Dealers' Rental Operations Characterized by Service, RelationshipsBy Kim Phelan
Article Date: 08-01-2008
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.
Following is a summary of highlights collected from the 2008 AED Rental Round Table. Participants were encouraged to speak their opinions freely and without fear of being quoted; therefore, comments and quotes are not attributed to their sources.
A new threat has emerged in the construction equipment rental arena. A pure rent-to-rent (RTR) AED member recently identified a major trend he is witnessing in the Southeast: As a means to address the present downturn (which was severely exacerbated by the drought this spring) and subsequent reduced volume of work, a handful of large contractors in his region have actively and aggressively entered the rental business. The unexpected announcement took place during AED’s Rental Round Table, which convened on April 30 to address numerous trends and business issues impacting rental operations for AED member companies. The biennial meeting assembles rental executives from both the dealer and manufacturing sides of the equipment industry, with the objective of giving AED a first-hand pulse check of challenges and concerns in the rental trenches in order to identify possible opportunities for the association’s intervention and assistance.Very early in the dialog, as the group began discussing the state of the rental industry, the revelation about contractors was raised. The rental dealer says these companies have established themselves as major rental companies that are becoming his biggest competition. They’re engaging in rate-cutting, they are servicing and even selling equipment in some cases.He also raised his concern about how manufacturers will address these situations, for example selling direct at a discount similar to their arrangements with national rental chains. A representative from a major earthmoving OEM provided background into the rationale from the contractor perspective, pointing to their enormous investment in equipment, the ongoing need to pay their bills and service their debt, and the need to generate income during a soft economy. Contractors are reluctant to sell off inventory, he said, which represents a sizeable percentage of their total net worth. He noted that this trend is not uncommon during downturns, and while the group speculated about whether these companies will pull out of rental once the market bounces back, no definitive consensus was reached. Rather, they concluded, it just remains to be seen. Use of the Internet for
Selling and Renting
A manufacturer noted that many of its rental companies and dealerships are asking for help in their practice of selling and renting outside of their geographic market areas, in one example wanting the manufacturer to drop-ship from their East Coast factory to the dealer’s West Coast customer. The problem arises in the product support arena when local dealers are angered and even refuse to service products acquired from outside of their regions. Ironically, dealers and manufacturers noted, a contractor might purchase a machine from many states away, passing over his local dealer and think he’s getting a better deal because it was via the Internet, when in reality he would have fared better with the nearby dealer.The group acknowledged that rental customers are much more Internet savvy and using the Web as a tool to research product specs and rates, often knowing as much about a dealer’s inventory and brand specs as the counter staff.Regarding the dealer rental operation’s use of e-mail promotion, many contractor companies flat refuse and block e-mail advertising. One dealer said you have to be smart about it and make sure you’re sending something of value rather than just announcing the weekly special.An observation was made by a manufacturer that since so much sales activity is now generated over the Internet, business does migrate from sales into rental once a relationship is established.Are We in a Rental Recession?
Dealers: Not as bad as expected; as recession enters the economy rental is typically expected to fare well; rates are holding up okay. One dealer cites his company’s four primary triggers for rental inventory management: utilization, hours on machine, age of machine and repairs as a percent of acquisition cost – any of these factors can trigger consideration to dispose of it. All agreed on the importance of intelligently using data that’s available to dealers today.Manufacturers: Theoretically, rental should not enter recession if you manage assets properly and keep fleets tightly controlled – there is a close tie between utilization and rate. When the sales side declines, rental bumps up. Trend observation: A national rental chain reportedly told a major earthmoving OEM this year that they are, for the present, halting their purchasing on construction equipment and are instead investing in assets that are better utilized now, such as telehandlers, personnel lifts, cranes, etc. The atypical open communication indicates their efforts to maintain a positive relationship with their suppliers during the buying freeze, reflecting more of a partnering attitude than in the past between rental chains and OEMs.Separately, a manufacturer mentioned a trend connected with national chains and their suppliers: More of these rental companies, according to this source, are asking manufacturers to rent them manufacturer-owned equipment, which they (the rental chain) want to return after use. The group choruses this advice: Just say no! It’s a slippery slope for a manufacturer to embark upon, as is the practice of manufacturer buy-backs.Impact of the “Greening”
of Equipment on the Rental Business
Dealers: Some are starting to see customers asking about engine tier levels on machines. Some believe the impact of high-tier and emissions regs (at the level seen now in California) will not seriously impact their operations for 10 more years. It was observed that in California contractors are being fined $6,000 if units don’t meet standards and aren’t registered with the state.
