Issue link: http://read.dmtmag.com/i/184881
On the Numbers The Coming Extinction of Sales Market Share The proliferation of rental, among other things, is raising provocative questions that demand your attention. By Garry bartecki The proliferation of rental, combined with dealer savvy in transitioning their business model to align with customer demand, is raising provocative questions. If ever there was a time to step back from your day-to-day tasks and spend some time gathering data about the future, the time to do it is probably right now. There are major changes that will take place in this industry over the next 18 to 24 months. If you don't think so, then please consider the following: n The rental business is expected to increase 37 percent over the next three years, which will significantly change dealer/vendor relationships. n As we speak, Congress is considering a change or elimination of every major tax break a dealer or rental companies currently get. n That mysterious thing we call interest rates appear ready for an increase, and it could be significant – but then again, it may not. n Employer/employee relationships will never be the same after ACA because you will need to balance changes in personnel costs between pay and benefits. I don't think there is anything farfetched here, do you? If even half of this shortlist comes about new strategies will need to be implemented to deal with the new order of things. No matter how you look at the next three or four years, and I am sure you could add to my list, C-level executives are going to earn their keep by making the necessary changes to the business to keep it competitive and profitable. Finding the time to work on the business instead of in the business may mean divorcing yourself from the day-to-day operations and devoting the bulk of your time planning the future direction of the company. Dealers are now in the rental business and will continue to be in the rental business if they hope to maintain their customer base. And when I say "rental business" I mean the rental business the way rental companies do it. To be in the rental business, dealers are transferring inventory into rental assets, and they can't both maintain inventory levels and a rental fleet because it is financially impossible. Rental companies keep their units for 60 to 84 months before they replace them. Of course, they set up a rotation policy, but they are only buying 20 percent of their investment in inventory (I mean rental fleet) per year or maybe a bit more if business is increasing. What this means for OEMs is less equipment sales. Contractors are not buying and probably won't buy as much going forward now that they have figured out how much it costs to own equipment. Dealers are now the new customers via their rental fleets, and they will replace fleet when the ROI analysis tells them it is time. The parts sales will be there, but not maybe as much, because dealers maintain their fleet better than a contractor would. So what does this all mean? It means the market share concepts go out the window. It also means dealers may have to divert some of their purchases to other vendors to fill rental customer needs, further reducing market share stats for existing vendors. It looks like your annual vendor meetings are about to get more interesting and dealers need to be prepared to discuss these issues from a position of knowledge and strength, because I am not so sure vendors are up to speed on this yet. If you are looking for subjects to add to your annual board meeting agenda I suggest: 1. How are we going to transition our business to accommodate customers who now want to rent, finance that transition, make rental profitable (same as public rental companies) without a negative impact on cash flow? 2. What exactly is our current tax position in terms of carrybacks, carryovers, deferred taxes (even if you don't book them) and effective rates. And what happens if our depreciation deductions are reduced by 50 percent, LIFO goes away, LKE use is restricted and dual-use rules become more restrictive. In short, what if my tax bills go way up (even with lower rate)? What happens to our cash balance over the next two years? 3. What would a significant increase in interest rates do to us? Our customers? 4. What if ACA hits us with extreme increases in health care costs? It's very possible depending on what state you work in. With total personnel cost being as important to dealer profitability as it is, how would you handle a 40 percent increase in health insurance premiums? Call me to sit in on your planning meetings, if you like. Or maybe you want to send me to your OEM to get them up to speed. Garry bartecki (gbartecki@ aednet.org) is AED's vice president of Finance. October 2013 | Construction Equipment Distribution | www.cedmag.com | 47 47_On_the_Numbers_KP.indd 47 9/27/13 12:37 PM