Distribution's Rental Dilemma - Rental Round Table
Construction Equipment Distribution magazine is published by the Associated Equipment Distributors, a nonprofit trade association founded in 1919, whose membership is primarily comprised of the leading equipment dealerships and rental companies in the U.S. and Canada. AED membership also includes equipment manufacturers and industry-service firms. CED magazine has been published continuously since 1920. Associated Equipment Distributors
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SECTION: Rental Round Table

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Distribution's Rental Dilemma

Written By Pam Gruebnau and Mary Seaman

Article Date: 10-01-2005
Copyright (C) 2005 Associated Equipment Distributors. All Rights Reserved.

Competition if up, costs are up, demand is up, but rates are still down.

What are the biggest challenges facing rental companies and dealers who offer rent-to-rent? Dealers/rental companies reply:

  • The cost of equipment is going up faster than the increase in rental rates. There's a squeeze that's negatively affecting the bottom line of rental operations.
  • In certain product categories, there is a shortage of equipment and customers who normally would have rented are buying to have control over that equipment.
  • Rental has created a rent-to-sell market. Even if customers are prepared to buy equipment, they know they can rent it for one, two or three months and defer payment.
  • We have a large local rental house that we sell equipment to. After returning from ConExpo, they bought a dozen rollers from a Chinese company. This dealer bought a dozen rollers at half the price he would have paid his manufacturer. They aren't worried about parts and service. I'd say on the "mom and pop" side of the rental business that may become an issue. Does rent-to-rent have a positive or negative affect on the balance sheet or income statement?
Dealers/rental companies reply:

  • It's major - the largest asset any equipment dealer has. It presents financing challenges. Sometimes it's a good return on that asset; sometimes it's not so good, and a lot depends on the economy at the time and the management. Since no one is saying they are going to get out of the rental business, it must be good enough.
  • After several years of over-capacity and under-demand, companies have found they can't afford to maintain separate infrastructures due to the cost of people, real estate and bricks and mortar; it's just not affordable. Back under one roof, it's all about asset management.
Are national rental companies using re-rent to satisfy customer demands? Will dealers re-rent competitive brands if necessary?

Manufacturers respond:

  • Our factory-owned stores re-rent, primarily to national rental companies and independents, and to our own dealer network. We have dedicated a significant portion of our rental fleet for re-rental. It gives us a competitive advantage others don't have on certain products.
Dealers/rental companies reply:

  • I'm not making a pitch for re-rents, but I view them as good from the standpoint that it keeps the excess capacity out of the market.
Manufacturers respond:

  • If you're a dealer for brand X and you've got a customer that wants a brand Y, would you re-rent to that customer with brand Y?
Dealers/rental companies reply:

  • We don't like to say "no" to customers. There are very few customers that have fleet commonality to the extent we would like to think. Most customers have acquired equipment over time, and it's not all one brand. If they are brand-specific, we try to say "yes" to that somehow.
What drives rental fleet size other than utilization? Are dealer systems sophisticated enough to provide managers with this information?

Dealers/rental companies reply:

  • No, it's normally done through spreadsheet analysis. You go through by model, what the rental rate is expected to be, what utilization is expected.
  • Compared to where rates were in the mid-90s, the prevalent rates today are 35 to 40 percent less in some categories. Has our cost of real estate gone down? Is the cost of people down? The cost of product? IT? Insurance? Show me one category where costs have significantly gone down. My hope is maybe one of these days rates will get sort of back to a number where you can make an adequate return on capital in rental.
  • I see a lot of people who have not adequately measured their rental costs. Money coming in on the top line looks good, but they don't understand the cost risk, and I don't think they have information systems that give them that data.
  • Large rental companies drive incremental rental rates. When you have assets sitting not rented, the thing you try to do is rent at a lower rate. It's the nature of this business. The cost of entry is low, incremental rental rates always stay at a level of just above break even, just enough to keep someone in business.
  • I don't think large rental companies drive it. Look at any market and count how many outlets rental companies have and how many everyone else has. Typically, they're outnumbered 10 to 1.
What are the value drivers for rental companies and dealers with rent-to-rent operations?

