Don't Be Left in the ColdWritten By Jay Lyon
Article Date: 11-01-2007
Copyright(C) 2007 Associated Equipment Distributors. All Rights Reserved.
Smart, creative strategy - rather than just price slashing - are key to not only surviving but succeeding with rental this winter.
When the cold winter winds blow, rental dealers in the northern regions of the U.S. face challenges that their southern counterparts do not. So how can construction equipment distributors prepare their rental operations for ongoing strength during the construction industry's down season?
Rental pros say they try a variety of approaches to improve their bottom line, but no matter how they may differ, some things stay the same: knowing your customers, trying creative solutions, and planning ahead.
Make Inventory a Reflection Of Your Marketplace
"Know your strengths, and play to them," said Ned Graham, senior vice president of operations at Scottsdale, Ariz.-based RSC Equipment Rental. Graham works in RSC's New Castle, Del., regional office. "All customers have rental suppliers. If you're going after a new customer, there's a far greater probability that you're going to be successful when the market is strong than there is when it's weaker - as it might be in the winter season."
By focusing on customers, a dealer ideally positions himself as a reflection of what his customers use, Graham says. That can help a dealer maintain a more consistent profitability throughout the year, instead of being susceptible to seasonal changes.
"The best strategy to deal with any expected change in demand is to know your customer. Consistently meeting current customer needs and anticipating their future needs is the best approach to maintaining stability in our business," he added.
Even in areas where activity actually increases in the winter, knowing your customers is the highest priority. In Canada, where swampland makes large tracts of land inaccessible during the summer, winter's frost provides opportunities for construction crews and the rental dealers who provide their equipment.
Matt Campbell, chairman of Hammer Equipment Sales, Ltd. in Calgary, says that the company doesn't market any differently based on season at any of its locations (which also include Edmonton, Fort McMurray, Red Deer and Grande Prairie). "That customer relationship is the key. You have to have that 12 months a year," he said.
Promoting equipment for seasonal use is also easier with a regular customer. "We market our skid loaders for snow removal contracts," explained Dale Leppo of Leppo Rents/Bobcat of Akron - who has six outlets in Ohio. "It's important to start with those deals early - in September or October - because they are typically in place by late fall."
Usage of some equipment, such as boom and scissor lifts, is actually higher in the winter than in the summer, as the industry shifts from working outside to work that can be done indoors during the winter months. "Half of our fleet has some seasonality to it - excavators and dozers, and some loaders that perform dirt work. There's not a lot of seasonality for aerial work platforms and telescopic forklifts," Leppo noted.
Dealers are also finding creative ways of improving their profitability during the winter months.
For example, one way Leppo Rentals improves its bottom line during the cold season involves lowering fixed costs - but not those related to its inventory.
"The first things we do differently are the things we do in the summer time," Leppo said. "We hire 20 percent of our rental staff in the summer from college students or vocational-school interns."
That allows Leppo to test out potential hires, but it also means that the company's fixed costs naturally decrease with the onset of fall and winter, as students return to school.
Creativity can also come in the form of pricing incentives, though some dealers differ in their approaches.
Ryan May, president of Century Equipment Co. in Salt Lake City, Utah, says his company will reduce rental rates in winter for its wheel loaders and back hoes for snow removal use. They also cut the allowed hours put on the equipment. "By cutting the rate in half and the hours in half during the winter, it gives the customer an incentive to keep the equipment during that time," he said.
That, says May, prevents Century from having to store the equipment while keeping cash coming in at its eight locations in Utah, Colorado and Wyoming. "Sometimes it's better to have a machine sitting in the yard instead of digging dirt during cold months, but if the use is light and not hard on the equipment, we'd rather have it out in the field."
Graham agrees on the importance of cash flow, but cautions dealers to be aware of the price incentives they may offer.
"Some might say that winter means that rental rates will significantly decline because of competitive pressure," he explained. "While supply and demand impacts prices, we would offer a word of caution, because any discounts in rental rates result in a direct reduction in profit dollars. Unless a company is only focused on cash flow, aggressive price cutting in the winter can have a disastrous impact on profits. Companies that rent equipment at deeply discounted winter rates may find it difficult to explain to their customers in the spring that they need to recover with higher rates."
George M. Keen, partner at Currie Management Consultants, Inc., recommends that dealers consider their rental pricing carefully.
"The people inside the dealerships are more sensitive to the pricing issue than customers," he said. "And the pricing problem is not on all units. Sometimes if you have a large concrete cutting saw, you can practically charge anything you want, because not everyone has one. But on a small skid-steer, you will need to be more competitive."
