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Growth and Profitability Tied Directly to Rental

We are living in a very exciting time, one in which a large business size and footprint don’t always win. As we witness the closure of some large retailers and the impact that the internet and technology are having on how we conduct business, it is vitally important for our industry to keep pace. Speed and agility is strength moving forward. Does your current business model and your value add keep pace with today’s market trends? A recent article in Forbes magazine captures much of influences on business trends:

Take ownership for instance, owning things was the marker of the middle class. Those who had more money could own more things. Today, many people living at or below the poverty level own plenty of things, but it isn’t a good indicator of their relative wealth.

In fact, as millennials enter adulthood and the middle class, the trend seems to be for them to own less stuff. Not only is there a thriving “minimalist” movement, but the advent of the digital and sharing economies have made this much easier. Whereas being a “two-car family” (or even three or four cars) was once a mark of status, today many millennials see more status in being a one-car or even a zero-car family and making use of services like Uber, Lyft, CarGo, and others, to use cars only when they need one.

Ridesharing, apartment/home lending, peer-to-peer lending, reselling, coworking, talent-sharing… The sharing economy, sometimes also called the collaboration economy, is taking off in all sorts of niches.

These companies don’t just represent a new way of thinking or new services, but a new way to use data. None of these services would be possible without the big data and algorithms that drive their individual platforms. Without a sophisticated app to match a driver with a rider, Uber wouldn’t be competitive with taxi drivers who cruise around all day looking for fares – and the same is true of each of these services.

What’s fascinating is that the company is rarely the actual service provider; instead, they act as facilitator, making the transaction possible, easy, and safe for both the provider and the user. They break down the barriers that … make it both easy and lucrative to participate in this collaborative economy. Bernard Marr is a best-selling author and keynote speaker on business, technology and big data.

Rental Industry Growth

Considering this change in the consumer mindset and rapid advancements in technology, our industry needs to be on its toes. Trends mean something, and we need to pay close attention. The American Rental Association (ARA) has forecast continued growth across all sectors of the rental industry. The construction and industrial equipment markets represent about two-thirds of the annual rental revenues forecast. The growth through the next five years should be between 4 and 5 percent annually, which is more than double the current GDP growth in the United States.

Dealer Trends 2017

When examining the latest version of the AED Cost of Doing Business Survey (2017; reporting on calendar year 2016), we see some very notable trends that dealers need to be aware of. These trends are quite clear and should give pause to dealerships to examine their business model and alignment of resources heading into the future.  

The chart below represents the revenue mix by percentage of total revenues generated (2016), such as machine sales, parts sales, service revenues and rental revenues. Although parts and service revenues are maintaining their profit margins, their overall percentage of total revenue is either flat (service) or in steady decline; for example, parts sales have dropped from about 24 percent of the mix to about 20 percent of the mix in just five years. Dealers trying to maintain overall gross profit margins are challenged with backfilling the void. Machine sales with margins of 12-13 percent won’t do it.

Now to the exciting news. The illustration in the chart shows a very positive trend for rent-to-rent for AED members. Revenues have increased from .4 percent in 2011 to 5.9 percent in 2016. Since the recession we have seen a real jump in rental penetration, with most estimates indicating more than 50 percent of the machines in the marketplace being sourced through rental. RTR gross profit margins are also strong, coming in around 30 percent.

Rent-to-Rent vs. Rent-to-Sell

Most dealers are engaged in renting machines with the end game of selling them as soon as possible. Commonly known as rent-to-sell (RTS), these machines are generally in new inventory status and when rented are charged an accelerated depreciation, which reduces their net book value (NBV). The activities of RTS are included in the sales data shown in the chart above and have been relatively flat over the last four years.  

Rent-to-rent fleets consist of machines that have been intentionally selected, forming a mix of units that will not only serve the local market opportunity, but will deliver annual profits to the dealership. Unlike RTS machines, these units show up on the balance sheet as “assets” of the company and typically have a corresponding debt service. On average, most RTR fleets are used for a period of three or four years before being rolled out. With an annual GPM of 30 percent and the ability to create a sustainable pipeline of good used equipment with margins above 20 percent, what’s not to like?

Rental Should Be Strategic, Not Reactive

According to the AED survey, close to 40 percent of dealers are not engaged in RTR activities. There are a number of reasons why this might be the case, but the most common are access to capital and aversion to risk.

As mentioned earlier, dealers can better manage their respective territories, improve overall gross profit for the dealership and gain more control over the used machine market. Most likely some of your best customers are spending rental dollars somewhere else if not with you. With the rental department becoming a customer of the parts and service department, there is additional profitability created in each of these departments that otherwise would not exist. Even after paying a fair market price for internal services, the rental department can be profitable. If you compete against a national rental company or a large competitive dealer, as they grow their rental fleet they are eroding your market share and gaining control over your customers.

Positioning Your Business for Success

Dealers that derive 10 to 30 percent of their revenue from rental tend to be in the “high performance” category of dealers in the survey and report GPM’s before tax of 8.2 percent, which is more than double that of the average dealer (3.6 percent).

Properly positioning yourself in the rental market requires understanding how your customers think. Knowing what is important to them in order of priority is paramount to aligning your resources. Here are a couple of key questions for any machine salesperson or rental salesperson to ask their customer: “How do you decide whether to buy brand new, buy used, or rent equipment?” and “When choosing a rental supplier, what are the most important factors to you?”

There is no doubt that a company’s reputation in the marketplace is an early decision point. If your dealership has been around for a long time and the brands of equipment you represent are considered favorable, then you’re in a good starting place. However, if you have not been known for renting equipment in the past, don’t expect customers to automatically jump on board with your rental program. There is somewhat of a vetting process that contractors go through in evaluating if they can risk renting equipment from you. They value service.   

Machine availability is usually the first decision point when a customer is renting. Unlike sales, where you can make a sale and then order the machine, rental has a different level of urgency. You might have the machine in your fleet, but if it’s at the wrong location you could lose the rental. If the machine is in your yard and has not been serviced since the last rental, you could miss out as well. Customers also evaluate you on your overall commitment to having a consistent rental fleet. This means having some real depth within any group of machines and not just one or two. They need to have confidence that you will routinely have machines available.

Fleet reliability is a high priority. Not only must you have the machines available, but they should be low in hours, well maintained and supported with a trained staff of field service technicians to minimize downtime. Most dealers would score well in this area; however, some choose to rent fairly worn-out trade-in machines, which might not be the best strategy in promoting a brand and service. In addition, if your service department is not on board with supporting the rental fleet as if it were the dealership’s very best customer, this also could be a strike against renting from your company.

Although customers may often indicate that rental rates are the highest priority, in most surveys I have seen over the past 30 years, rental rates usually rank about third or fourth. Price alone is not worth the risk to the discriminating contractor. The customers you really want are those that objectively understand your dealership’s “value proposition.” This means you must have more bundled services than just a machine and a low rental rate. The rent-to-rent business is about total services, not just renting a machine.

As the rental industry has matured over the last 40 years, it is becoming increasingly a logistics game. As mentioned before, just having the machine in the rental fleet does not guarantee success. It needs to have proximity to the customer. This means you must have convenient locations that are strategic to your market coverage and access to transportation services that are efficient in overall time and cost. Availability to a customer really means “When can you have it on the job site?”  

Additional service points that are vitally important:

·    Ease of doing business

·    Online access to information or account management

·    Fleet management through use of telematics   

·    Accurate rental invoicing

·    Insurance requirements for renting equipment

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