Dealers/rental companies reply:

  • As a dealer, our customers have the opportunity to not only rent-to-rent but also to rent-to-own, or they have the option of returning the machine and buying something new.
  • Our fleet is strictly rent-to-own. Customers don't care if it's in the rental or sales fleet. We rent nearly new or new. If the customer rents a machine and his situation changes and he wants to buy it, we're able to sell it to him. We depreciate everything based on the hourmeter, the rate sheet percentage and maintenance costs. We put a profit margin in there too. If we demo a loader-backhoe for 10 hours, we get hourly depreciation on the backhoe.
  • For smaller customers, utilization is key. You're not going to come in and solve it all for every market, but if you focus on a few markets and you can service those customers, they will see you as experts, as opposed to a guy that is renting everything. If there are 10 major markets, we'll focus on the ones we know, the ones we have the most expertise in so a customer views us as a specialized solutions provider, not a rental house.
  • No offense to manufacturers in the room, but it's a whole lot less about product and more about helping that customer be more competitive. On a typical project, fleet cost tends to be less than 3 percent of the total cost of the project. Labor can be 50 percent of the cost of the project. If you have one machine down, the cost to the customer on the labor side is enormous.
Are dealers investing in their rental fleets?

Dealers/rental companies reply:

  • I'd say having a new rental fleet is an incredible advantage for anyone. No one complains about new equipment going down, but if you have old equipment and it goes down you're public enemy number one.
  • Every customer survey shows the quality of equipment is important but it's availability first, then delivery, and then quality.
  • We have a problem with excavators. If it's an $89,000 excavator and the customer wants $12,000 worth of attachments but we can't get a rental rate that covers them, how do we depreciate attachments to pay for them?
Why has the gap between auction values and retail pricing grown so narrow over the last couple of years?

Dealers/rental companies reply:

  • It makes it difficult for dealers to take trade-in's because auction prices are so high. People who ordinarily trade in equipment are taking it to auction and getting maximum bucks.
  • The spread between auction and retail is as narrow as I've ever seen it. We're seeing brand new equipment at auctions. What's with that?
Manufacturers respond:

  • A couple of manufacturers have selected auction as a channel to market. With prices up, it makes it attractive for the time being.
  • Auction values are up 8 percent to 15 percent. Availability issues have caused auction prices to jump up.
Dealers/rental companies reply:

  • Why haven't retail prices been able to keep up with auction prices?
  • Part of it is availability. At an auction in Illinois someone bought a two-year-old wheel loader for more than the customer had paid for it two years before - at list. Contractors have jobs and they don't care what the equipment costs. You can't get paid to do work if don't have the equipment.
  • Then you've got what the Internet companies are doing. It's impressive. Look at e-bay. They're creating a business segment within e-bay to focus on our industry. Not because they woke up and decided it was a great strategic vision, but because of what they've already sold in this segment.
One of the most common questions dealers ask is how they can service their rental fleets and their customer's machines from the same shop. Having one shop and using the same mechanics doesn't work. What advice can we offer them?

Manufacturers respond:

  • Develop the expertise of your mechanics. Don't use your top mechanics on rental equipment.
  • Why doesn't it work having the same mechanics service both rental and customers?
Dealers/rental companies reply:

  • When a retail customer or a third-party customer wants his machines, any service manager puts the customer's machine ahead of the rental fleet because he sold the machine. One is a captive customer and one is not. Even with the charge-out rate the same, customers paying cash will get preferential treatment.
Manufacturers respond:

  • It's also the mindset of mechanics: If it's an internal rental machine, they won't fix it if it has 50 percent of its life left, they will recommend replacing it. You can't have the same mechanic going back and forth between rental machines and customer's machines. He forgets about the cost-saving aspect. A revenue-generating mechanic thinks in terms of selling labor hours, while the other one thinks of fleet readiness. He can't jump back and forth and be successful long-term. Dealers/rental companies reply:
  • It would be interesting to see how to make a shop work for both, but it really doesn't - it needs to be separate. The focus of the service department is completely different from the rental perspective.
  • Anyone try having two different service managers? That's the way we do it. We call them area managers and they have completely different mindsets. It allows us to do it under one roof and move mechanics back and forth. The mechanics have the same skill sets; that's not the issue. If you pick the right managers, it works.
  • We view mechanics or technicians as a competitive advantage. They're scarce and if you have them, you want to keep them and utilize them.
Should dealers provide product support for rental company fleets and should rental companies rely on product support from dealers who compete in the rent-to-rent business?

