The Art - And Discipline - of Rental By G.C. Skipper
Article Date: 12-01-2008
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.
Segregating rentals from the sales side of the business is the foundation for one dealer's successful formula to generate revenue in a rocky market.
A few months after John Van Ruitenbeek took the helm as president of Briggs Construction Equipment in Charlotte, N.C., he witnessed something he had never seen before.
Not only had the housing market, where the company was firmly entrenched, fragmented like broken glass, but Van Ruitenbeek said, “This is the first economic downturn when equipment rentals have slowed down along with new equipment sales.”
Historically, rentals have been strong when new equipment sales dropped, he explained, because customers don’t want to make a five-year commitment in financing new equipment. “However, today’s market has softened to the point where customers aren’t even renting equipment. They are using their existing fleets and are taking longer to finish the jobs they have,” he said.
Nevertheless, as troubling as the economy is today, Briggs remains a dealership that has done well on both fronts – equipment rentals and new equipment sales. In fact, that ability to support both – and the financial wherewithal to do so – is one of the key reasons that prompted Van Ruitenbeek, in February 2000, to join the company in the first place, he says.
The dealership represents Case Construction Equipment, covering North Carolina, South Carolina, Georgia, Florida and East Tennessee; Dynapac road building equipment, including soil and asphalt compaction equipment and asphalt pavers and planers; Sennebogan, manufacturers of material handling machines (Briggs is the third largest Sennebogan dealer in North America) and NPS machine mounted hydraulic hammers, material processors, plate compactors, crushers and pedestal systems.
Today, the company has 19 locations in the southeast. Its North Carolina acquisition took place in February 2000, Florida in December 2000, South Carolina in the fourth quarter of 2002, with the Georgia and East Tennessee acquisitions coming in May 2005.
Since Briggs is a privately-held corporation, Van Ruitenbeek did not disclose the company’s sales volume, but he did say Briggs is the largest Case dealer and the 20th largest rental house, according to the RER 100.
When the market became fragmented, Briggs maintained its business growth by finding business in other markets, such as landscaping, mining and aggregate, to mention a few.
Although many dealerships rent equipment, and do so successfully, Briggs’ approach is different in that top management (as well as employees on the front line) realizes that the philosophy of managing a rental operation is totally different from that of managing new equipment sales.
Right from the get-go, Briggs set out to build a true rental business model in addition to the dealership business model when acquired by their parent company, Sammons Enterprises, according to Mike Alberse, the company’s corporate asset manager. Alberse is located in Tampa, Fla.
That is right in line with Van Ruitenbeek’s thinking.
“Rental is an art that the sales side doesn’t do well, said Van Ruitenbeek. “And sales is an art that rental doesn’t do well. Briggs does both well.”
The reason for the success on both fronts is that Van Ruitenbeek and Alberse have found a way to segregate the two businesses, despite the fact that both are under one roof, so to speak. “Because rental is not the same as sales and vice versa, we have different sales forces, separate measuring sticks to track growth and we have separate fleets,” said Van Ruitenbeek. “For the most part, the rental fleet is not for sale until we are ready to sell it. The sales fleet is not for rental.”
The company does, however, rent the same manufacturer’s equipment that it sells, and each of the 19 Briggs locations operates rental departments, Alberse said.
“We are organized into three regions,” he explained, “all of them focused on local market customers. Our branch managers, in cooperation with our regional managers, have autonomy to run their business as if it were their own,” Alberse commented. “This ownership focus enhances the ability of the branch manager and sales team to maintain strong, loyal local customer relationships. Decisions to service the customer properly can be made on the spot.”
That decision-making authority is necessary, Alberse said, because rental deals usually happen quickly.
Different Models Required
Segregating equipment rentals from sales required two completely different business models, said Van Ruitenbeek. He described them this way: “The rental model is based on a fixed depreciation and, from there, it’s a cash flow matter. You want to have more cash coming in than the depreciation and repairs. That is where you make your spread on a monthly basis. Then you make your money on the sale at the end.”
On the dealership side, by comparison, everything depends on turning the inventory, he says. “You try to turn that inventory. You put it on a floorplan and try to have it sold before the period is over,” he said.