Manufacturers: There’s no way around it; we’re forced to comply. Considerable discussion ensued on the cost impact – manufacturers are trying to absorb some of the burden but have to pass some of it down the channel. There are many hidden costs associated with hydraulic componentry, one remarked.
It boils down to the fact that society is calling for the change and contractors will ultimately have to be willing to pay for it – dealers note that educating customers now is critical so they’ll transition their thinking and build the added cost into their bids. Another dealer says: “Adding higher rates and adapting to the market as it changes is not a sin.” A manufacturer summarized the discussion saying that successfully passing cost down to that level is dependent on states mandating the green regulations – until it’s required the incentive to pay more will not exist. They speculated that Texas may be next to adopt California’s stringent standards, or perhaps somewhere on the East Coast. The group discussed state tax funds and grants used to help contractors rotate out low-tier, noncompliant equipment from their fleets.
Another point: Alternative fuel/biofuel is not going to be a long-term solution, a manufacturer remarked, because it reduces the life of engines and does not meet EPA regs. Value Proposition of the Dealer’s Rental Operation versus National Rental Chains
Dealers pride themselves on highest standards of service, quality of equipment, trustworthiness to take care of the customer, and, bottom line, establishing long-term relationships with customers. When you go the extra mile, they agreed, you gain contractor loyalty. Dealers make their customers feel like more than a transaction. Other elements of value:
Are Manufacturers Trying to Take More Control of the Channel?
- Fleet age. Dealers and manufacturers agree that younger equipment is a definite competitive edge, and yes, you can and should obtain a higher rental rate for newer equipment with the bells and whistles. One RTR member notes that he has not been able to afford to rotate many machines for nearly five years – he is successful in painting and maintaining his rental fleet to look and run like new, and because he is service-focused, it works.
- Brand loyalty versus company loyalty. Even major single-line dealers can’t rely on their brand name these days; they fly or fall based on their own performance and track record. The group agreed that brand is not much of an issue for renters, but weighs heavily for purchasers.
- Price. A pure RTR AED member shared results of his major customer research encompassing 2,500 contractors of diverse sizes: The No. 1 rental priority, hands down, is availability of equipment – and proximity to where the jobsite is. Price ranked fifth. Anecdotes were shared in support of this premise.
Not the ones on this round table, they say. Manufacturers observe that some well-known heavy and light equipment manufacturers of European origin have occasionally been inclined to establish factory-owned distribution in the U.S. market because it has worked for them overseas. One major OEM representative notes that Cat’s and Volvo’s approaches were tied to the personality and individual strength of their dealer organizations – he indicates that his earthmoving equipment company has no desire to be in the rental business in the U.S. and that “we’ll always do what we can to support our distributors, provided they’re profitable.”Has There Been a Shift Among Rental Operations (from national to smaller independent) Away From Pure RTR Toward More of a Sales and Service Distributor-Type Business Model?
One dealer says it starts with the first piece of equipment they sell, which “opens the floodgates from the very beginning and [alters] the expectations you give the customer.” He questions whether there really is any such thing as a true RTR business anymore – everything’s for sale at any rental operation. However, another AED-member rental owner still views himself as a pure RTR contractor store even though he does sell and service smaller equipment. The difference between an AED-type dealer and a pure RTR operation appears to be that while there’s a cross-over into sales among rental companies, they don’t necessarily send sales reps into the field to actively sell new equipment. Regarding dealers servicing equipment for national chains, two dealers with heavy rental emphasis said they have made the decision to “dance with the bully at the bar,” stay friendly, and not turn these product support dollars away.
Rental Marketshare – Did Post-Rollup Predictions of National Chain Dominance Come True?
One dealer says: “No one owns the market…and anyone can be in charge at any given day...We felt as though [nationals] would be the train everyone was chasing,” but that hasn’t materialized. Another single-line dealer tells of recently interviewing a job candidate who has lost his job in the acquisitions/expansions/new facilities area of a national rental company. In the foreseeable future, he says, that chain won’t be doing any acquisition activity in the Oklahoma, Texas, New Mexico and Louisiana regions. Another single-line dealer remarks: “They’re probably done with consolidation for a while…they’ve got more than enough equipment sitting…”How are Chinese Manufacturers Approaching the North American Market? (Editor’s note: this topic will be explored in-depth during an Executive Forum panel comprised of high-level Chinese executives whose firms are currently developing a U.S. presence.) One dealer says, in his opinion, they are not yet sufficiently Americanized in their methods to attract dealers. Another dealer says the Chinese may enter this market via strategic alliances with other manufacturers. Others agree it will be a long time before Chinese manufacturers are able to break the barriers and gain much market share. An AED staff participant added that there aren’t too many voids in which Chinese manufacturers can insert themselves. The risk is that they might choose to flood the market through the auction path, and thereby abdicate on the product support factor. Another dealer had commented earlier in the meeting that rental could be a viable route in which Chinese manufacturers could potentially introduce their products.
