The Realities of RentalBy Joanne Costin
Article Date: 09-01-2010
Copyright(C) 2010 Associated Equipment Distributors. All Rights Reserved.
Rental can and should be boosting your bottom line, but the recession reminded us that along with the rewards come risks.
When it’s working right, a dealer’s rent-to-rent business boosts profitability. AED’s Cost of Doing Business Report provides consistent evidence that firms with strong rent-to-rent revenue have greater profits than firms with less rent-to-rent revenue. However, the recent economic recession provided dealers with a dose of “rental reality,” as they were forced to unload inventory and cut rental rates.
“When it is good it is very good, but when it is bad, it can eat you alive,” said Dave Griffith, president and CEO of Modern Group Ltd., a top 50 rental dealer by RER’s appraisal, and leading distributor of material handling products, warehouse equipment, construction equipment and stand-by power generation throughout New Jersey, New York, Pennsylvania, Delaware and Maryland.
Throughout the industry in general, “a lot of inventory was bought that really didn’t belong,” said Carlson, president of Gary Carlson Equipment Co., based in Blaine, Minn. “That is why so much of it ended up in the distress mode. And so many dealers ended up in bad shape with the finance organizations, because it stopped turning. At that point they didn’t know what to do with it. A lot of dealers didn’t understand how to make money on rental.”
Carlson was an early proponent of rental who has a unique perspective on the industry – he once sold a dealership to United Rentals, worked for them, and then started a new dealership five years later. Today, he believes many heavy equipment dealers were satisfied to get a machine out the door, and sell it for a small-percent margin after they had rented it for a month or two. A better approach, according to Carlson, is for dealers to get back to understanding the marketplace, knowing how they are going to get utilization and figuring out what they will do when a machine comes back. “You can’t push on a string. People don’t rent if they don’t have work,” said Carlson.
With rental rates as much as 40 percent below what they were in 2006, dealers are being much more cautious in their decisions today. Carolina CAT, another leading construction rental firm, recently created a new rental financial model to help evaluate their purchasing decisions. “It used to be if a customer needed it, we would put it in at any price,” said Robert Russell, chief financial officer for Carolina CAT. “Now we are a lot more deliberate with our acquisitions.”
“We would normally look for the amount of money that you collect in a month to be roughly 5 percent of the acquisition cost in good times,” said Griffith. “We haven’t seen 5 percent for a number of years, and many folks are running into the 2.0, 2.1, 2.4 and 2.7 percent range.”
Uncertainties persist. Just ask Larry Workman, president of Lemont, Ill.-based Illini Hi-Reach Inc., a company that has been among RER’s list of top 100 rental firms for the past five years.
“In the Chicago market, you used to be able to find out how the market was going to be for the rest of the year by St. Patrick’s Day,” said Workman. “Then it moved out to Tax Day (April 15), then it was Memorial Day. In the last three years, we haven’t figured out how strong the market is until close to the fourth of July.”
Clearly, whatever used to be, is no longer. Most dealers have had to take painful steps to downsize or right-size their operations and return to profitability. Equipment buying behaviors have changed, along with other management practices.
Ohio-based Leppo Rents has taken advantage of Bobcat dealer training in lean methodology. “We have been using those methods to improve our processes, our customer flow and the flow of our rental fleet,” said Chairman Dale Leppo. “It has allowed us to improve both the turnaround time for machines coming off rent and the time it takes us to get a customer in and out of our facilities.”
Griffith and Russell now purchase high-quality, late model used equipment instead of new machines, as a way to trim acquisition costs. At Modern Group, about half of their assets are not owned, but are on operating leases, which enables the dealer to return them in a structured fashion, without any real negative consequence. “What we learned during the last recession is that you better not own everything,” said Griffith.
“I am not changing the number of assets, but as I dispose of old equipment, that is what I am using to buy newer machines. Where I am predominantly replacing is on the forklift side,” added Griffith.
Cost cuts have been made everywhere and anywhere. Gas tanks at Illini Hi-Reach are now only filled half way, to cut costs.
Modern Group is also changing the mix of the rental assets to command higher rates and aftermarket parts business, and the company has added three new product lines. Leppo Rents recently added larger generators, as they try to find more niches in the market.
Diversification, whether it is in terms of product lines, customers or services can help offset the cyclical nature of the construction market. Rental accounts for 22 percent of the Modern Group’s revenues, but the company also sells new equipment, used equipment and service. “We try to maintain a balanced portfolio,” said Griffith. However, even the best laid plans can go awry in a recession. In the most recent recession, two sectors that the company serves nosedived. The material handling market dropped 40 percent and the construction market dropped 70 percent.
Rental is the sole focus at Illini Hi-Reach, with a very specialized product line of aerial work platforms, booms and scissor lifts. However, the company continues to explore new or underserved markets, such as agriculture.
While the construction equipment rental market was getting beat up, some dealerships pulled back and others stepped in. One of those that have stepped in is Minnesota’s Gary Carlson Equipment. “We have gone from a quite narrowly focused specialist to a fairly broadly based rental firm,” said Carlson.
