we were able to enjoy a robust economy, while maintaining control over the money supply. Rates were moderated with the FOMC occasionally adjusting federal funds rates which averaged between 3.0 – 5.0% through the mid-2000s.
Then in 2008, an unprecedented banking crisis nearly took the country into a deep depression. Credit tightened, as banks had to adjust to new regulatory parameters. The Federal Reserve, in an effort to soften the severity of the economic impact, started printing money (using the bond market and a new euphemism called “quantitative easing”). They also lowered the fed funds rate to spur borrowing of those printed dollars, in an effort to get the economy moving again.
All of this phantom liquidity caused some concern. Rewind to 1980. Too many dollars, chasing too few goods equals inflation. Surprisingly…inflation did not materialize. So, the Fed lowered rates again…and again…and again. From a high of 5.25% in June of 2006 to a low of 0.25% in December of 2008.
For the next 13 years (with a few notable exceptions), the government has kept printing money and making it available to banks at nearly zero net cost. This left many (myself included) scratching their heads about the mathematics connected to economic inflation. The banks, the investment firms, the government bailouts, the low-cost loans, and even a worldwide pandemic could not seem to stir the inflationary beast.
Funny thing about inflation; by the time you figure out it’s started… it’s already out of control. Well, it seems the wildfire has been started…on a very windy day. The supply chain crisis has finally kicked us over the edge of the inflationary cliff. All of the printed dollars circulating in the economy have fewer and fewer places to go. Cars, machinery, real estate, clothing, food staples, gasoline, building materials, and nearly every other consumer and commercial category are facing rising prices as demand increases, and supply shrinks.
In January of 2021, the CPI inflation index was at 1.4%. It DOUBLED two months later (Mar 21 -2.6%). Then it doubled AGAIN on May 21 (5.0%). At this writing, the numbers for November were just published at a staggering rate of 7%. Ships are still waiting to unload at the ports, shortages are becoming commonplace, and makers of microchips are still reporting lead times that extend well into 2023.
Yes…. we need microchips to build forklift trucks.
Inflation is not “on the horizon”. It’s not “transitory”. It’s here…it’s real and as dealers, we are directly affected by it. For the past 40 years, we have not really had to deal with spiking prices. Our SOP’s, our pricing policies, our workforce, and our customer service processes will all need to be reviewed. Our success in 2022 and beyond will in great measure, be predicated on the decisions we make NOW regarding inflationary pressure. In this article, I want to suggest a few key areas where we need to prepare the management team ahead of this expanding price wave. Doing so will ensure that we maintain adequate profitability as well as long-term customer retention.
New Equipment Sales
My wife and I just purchased a new vehicle a couple of months ago. Have you been to a car lot lately? What did you see? New cars? No, you didn’t. You saw USED cars. That’s because every dealership in the country is waiting on their inventory from the factory…. just like we are. Of the model we were interested in… they had a total of two in inventory. We were quoted a full sticker price PLUS $4,000 if we wanted to drive it off the lot. No deals. No discounts. They knew exactly how many new cars they were apportioned, and exactly what they had to sell them for in order to remain in business. They didn’t really care if we bought it or not, because someone would….and quickly. We wanted it, so we paid for it. We also knew that to find another one, we would have to drive over 100 miles, and pay the same price. So, our options were limited because the INVENTORY was limited.
Can you sell your new lift truck inventory on the yard for the list price? Perhaps not…. But you need to understand the power that scarcity gives us. As a sales manager, I can’t ignore the fact that we may be out of stock by the time the trees are in bloom. Every dealer has a minimum profit percentage for a new forklift deal. Raise the floor on that expectation NOW. Announce immediately, in no uncertain terms, that the dealership will not entertain a deal less than the new standard. Keep that floor moving up. Chart inflation for ALL capital equipment and let it inform your pricing policy. Raise your price BEFORE your OEM does. Stay AHEAD of the wave.
Be strategic about your marketing. Everyone is in the same situation here. Very few dealers (if any) will have an inventory advantage. So, look at your inventory and the limited shipments you will get in 2022 and MATCH them to select customers. Then go to those customers and offer them the “right of first refusal”. Price the units aggressively and connote the idea that it’s OK if they don’t “exercise their right”. Doing this does three things:
- Makes the customer feel prioritized.
- Puts the customer “on notice” about the ramifications of not securing a unit now.
- Puts the dealer in charge of setting the price without exceptions or argument.
Units that are on order, and are more than six months from delivery should be priced at a premium to your existing yard inventory. Don’t think for a minute that the OEM will not raise prices on undelivered (or even un-manufactured) inventory. As their raw material costs rise…so will their inventory pipeline pricing. Book that estimated increase into your calculation now. It will be pretty darn uncomfortable to call a customer who has been waiting nine months for equipment to tell them they have to pay more for it.
Used Equipment
The same rules apply to used equipment. You will no doubt be cherry-picking units out of the rental fleet to have something to sell…so make sure you get paid for it. Once again, take a lesson from the car business. Used car prices across the U.S. from March of 2020 to September of 2021 are up 40%. It should be no different with your used forklift offering. Update the website. Match the right truck with the right user and hold the line on pricing.
Inventory is gold. Don’t waste it!
Next month I will continue these thoughts and suggest policy updates for rentals, parts, and services. I will also include ideas on how to outline what you will need to do with wages over the next year in order to retain your staff.
About the Author:
Dave Baiocchi is the president of Resonant Dealer Services LLC. He has spent 40 years in the equipment business as a sales manager, aftermarket director, and dealer principal. Dave now consults with dealerships nationwide to establish and enhance best practices, especially in the area of aftermarket development and performance. E-mail [email protected] to contact Dave.