Mike Alberse added, “There are two formulas that we use. One is the physical utilization formula based on the unit count. You take the units you have on rent and divide them by your total units. That gives you the basic utilization rate. We don’t count attachments, such as buckets. If the machine is on rent, it’s on rent. If it is in any other status, such as in transit to a job, or it is just available, that is considered not on rent. That’s how we figure time utilization.”
The second formula, said Alberse, is investment utilization. Rather than the unit count, as in the first formula, he uses his investment dollars on rent divided by total investment dollars of the entire rental fleet.
“If you have a lot more pieces of larger, higher cost equipment on-rent,” he pointed out, “your investment utilization will be higher. If you happen to have a couple of skid-steers lying around, that will not affect your investment utilization as much. Your investment utilization will still be higher because you have a lot of dollars invested on-rent. By having the larger investments (the larger units) out there on rent, indicated by high investment utilization, you know you are recovering your higher dollar depreciation and interest cost.”
Other approaches used by Briggs include revenue analysis, which is looked at by unit, by category and by branch. The rental revenues minus expenses give you a contribution margin, which is divided into the investment cost. This return on investment (ROI) percentage indicates how the units are performing, Alberse said.
By becoming more sophisticated in this approach and more disciplined, the rental department operates more like a rental house, Alberse said.
“Getting to that point,” he said, “has been a combination of mind set and technology. Mind set being the fact you understand the difference between your rental department and your sales department. You have to have a disciplined approach identifying what is dealership inventory, that is new equipment, and what inventory is rental – that is, units that are used for rentals. Just because you have a new unit sitting there doesn’t mean you put it up for a month’s rental. That is part of the mind set. The two [sides] have to work together.”
A third element that plays into the equation is the parts and service department, Alberse said. “All three have to work together to make the model work. It’s more of a challenge than it would be if you were only a rental house.”
Determining when to sell off a piece of rental equipment is based on revenue performance analysis, Alberse explained. “We can see which ones (machines) are winners and which ones are losers,” he remarked.
With rental equipment, he makes a conscious effort to age some of the fleet in certain categories, “to get our expenses down and to differentiate between the rental fleet and the new stock,” he said.
“For instance, we look at rolling 12 month performance of the equipment, which takes into account seasonality and if the units in a particular category seem to be a little slow; then it’s time to sell some of them,” Alberse said.
Keeping an Eye On Rentals
The rental fleet units come under close scrutiny after aging 48 months, Alberse said. Again, it depends on the category. “For example, take undercarriages: If you have a dozer in Florida that has 1,000 hours you may have to do some undercarriage work. Up north, undercarriages last longer. If you’ve just spent a whole lot of money on that undercarriage – $20,000 or $30,000 – that’s not the time to sell it. In that case, figuratively speaking, we put a big sign on it that says, ‘Not For Sale.’ ”
One factor that keeps rental fleet costs down, said Alberse, is the extended warranty. “That’s also a great selling feature when it comes time to re-sell. If you have a whole year left on the warranty, it ups the resale value.”
As corporate asset manager, Alberse is the one who makes the decision on when to sell off units from the rental fleet – but that call isn’t made in a vacuum. The decision is reached after consulting with branch or regional managers.
“They know their individual markets,” Alberse said, “so if we had a lot of articulated off-road dump trucks and a lot of excavators busy in a strong housing market and that housing market declines, as it has, we transfer those inventory types we’ve invested in to the ‘for sale’ column and sell some.”
The advantages of being both a rental house and a dealership become obvious when it comes time to sell off rental equipment, Alberse noted. “Our primary means of disposing of older rental machines is within our own structure. It’s a perfect distribution channel. Our full line sales representatives have extensive knowledge about the Case products and other lines we carry and have the customer relationships to find new homes for the units. The best sales pitch” he said, “is that the units have had only one owner (the Case dealership) and all repairs and maintenance have been done by factory-trained technicians.”
“There always have been questions about whether a dealership and a rental business model could work together. I think we’re really making a good go of it,” he added.
As for the general market outlook, a sage once said, “To know where you’re going, you have to know where you’ve been.”
Briggs, as a company, certainly knows where it has been. As for the future, John Van Ruitenbeek expects the market to stay flat all the way through 2009. “We’re looking for an up-tick in 2010,” he said.
In the meantime, as the new president of Briggs Construction Equipment, Van Ruitenbeek said his biggest challenge is to prepare the company to take advantage of the inevitable upturn.
“Although it’s not the best of times, I welcome the opportunity I’ve been given,” he said.
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