Carlson started an equipment buying spree in January 2009, after several chain locations on their side of town closed up. “There was no one left with a rental fleet and we had available capital,” explained Carlson. The company’s fleet expanded from trench boxes and pumps to light construction equipment – and as the fleet grew, so did his customer base, which includes utility contractors, specialty contractors, and highway/heavy contractors.
Other companies are looking to grow revenue through acquisitions. Founded in 1946, Modern Equipment has perfected the strategy, taking on 33 acquisitions over the years. In July 2009, the company restructured its operation into a single integrated full-line distributor in anticipation of more acquisitions, which Griffith said are now under consideration.
“We are starting to see some competitors exit the market,” said Leppo, whose company recently acquired some assets of a neighboring dealer.
Illini Hi-Reach is evaluating a possible third location in northwest Indiana, where they already do business. “The old trick is, if you can’t rent what you’ve got in the market you are in, find an adjacent market and try to rent the excess over there,” said Workman. “Of course, that means added overhead and some unknowns.”
Jesco, based in South Plainfield, N.J., is another dealer that’s in acquisition mode. In 2010, they have added five locations with the purchase of Standard Equipment of Frederick, Md. and also the Beacon, N.Y. facility of Nortrax. According to Sales Manager Emilio Pescatore, the acquisitions include two more large non-attainment zones, so the company is retooling its rental fleets to help customers meet Tier 4 standards. They retrofitted four machines in their rental fleet with emissions devices and ordered three Deere 744K wheel loaders, the first Tier-4 machines to ship from the manufacturer.
Carolina CAT has turned to renting machines with machine control as a way to improve profitability and generate interest in this new technology. “Customers are really excited about it,” said Russell.
Outlook for 2010 and 2011
In an informal e-mail survey of AED dealers, just over half of the 53 responding dealers reported that utilization had increased in the first six months of 2010 versus 2009. However, rates haven’t shown the same improvement. The number of rental dealers citing an increase in revenue over the same period was slightly lower than those reporting a decrease.
Nevadahas been one of the states hardest hit by the recession. In the past 12 months, more than 25 percent of construction jobs have been lost. At Cashman Equipment, based in Henderson, Nev., CEO MaryKaye Cashman has seen only “small signs of life in rental.” Likewise, a dealer in Southern California told CED this summer that the rental market is so cut-throat they are in the process of removing a few hundred machines from their rental fleet and putting them into used equipment inventory for sale.
In contrast, things are improving in states like Maryland. Jesco has 350 machines in its rental fleet and more than 100 new machines on order with John Deere. “We think it’s going to be pretty good, very steady, “said Pescatore. The company is looking to hire four to six more people just for the Baltimore, Md. area location.
Carolina CAT has also seen an increase in utilization. “Right now the rental fleet is out and rental purchase is starting to pick up,” said Russell. They have seen a lesser pickup in allied equipment, which is more affected by the downturn in home building.
Low rental rates are unquestionably one of the biggest challenges facing dealers, and as long as supply surpasses demand, low rates will likely persist. And while most dealers we spoke with have seen an uptick in their rental business, no one is expecting things to rebound quickly. The forecast for housing and commercial construction, which are key markets for rental, remain bleak. “Ten percent improvement from down 75 percent is still a lousy number,” contends Leppo.
“We are in a dogfight and we are going to be in a dogfight until credit returns; until housing returns,” said Griffith. Carlson believes it will be a “used” and “rental” market for the next few years.
With tight credit, rental is a market that dealers should be focusing on and our survey confirms it. Nearly 70 percent of the AED dealers surveyed plan to provide more sales and marketing effort in the next 12 months. “Rent-to-rent will be prevalent,” said Workman. “The banks won’t let customers buy.” At Jesco, they are offering a rental alternative lease through John Deere Credit to help customers reduce the costs of longer term equipment usage.
Illini Hi-Reach has doubled its sales staff so as to not miss any deal, while Modern Equipment has cut sales staff, placing an increased emphasis on social networking sites such as LinkedIn, its website, e-mail marketing and online pay-per-click advertising. Jesco favors more traditional print advertising and direct mail methods.
As dealers get used to getting along with less, they are increasingly relying on technology to help them manage costs, gain efficiencies and improve performance. “I think technology is the way home,” said Griffith, whose firm recently invested $3 million in a new ERP system and has plans to develop a customer portal on its website.
One issue that is starting to emerge is product availability, which will be complicated by the introduction of Tier-4 machines. “If you are not planning ahead you can get caught without inventory,” said Carlson.
“We are already feeling that experience with the Tier-4 equipment, and there will be slowdown in production,” said Russell. “On the positive side, that will drive prices up for rental.”
Workman believes this is a time when dealers need to be thinking about how they will support an increase in business that they can’t anticipate. “There will be a flood of activity and everyone will be undermanned and understaffed and underfleeted,” said Workman. “I think there will be a giant disconnect from what is available and how it is supported. The demand of the first significant uptick in the construction economy will probably divide the men from the boys. Those who can support the customer will get the customer. Those who can’t support the customer won’t get the customer.”
After enduring the past two years, it’s a challenge that dealers everywhere are looking forward to.
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