Most customers shop pricing based on the four-week rate, Keen says, so the weekly and daily rates are not as price sensitive.
Planning is critical in order to make the most of a dealer's operation - regardless of the time of year.
"For those dealers who've identified and segmented their ‘rental fleet' from their sales inventory, many will find that it is the largest single asset on their books," said Keen. "Dealers need detailed information about their fleet, unit by unit. The dealer needs the ability to drill down into the mass of data to find out what units have trouble and which are doing well."
According to Keen, a benchmark performance on this significant asset is 60 percent of the original acquisition value in revenue every year (or 5 percent of the original acquisition value in monthly revenue). The dealer generally has some fixed costs, regardless of whether the equipment is rented: asset depreciation, interest, occupancy costs.
"Because of these fixed costs and the variable costs that come along with it, the dealers need to be getting a good return on their investment," he said.
Keen recommends that dealers take data from their business system or a rental spreadsheet to see when each unit was acquired, for how much, how much depreciation has occurred already, what the Life-to-Date (LTD) rental revenue has been, and the average rental revenue per month in the fleet.
"They should compare the average monthly revenue to the original acquisition value," he said. "If that number isn't 5 percent or better, a dealer should look into the unit's performance."
The idea, Keen says, is for dealers to establish some benchmarks of asset performance.
"If they don't have these benchmarks clear in their mind, any bump in the road or unexpected change around them will distract them from what they need," he explained.
Dealers agree that planning is critical, whether it's planning for equipment maintenance or fleet management.
Like many dealers, Leppo uses the winter to maintain equipment, which defers the income potential of the equipment.
"We use the winter to perform significant rehab work on our machines," Leppo said. "We do as many annual inspections as we can in the winter. From an accounting standpoint, it's a negative, but it allows us to keep our full-time staff busy 12 months a year."
Leppo cautions that it's important to plan for maintenance, and to keep the bottom line in mind when it comes to which pieces of equipment are maintained. By establishing a plan ahead of time, Leppo says dealers can avoid one thing they don't want to do: lose money.
"What you don't want to do is use the winter as an excuse to keep your guys busy repairing and maintaining equipment that you're not going to get your money out of," warns Leppo. "You don't want to take equipment that's worth $15,000 and put $10,000 into it to make it worth $20,000 just because it keeps your guys busy. Suddenly, you can become buried in a machine with no way to get your money back out of it."
In putting their plan together, Leppo depends on his rental department - not his sales department - to determine which pieces of its inventory to dispose of.
"A lot of dealers do rental-purchase transactions, moving the customer from renting the equipment to buying it," said Leppo. "Our goal is almost never to do that. When we turn over a machine to reduce our fleet, it's for a different reason. Eventually, a machine is old enough that we have to get rid of it because our liability increases with its age, while customer satisfaction with the equipment might decrease at the same time."
Graham agrees that planning is critical to maintaining profitability in the cold season.
"Dealers need a winter plan that reflects their market, because winter is not the same in every area," he said. "A winter plan takes all aspects of the business and market conditions into account. If you begin to create and implement your plan in December you have waited too long."
RSC also emphasizes maintenance with its inventory.
"You have to take control over those things you can control," says Graham. "It's critical to maintain our focus on equipment service and maintenance throughout the winter, because if the equipment is not ready for rent it can't be rented. A cold snowy day provides ample opportunity to prepare for a sunny day."
Graham cautions dealers who sell off inventory in the last quarter of the year to right-size their fleets. "If you need to liquidate a significant portion of your fleet in winter - say 20 percent or more - to maintain cash flow to survive, you should look at how large your fleet was to begin with," he warned.
Dealers with significant swings in fleet size probably have far too much financial leverage, Graham says, "and selling assets in Q4 that need to be replaced in Q1 or Q2 is probably an expensive strategy."
"While ‘availability' is the first concern of any customer looking for equipment, having too much equipment based on the market pricing, market demand and dealer's management style can still spell disaster," he said. "There needs to be a balance between having anything the customer calls for, any day of the year, and having a reasonable investment in equipment that returns good money for the owner."
Above all, Keen says dealers would do well to remember that the customer is king. "When someone calls asking for a piece of rental equipment, the automatic answer has to be ‘yes, we have that!' If you don't, substitute larger equipment if you have to, or sub-rent from someone else.
"Never give the customer any impression that it's difficult, or that you have to move a mountain to find the equipment they want. They want you to be a one-stop solution to their rental needs."
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