The New Face of the Competition Just when you think things can't get any worse - your customer could become the enemy. When the economy cycles downward, dealers typically can rely on their rental business to make up for lost new equipment sales. Unfortunately, some AED equipment dealers are finding that the same customers whose business they are competing to win have decided to try renting out their own equipment to others – in essence becoming another rental competitor in the marketplace. It’s a trend that’s popping up in the Southeast, but because it’s driven by contractors’ need to replace absent project revenue, it could crop up anywhere.Jeff Wearing, president of Ready Rent-All in Decatur, Ga., says there have been several large contractors in his area that at first bought large equipment and started renting it to themselves. For instance, they purchased a large crane, and rented it to different parts of their own business. “Then they got a little bolder and started renting out other equipment,” he said. “They were trying to justify buying the equipment.” But it was the final step that threw Wearing for a loop: The contractors have begun renting out equipment to their subcontractors. “So what they are doing is getting the large jobs, such as building a hospital, and they are going to their subcontractors on the job and renting them equipment,” said Wearing. “The bad thing about it is that it puts the subcontractor and us in a bad position because the [general contractors] don’t like to see us on the job. They want their own subcontractors renting from them, so the subcontractor thinks, ‘If I don’t rent from this guy maybe he won’t give me more work,’ so it puts them in a bad position.” Jamie Hale, rental sales manager for Gregory Poole Equipment Co. in Raleigh, N.C., has witnessed the same contractor move into his territory with their own leasing company. Subsequently, Gregory Poole Equipment sold them equipment, and later this contractor began renting the equipment back to themselves. “When business got slow they started renting this equipment that we sold them – with our logos on it – to other highway contractors and other guys in the grading business for $1,200 or $1,500 less per month,” said Hale. Hale says many contractor businesses start their own leasing companies and he says they’ve been renting to their own jobs for years. “It was intended for them to rent back to their own jobs, but now they are hiring sales reps and rental reps to build their leasing company,” said Hale. Wearing says it’s some of the big regional or national contractors that are the biggest culprits, and it has already affected his business. “What irritates me most is that they came in here and got one of my sales people,” said Wearing. “I know that it is not necessarily all their fault. Maybe my guy was looking for more money, but some of it is unscrupulous and unethical.” For Hale, right now what’s hurting business most is the equipment brokers who have decided to rent equipment. “The market is slow right now,” said Hale. “We have heavy equipment sitting. I ran into a deal last week with a PC300-size Komatsu, a 500- or 600-hour machine that they brokered somehow in a trade and ended up renting it to a contractor on an ethanol plant that I was sure I had a deal on. I felt sure we did, and then they said they were getting it from someone else. It ended up being a broker, who was renting it for about $2,500 cheaper per month than we offered – with no freight. It’s impossible to compete with.”
The cause is self evident. “They have equipment sitting there just like we do,” said Wearing. “They have to find ways to make money with it so they start renting to jobsites.”But will these contractors-turned- rental-outfits stay in the rental business when the market comes back?
Hale agrees that the influx of new rental companies is purely driven by market conditions, and he believes they will soon fade away. “I think it’s just a market trend,” said Hale. “When the market turns I think it will fix itself. I think the big contractors will pick up the work they need and they won’t have equipment sitting. I think it’s just an anomaly now.”How to Get Ahead
While Wearing believes having contractors in the rental business is not an easy situation to fix – and one that isn’t going away any time soon, he says that the way to beat the new competitors is to offer better service. “I still don’t think they can beat the service we provide,” he said. “Maybe they’ll find it’s not such an easy business to get into and realize they need mechanics and have to provide that service to their customers.”Hale agrees that supporting the fleet is what separates him from the contractors. “I don’t know how they are supporting their rental fleets,” said Hale. “I don’t know if they are telling their customers to do their own maintenance, or maybe they’ll end up coming back to the dealer.”
The one thing that Hale says he knows for sure is that when a customer is saving $2,500 a month on rental fees, he’s rolling the dice. “I hope that the end users see that the contractors and brokers don’t have the means to maintain the equipment at a cheap rate,” said Hale. “If it doesn’t work out, they are going to come back to us to have their equipment fixed.”
[ TOP ]