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AED’s Rental Operations Survey

AED asked me to conduct a survey of its members to assess their current view of the equipment rental business, whether they participate in the rental business, how they operate it and their long-term view of the market. I conducted the survey over a period of a few months with the assistance of the AED staff. I believe the opinions and results can be used as a proxy for all AED members that are involved in the rental business. This article is a summary of the survey results with my comments and observations. It should be noted that our respondents were dealership persons who are involved with rental operations. Therefore, some of the answers differ from those of other AED surveys, such as the Cost of Doing Business Survey where the respondents are primarily on the financial side of the business.

This is the fifth rental study I have conducted for AED. The first one was the groundbreaking Rental 2000 written in the late 1990s. In the late 1990s many of the people involved in traditional dealer equipment sales activities did not believe the equipment rental segment would ever grow enough to influence the sales of new machines. Few people today would challenge the notion that equipment rentals have become a major North American channel-to-market for many types of construction equipment products.

In fact, the equipment rental business is growing and is expected to continue growing. Interestingly, our respondents indicated that currently 40 percent of their revenues are from rentals. They indicated that over the next three years they expect to increase their machine fleet utilization, which, of course, will increase their top line rental sales volume.

In addition, they expect to increase their market opportunity, by growing geographically or through the expansion of their fleet, to include more product categories. Our respondents’ rental fleets increased as much as 25 percent.

Most of our respondents operate four or more locations and offer their full range of services, including machine sales, parts, service and rentals, at all their facilities.

Most of our respondents employ 20 people or fewer. I was interested to learn that very few of our respondents can accept online equipment reservations.

There has been a debate in the industry over whether rental operations should be separated from the equipment sales side of the business. The theory is that a focused rental operation will generate more rental business and that selling rentals to equipment users at the same time they are selling new machines detracts from both selling efforts. Only 30 percent of our dealer respondents separate their business.

Apparently, selling both is not as much of a distraction as it was thought to be. Salary plus commission is the method used by most of our respondents to compensate machine and rental salespeople.

Renting equipment has the immediate effect of increasing the time and financial utilization rate for those rental products, which in turn increases demand for parts and service. Over time it also has the effect of decreasing demand for new equipment sales. I have observed both of those trends during the past 10 years. In fact, our distributor survey respondents reported that their highest financial utilization rates are for compact equipment and larger earthmoving equipment, as well as compaction products, air compressors and portable lighting equipment.

One of the reasons that rentals have become more popular among equipment users is that equipment manufacturers have aggressively raised their new equipment prices in response to the high cost of conforming to U.S. EPA-mandated engine emission regulations. I estimate that over the past five to seven years the regulations have increased the cost of diesel engines by 25 to 35 percent. Manufacturers have passed on those increased costs. This was confirmed by two-thirds of our survey respondents, who indicated that the original equipment cost (OEC) of their fleet has increased by 5 percent over the past three years. The other one-third of our respondents indicated that their fleet OEC has gone up more than 10 percent during that period.

Our dealer respondents partly offset equipment cost increases by increasing their rental rates during the past three years – as much as 6 percent for most products and as much as 10 percent for some categories, such as lighting products.

Expert management of a rental company fleet is key to making a profit in the rental business. The profitability of a rental business can be linked to managing information about cash flow and also to monitoring used equipment prices, depreciation, and maintenance expenses and using that information to sell used machines before they cost too much to operate, and then replacing them with new or younger machines. There is computer software that keeps track of most of those factors.

Our distributor respondents are using both engine hour meter readings and the number of months a machine is in their fleet. If utilization rates stay high for an extended time, our respondents add to their fleet. Lower utilization rates for an extended period cause them to reduce their fleet. Nearly 42 percent of our respondents indicated that their target hour meter reading is 2,000 hours or more, while 34.5 percent indicated they are using the chronological age of the machines and trading them out after they are 30 months old. Depreciation is handled by using a five-year straight-line depreciation method or a percent of revenues (70 percent or 80 percent). Many of our respondents have fleets that are less than 36 months old. They indicated their optimum fleet age should be higher than 36 months.

Acquiring equipment at the right price is important to the profitability of the rental operation. Our respondents indicated that all manufacturers are selling direct to rental companies, which presumably means purchase prices are lower than normal retail sales prices. The exception is larger earthmoving equipment. Usually, purchasing new machines means that most repairs are covered by the manufacturer’s warranty in the early life of the machine, thus reducing service expenses. Managing repair costs is important to profitability. A large portion of major repairs is handled within the dealer service department.

If a rental company has a territory in which to sell those machines, and the manufacturer sells to other rental companies in his territory, then the rental company is usually paid a fee of up to 5 percent by the equipment manufacturer.

The future of the rental business is indeed bright. Our respondents all concurred with that statement; however, they all agreed that the biggest impediment to future growth is their capacity for handling financial risk. Finding skilled people will also limit growth.

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