Rental: Where Do We Go From Here?Written By Pam Gruebnau
Article Date: 06-01-2004
Copyright (C) 2004 Associated Equipment Distributors. All Rights Reserved.
AEDís Rental Round Table is a standing committee that provides perspectives and analysis on key issues and trends impacting equipment rental. The committee met May 5, 2004. The goal was not to arrive at a single set of conclusions, but rather to capture the best thinking of senior-level executives.
How has rental changed in the last few years?
Do you see fewer factory-authorized dealers involved in pure rent-to-rent?
- Most of the non-compete agreements from the rental consolidation have expired or will this year. Weíre seeing guys who have not been working for two to three years or are leaving their jobs, going back into business for themselves. Theyíre going back into business where they had strong relationships. Maybe they had 20 branches before and now, with one or two, theyíre back carving out a place for themselves. Theyíre penetrating fringe markets, as opposed to competing with multiple product lines.
- We see guys taking part of their wealth, getting used and refurbished machines, peppering their fleets with some new machines, and bringing in partners. They are going to traditional lenders, and finding capital at a fairly good rate. These are small in terms of sales, but there are a lot of them.
- During the consolidation phase, operations are not an issue and profitability is stated in terms of acquisitions, which hides a lot of sins. In the roll up phase, there is a cleansing process. The U.S. rental industry is in a cleansing process. Itís not over yet, but the end is near. The next stage focuses on operational issues. All rental companies will get to the operational phase and begin to operate more efficiently. Weíll see some changes in the next few years toward being operationally efficient.
- Operational effectiveness is a big challenge. Weíre focused on how to run the business better, reduce costs and be more efficient with capital and labor.
- When itís a public market, it forces you to make decisions that may not be good long term. Analysts dissected the rental business and decided rental rates were everything. Analysts wanted to think of used equipment as a separate factor, but itís integral to the rental business. Now the rental companies are upside down.
- Rates have gone up a little, but they are nowhere near where they need to be.
- We hear a lot of talk about raising rates, but making it stick is a problem. Every day we run into situations where weíd love to get the rates up but we canít. Weíre competing with someone whoís hanging by a thread and trying to generate cash.
- I talked to a large rental company last year in the southeast that raised
rates three times.
- Time and dollar utilization are up. Itís the start of some good times for rental.
- Manufacturers are pushing AED dealers to be in the rental business.
- Weíre looking at a more complex world, but I donít think itís an either/ or kind of world. All kinds of new channels to market are opening up.
Is rent-to-rent an attractive business model for an equipment dealer?
- Weíre seeing dealers who opened rental stores, closing them and going back to what they do best. Theyíve stopped trying to be everything to everyone.
- We got into concrete equipment when we first started. We got into things we didnít know anything about, but everyone said thatís what we should be doing. We have slowly gotten out of peripheral things that donít fit with our core business.
- Pure rent-to-rent is not a good thing for dealers.
- It depends on the type of equipment business youíre in. In the bigger dirt equipment, itís a negative. In compact equipment, there are challenges but itís not as capital-intensive, so it can work. If you add 25 skid-steer loaders or excavators, itís not the end of the world. The larger the equipment gets, the smaller the return, depending on product mix.
- If you run it right, itís profitable. If you put infrastructure in place, add mechanics and train the sales staff. I had to push out the age of the fleet. I use to turn forklifts in 18-24 months, now itís 36-48 months before I can make money.
- Rent-to-rent is a profitable business but itís not the distributorís business just because he has construction equipment in his fleet. The two models are different ó the way they operate, the debt structure, the return on investment. Some distributors just try to add rent-to-rent into the distributor model. Trying to blend the businesses is where they get into trouble.
- To make money in rental, you have to say ďyesĒ more than ďno.Ē You donít want to tell the customer that wants to buy that you canít sell it because itís in your rent-to-rent fleet. Make the average age of the rental fleet as young as you can, say yes to customers who want to buy six-month-old machines, and account for it properly.
- Having one shop and using the same mechanics doesnít work. Can you have a common sales force and customer service? Probably not; everything has to be separate.
- We have separate mechanics for the rental side of the business, also separate inventory and new equipment. We donít mix. They are all in the same place, but the fleets are separate. Itís all accounted for separately.
- You can do everything right up until machine disposal, and if you get that wrong, you havenít done anything right.
Do manufacturers view rental and distribution as two different businesses?
- Can rental be profitable for a dealer? Yes, it sure can. The question is when and how. The hurdle is cash flow. Because itís so capital intense, the issue is can you manage cash and produce a model that generates cash flow long enough to get to profitability. It takes discipline to do that even when it hurts short-term profitability. You will probably not make money for the first three years ó until you get into the first turn of your fleet and take some of the gain.
- We wanted distributors to emulate national rental companies, but it
didnít work out as well as we thought it would. Part of the issue was depreciation. Some distributors put rental fleets into long-term depreciated assets, others have nothing but rent-to-sell. There is no one rental model out there. The line between rent-to-sell and rent-to-rent is blurred.
Excerpted from June 2004 Construction Equipment Distribution.
Excerpted from June 2004 Construction Equipment Distribution.
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- Manufacturers want to sell machines; theyíre in rental because it provides a secondary market that gets units into the marketplace.
- Manufacturers are in rental because it allows them to control the channel to market to some degree.
- Manufacturers would rather have distributors involved in rental; itís simpler to have one relationship. Most manufacturers realize it ties up capital, and you do have to commit to truly making it a different endeavor.
- We believe the traditional AED dealer model is on life support. This industry is not earning its cost of capital. That doesnít mean you canít make money in this industry. The airline industry and automotive industry havenít made their cost of capital in 40 years. In an asset-based business like equipment distribution where you estimate depreciation schedules, if you are on the upside of the business cycle you look good, but on the downside, you donít look so smart. We try to position the depreciation schedule in between because we know the business goes in cycles.
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