Adding a rental business to a dealership portfolio allows dealers to explore new market opportunities by utilizing their current customer relationships

Preston McGhee, Corporate Rental Director at James River Equipment, shares a practical conversation on what it really takes to build rental into a dealership. He discusses how to assess the opportunity, the operational realities behind a successful rental offering, and how dealers can determine whether rental makes sense for their business.

Why should ag dealers consider adding a rental business to the dealership portfolio?

McGhee: We’re looking to grow our customer base. We're looking to expand opportunities. The people who may want to rent a skid steer or a mini excavator may also end up buying medium to large ag equipment. It bolsters your parts and service business. You're getting more people in the door, and familiar with your dealership, that normally wouldn't have ever been on your site.

Why is rental a perfect play to hedge against severe economic cycles?

McGhee: When the market is booming, customers will rent to augment their existing fleet. When the market is a little more depressed, customers may not want to write a check for $800,000 for a piece of equipment they need, but they're more interested in renting it until the market improves. Rental is a little more flat in the cycle. It's a much more market resistant business model.

If dealers want to open a rental business, where should they start?

McGhee: Look in-house at what your current dealership model is and what products you're offering. Obviously, compact construction equipment is a very popular rental item. It makes up a good bit of the dirt rental market. The acquisition cost isn't terrible. It's relatively low maintenance equipment. If I was starting a rental company today in this space, I would look at general line and compact construction equipment.

Should dealers try tostart small with a specific product or location, or try to start this as a big bang across my territory?

McGhee: I believe it's scaling on demand. You want to bring products in, build a little brand reputation in the market, get a little traction. We all know what our interest expense is doing right now, so I don't know that it makes sense to go spend a whole bunch of money and over fleet. 

What operational processes do dealers need to establish on day one?

McGhee: The key to successful rental is providing a consistent, repeatable customer service experience. When they call for a piece of equipment, you're able to respond quickly. When you agree upon the rates, the contract is clean and they're invoiced in a timely manner.

How does adding a rental business impact a dealership’s financial statements?

McGhee: It's going to change your ratios. You’re bringing in assets that you intend to hold longer than anything you've ever thought about in the dealership world. When we're shifting into rental, it's going to be, what is my dollar utilization on this asset? What am I making my most profit margin on? You're generating revenue while you own the asset, you're paying down the asset via depreciation and you're selling it on the backend at usually a pretty good margin compared to new wholegood sales. It definitely changes your balance sheet ratio. You're going to see your turns go down when you get into rental, but you're going to see your margin start creeping up.

What metrics would you say are the KPIs of rental?

McGhee: In the rental world, we look at time utilization or the amount of time the machine’s out on rent. We look at dollar utilization. Dollar utilization is a factor of our acquisition cost, our time utilization and our rental rate attained. We want to be north of 30% dollar utilization. If we can maintain that over three years, we have a really nice return on that asset. We look at average days to ready. That's how long it takes from the time the machine comes off rent until it's back on the rental ready line again. We also look at haul recovery. We can get into a million different KPIs, but those are your main ones.

What checklist or process do you go through before adding a machine to the rental fleet?

McGhee: Mainly, what do we think the market rate is for this machine? Then we’re going to look at our acquisition cost and what time utilization it's going to take to generate the revenue that we want. This is a math game. Can we rent it for the right rate that'll generate the correct return we're looking for?

You've got to look for complementary products. If you have a skid steer and a mini excavator or you have light towers and Georgia buggies to go along with the mini excavator for the concrete customer, you're now building a fleet plan of complementary products. As you continue to get traction and you start seeing the returns, you can branch out into new things. We're not scared to add something to our product line if there's enough demand in the market for it.

Do you charge the same shop rate for rental units and customers?

McGhee: You are going to have a hard time generating the margin you want in your rental business charging full bore rate to your own department. I equate this to taking a dollar out of my right hand and putting it in my left hand because the money is still in the dealership. It's going to be a question of where do you want the profit to lie? If you want your rental department to be in line with their KPIs, you're going to have to discount the service rate. If you want service to have high volume and really good margin, you have to understand that it's going to impact the bottom line of your rental business.

Where do you normally see dealers lose money in rental?

McGhee: Not watching your costs. If you're not watching your maintenance and repair expenses, your hauling expenses and what's going on in the back of the house, it doesn't matter how much revenue the front of the house brings in. You could have the best go-to-market strategy and the best quality equipment but if your operations are not sound, you're going to have a tough road. I can't stress enough that the back of the house will make or break your business.

What would be a practical step for a dealer to evaluate whether this is the right business for them?

McGhee: Go talk to your customers. Ask, are you currently renting equipment? Who are you renting from? Are you happy with the product that you received from them? Why? Just listen to what your customer base has to say. I think you'll be surprised.

Listen to the full conversation with Preston McGhee at this link!