Analysis: AED’s 2017 Distributor Rental Survey

Rentals remain all the rage, according to the Associated Equipment Distributor (AED) members who completed the 2017 Distributor Rental Survey.

“Rental activity is very strong,” said Ron Barlet, president of California-based Bejac Corporation. “There’s no question about it. There’s a tremendous number of rental transactions on a daily basis compared to sales transactions.”

Respondents reported that new equipment sales and equipment rentals were, for the most part, evenly split; however, that percentage doesn’t tell the entire story.

“If you sell a machine for $300,000 or you rent it for $10,000 a month, it probably depends on how you’re measuring activity of rental versus sales,” Barlet explained. “The dollars, obviously when you’re measuring revenue, are a lot more in sales.”

Because of the rising costs of machinery, 91 percent of survey respondents said that, overall, they actually saw a decrease in rental revenues over the last three years compared to revenues from sales.

Revenue was also affected by geography and by the industries that dealerships are dependent on. For instance, states in coal country and more rural areas continue to struggle with a soft economy, which in turn impacts distributors.

“A segment of our rental market is off right now and has been for about 12 months,” said Glenn Engels, branch manager of White Star Machinery in Wichita. “In Kansas, our economy isn’t near as exciting as Dallas and Denver right now. We’re spread out more and tied more to a rural market, which has no recovery in sight yet.”

An overwhelming number of respondents (81 percent) said they are paying for their rental fleets with funding from banks, which can offer better cash allowances and incentives compared to OEMs and finance companies.

The biggest challenge that distributors face, according to 38 percent of survey respondents, is the financial risk involved in acquiring equipment to rent.

If the economy were to tank again, distributors would still be stuck making payments on any outstanding loans on rental equipment, even if that equipment was sitting unused; so distributors are left trying to perform a high-wire act with their debt-to-equity ratios, all while attempting to predict the future.

“If you asked a very general open question – would businesses be willing to expand their rental fleets – I think the answer would be yes,” Barlet said. “The limiting factor is how much risk you are willing to assume. That’s always a problem.”

Another 24 percent of survey respondents cited personnel as one of the biggest challenges facing their rental businesses, which clearly refers to the skilled labor shortage facing the industry.

Yet despite these challenges, dealers remain optimistic that more customers will opt to “try it before they buy it,” with 91 percent of survey respondents anticipating increased market opportunities for rentals over the next three years.

“The contractors are enjoying the luxury of a lot more choices without having to make the big capital expenditures,” Barlet said. “That being said, though, I think there’s a positive there, in that the rentals do allow you to expose a lot of these products to customers who maybe never would have considered owning them, because they maybe never would have had the chance to even try them. I think it is helping our sales, in fact.”

Survey respondents said that over the last three years they increased the number of compaction machines (35 percent), earthmoving equipment (35 percent) and forklifts/telehandlers (25 percent) in their fleets.

For Barlet’s company, however, it’s all about renting specialty attachments, such as breakers, pulverizers, screens and grinders – equipment that previously could only be bought and not rented. “Between the manufacturers trying to push units and the dealers trying to navigate their business, I think we’re renting a lot more specialty equipment that in previous lives would have been purchase-only,” he said. “AED dealers are probably impacting their sales a little bit by renting things that traditionally weren’t rentalable.”

That’s OK with the dealers, though, who are seeing those same rental companies come back to buy the equipment down the road. The majority of respondents said the target point to start selling rental equipment is 2,000 to 3,000 hours or 36 months.

“At three years, the dealer has probably received some pretty good rentals with very low maintenance costs,” Barlet explained. “Selling a three-year-old machine with 3,000 hours on it still gives a lot of life to the guy buying the equipment. It’s a sweet spot for the customer to get a nice reduction, and it’s a sweet spot for the dealer to have rented the equipment and still sell it at a pretty good price.”

An overwhelming 96 percent of survey respondents also said they typically dispose of their rental fleet assets by selling directly to previous rental customers. “We really do want most of it to stay in our area anyway, because the whole idea is to get the parts and service business,” Barlet said.

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