All types of construction and industrial equipment are moved through the supply chain using dedicated dealers, multi-line dealers and more recently equipment rental companies. Dealers and their original equipment manufacturers (OEMs) put contracts in place to annually purchase/sell both equipment and replacement parts to meet a defined market share for their territory. Dealers then sell the equipment primarily to industrial and construction companies with the expectation of gaining warranty, maintenance and repair work additional future equipment sales and rentals. This method of bringing product to market has been in place for at least 100 years. However, it’s in the process of a significant transformation because of the rise of an increased demand for rental units which now accounts for a significant percentage of equipment being manufactured.

This rental transformation is forcing dealers and OEMs to consider how to deal with this change in their business model. They either need to embrace rental as a profit center with the many changes this will require, or hold the line using dedicated dealers that primarily sell and service equipment.

Because of this rental conversion, sales volume and margin, as well as brand loyalty, are at risk for dedicated dealers as well as OEMs. In the end, rental conversion could materially impact financial performance and thus intrinsic value for affected parties involved in the supply chain. As a result, all entities involved in the construction equipment supply chain have to decide how they will deal with the growth of rental transactions, which are increasingly replacing customer equipment purchases.

About this paper

As we’ve demonstrated in the two previous papers in this series, rental is here to stay. So, if you are the CFO or VP of finance for a dealer, service, or rental company you need to understand how to successfully support the financial side of your business during the rental transformation.

This paper is the last in a series of three on “rentalnomics”— the new economy of rental. This paper makes a number of recommendations for dealers moving into rent-to-rent (RTR), including how to get educated, how to get an understanding of rental on your financial statements, and finally how to get the right people, processes, and supporting systems in place. We also provide some recommendations and advice on how to succeed with your rental transformation.

What rental leadership looks like

Rental leadership will be made up of individuals and companies that understand the reasons behind the shift to rental and the financial rewards RTR offers. These individuals will understand that rental depends on availability and ability to deliver equipment when it is required; they’ll recognize the need to maximize both time and dollar utilization and control costs.

Leaders will also need to work with current OEMs to foster a plan for the future, taking into consideration that rental is here to stay. OEMs have to work with dealers who want to provide rental services and understand that lost margins on equipment sales may be offset by margins from parts sales, thanks to 100% product support coverage of rental fleets owned by dealers.

In order to minimize financial risks related to rental, OEMs may want to provide training to dealers regarding rental operations and the financial risks assocated with rental. OEMs that can offer financing opportunities for rental fleets will find they have a higher degree of dealer loyalty and more control over the rental process.

Leaders in the rental industry understand that:

• RTR is a different ballgame compared to RTS.
• Working within a dealer environment may not provide the level of execution required by a rental operation in terms of delivery and service.
• Few C-level personnel understand the rental business without receiving significant training about how to get to required performance levels.
• The RTR business is an asset management game— return on assets determines who wins and who loses; debt service obligations require specific time and dollar utilization levels to be met.
• RTR assets have to be managed and altered on a continuous basis.
• RTR asset portfolios need to be matched to a workable financing program.
• “Down” units have to be returned to service as rent-ready asap, typically by the next day.
• Telematics must be used to minimize costly repairs and down time for customers.
• You need a business IT system to manage the RTR business that can bill for daily, weekly, and monthly use in a manner acceptable to customers.
• A RTR business requires its own dedicated sales personnel.
• Leaders need to form relationships with industry experts to gain industry knowledge and guidance.
• RTR creates a very complex tax situation that needs at least annual reviews and discussion of the many options available for tax purposes.

These requirements of rental leadership apply to all parties involved in the process, and are best addressed before making any significant investment in RTR.

Recommendations

Get educated

• Realize RTR is here to stay because customers demand it.
• Take a hard look at RTR (find someone to walk you through it) and decide if it is for you. If not, take steps to restructure your game plan for the future.
• Get and study American Rental Association (ARA) materials, especially their rental metrics work, as well as a copy of their “Cost of Doing Business Report.”
• Get a thorough understanding of all the local, state, and federal tax situations you will encounter.
• Subscribe to the Rouse Report. It’s free and the best thing you can do to understand what is going on in the rental markets.
• Make use of OEM telematics and train the service department in how to interpret the telematic data they receive.

Get an understanding of how rental will impact your financial statements

• Realize that rental demand will change any business that retails and services construction and industrial equipment.
• Project the impact of RTR on your balance sheet, cash flow and EBITDA.
• Discuss your plans with your OEMs, so they understand that a pure RTR business will most likely result in fewer equipment purchases offset by higher parts purchases.
• Consider the tax implications and options.
• Ensure your business IT system can support the financial requirements of rental.

Get the right people and processes in place

• Find bankers who understand the rental business. This is essential.
• The rental business is tough. People work very hard, every day. Find personnel who understand this, are committed, and can do this.
• Form even stronger partnerships with your OEMs.
• Dealer and rental company consolidation will continue; to plan for growth, you may want to pursue rental related acquisitions now, when the cost to do so is manageable (because of low interest rates).
• Ensure you have a strong rental package that makes it easy to support the business processes and can quickly integrate any acquisitions.

Note: Some OEMs may find the need to take greater control of their supply chain by making investments in their key dealers.

Get the right supporting systems

• If you decide to increase RTR activity, understand that availability and delivery take precedence over other service department and delivery transactions, and your systems and processes need to support this.
• Consider how technologies such as telematics and mobile can help ensure a high level of availability and efficiency.
• Budget out a plan that covers your RTR activity using ARA metrics and “Cost of Doing Business” docs as templates.
• If you decide to increase RTR activity, figure out how you will manage inter-department billing, while still providing data that can be benchmarked.
• Get a business IT system with built in analytics that provides the analysis for you.
• Your rental system provider can help train you and develop your rental skills. Your system provider knows what other customers are doing and can make sure you are competitive with customer deliverables. Take advantage of this knowledge.

Key conclusions

The key conclusions we can draw from the “Rentalnomics” papers are:

• OEMs and dealers have to plan for potential reductions in equipment purchases/sales and a loss in brand and dealer loyalty.
• Business IT systems can be the key to RTR profitability.
• OEMs and dealers both require extensive RTR training.
• The RTR business brings tough new challenges.
• There are significant financial awards available from RTR, if you do it well. You can be successful in RTR.

You just need to work at it.