Dealers/rental companies reply:

  • We provide product support for companies in the rent-to-rent business.
  • Do rental companies buy service contracts?
  • Very few.
  • If you moved the rental company up in the pecking order, do you think they would buy service contracts?
  • Absolutely.
  • I don't think dealers would oppose serving rental companies if they were servicing at retail. The problem came in when the manufacturer was trying to take away the retail rate. You lose money on the warranty.
  • Rental companies are doing their own service in our area. They call for parts, but as far as the work, it's done internally.
Manufacturers respond:

  • No matter the complexity?
Dealers/rental companies reply:

  • No.
    n Any OEMs sell parts directly to national rental houses?
Manufacturers respond:

  • We do.
Dealers/rental companies reply:

  • It's obvious that dealers with rental fleets and national and local rental companies are competing for the same portion of the rental business. No one wants to be dependent on their competitors.
Are Tier II engines having an impact on labor availability, training and compliance? Will we be prepared for Tier III engines?

Dealers/rental companies reply:

  • For us, it's having an impact. Mechanics and customers have had to go through training. Now instead of just having a throttle, it's all electronics. The training is a big component. We've developed it ourselves. We don't even know what Tier III will bring.
Manufacturers respond:

  • We're training distributors and they train the customer. Distributors are not paying for it.
Dealers/rental companies reply:

  • I'd say the same thing. We're doing a lot to train people, but there is no significant impact on service yet.
How large a problem is rental equipment theft? Is it impacting profits? What is being done to prevent theft?

Dealers/rental companies reply:

  • We had a backhoe stolen this morning. It had a security devide installed, and within three hours it had been found. It's a huge problem for us and it's only getting worse.
  • Skid-steers are the worst. We lose more skid-steers than any other equipment type. It's a big problem for us. We're looking at every avenue to address the issue.
  • We had a brand new skid-steer stolen from our yard. The state police found it in someone's backyard; the guy claimed he'd won it.
  • We had someone jump into a skid- steer, hot-wire it, crash through the fence, and load it on a truck.
  • We had $25,000 worth of trench boxes disappear from the yard.
  • Keyless starting systems would help and they'd increase the touch points with the customer.
  • We're talking with companies from the standpoint of RFID and geofencing. We need to tie the technology into our counter so if it's off contract or moves, we get an alert. There are all kinds of issues associated with that. We haven't come close to figuring it out yet. We're putting resources into piloting different techniques to see what works and what doesn't.
Manufacturers respond:

  • A handful of dealers are using RFID.
    That will change if the cost improves and the technology is acceptable.
Dealers/rental companies reply:

  • It's great, it even flags you if you have an operator driving with the parking brake on.
  • They don't have the perfect technology for smaller machines. We just need hours and location.
  • We're going to experiment with shutting the machine down if the customer isn't paying rent.
  • I know the potential liability, but we're playing around with the idea of disabling the machine after monitoring hours and physical movement over the weekend. We want to integrate into the counter system.
  • There's at least a 10 percent increase in revenue if you can bill all the hours put on the machine.
Dealers: Do you use rental-specific software?

  • Yes, we have two different systems now, but we are going to one. We have some enhancements to make on the parts and service side to make that feasible.
  • We've had some huge discussions, not so much on operating systems, but on the sales force side of the house for customer relationship management software. We're moving in a direction of owning all of that data rather than the sales reps. We own the data, control the data, and when someone leaves, access is gone.
Dealers/rental companies reply:

  • We used to provide a cell phone allowance, then we did a 180. Now, we own the phones and the numbers. We have the contracts. It's all about protecting our intellectual property.
  • I use a non-compete agreement as a condition of employment. I've been through court cases about what was unreasonable, whether you're limiting a person's ability to perform if you make it reasonably enforceable. We've prevailed one way or another every time - it's more of an annoyance.
  • It's a reason for people not to quit or move on.

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