Issue link: http://read.dmtmag.com/i/91455
On the Numbers Which is Better: Status Quo or Growth? For those seeking near-term exit, standing still is not really a good option. BY GARRY BARTECKI A large number of dealer CEOs face some tough decisions about the course their company takes in the next few years. The violent nature of world economics along with the unsustain- able government policies should give every entrepreneur pause when putting together short-term business strategy. Add in the rental-dealer conver- gence taking place in our industry, along with the large number of dealers looking to monetize their shareholder value, and you have another Perfect Storm. No dealer wishes to take on or expand any new business venture unless they believe it will add to share- holder value. That's the way it should be. You keep moving ahead to find new ways to meet customers' evolving needs, increase sales and profits, and thus increase shareholder value. And in doing so, dealers understand there is risk involved (especially at the outset), but they also know that with proper execution the rewards will more than justify the risk. But what about the dealer looking for a transition out of the business – are they going to take the same risks to grow the business? I don't think so. Oh, they will take the low-hanging fruit but more likely than not just hope to manage with the status quo, avoid future risk, avoid capital expenditures, pay down their debt and really just try to max out the EBITDA number until they can make a deal with the new owner. But is that a good idea? Every owner knows we work in a complex market, a market where factors emerge from beyond our control. Customer needs change even in this market. For example, the construction industry depression caused customers to avoid equipment purchases in favor of renting. As a result, the national rental companies have been having a great year. At AED's Executive Forum two months ago, someone mentioned that 51 percent of equipment delivered so far in 2012 was delivered to rental companies. There was also a slide prepared by one of the speakers that showed United Rentals to have higher margins in new sales, used sales, rent- als and service when compared to AED dealer members. I believe the recession allowed the convergence of the dealer and rental distribution channels to accelerate beyond a point of no return. Conse- quently, dealers today must determine how they are going to build share- holder value going forward, because it is not going to be the way they are doing it today. Why is there risk in maintaining the status quo? Because neither your competitors who are still in growth mode nor your customers are looking for status quo. Customers are look- ing for new innovations in terms of products and services and are going to buy from dealers who deliver them. Any dealer not willing to invest in new ideas will fall behind in a rather short period of time, because our industry is rapidly changing, whether you believe it or not. Competitors, now including local and national rental companies, will be moving ahead to capture the equip- ment utilization market and not the equipment sales market because of contractor demand. So if your plan is to just "dig in" and hold the fort in terms of your business operation there is a good chance you will wind up with less value. Your competitors don't stand still, your customers don't stand still, and your vendors don't stand still. Fall behind and there is a good chance your income drops along with your EBITDA number, neither of which improves your value proposition. Like I said, a tough spot to be in. So if you are a dealer willing to wait it out for another five years to improve your EBITDA volume you have some tough calls to make, because the construction industry is not scheduled to reasonably recover until 2014- 2015 – and that's just about the time they suggest another U.S. recession is coming, resulting from the stimulus money running its course. In case you are thinking this does not apply to you because you are located in a current "hot spot," I would suggest this affects every dealer who's deciding when to monetize their shareholder value. And one thing is for certain: The hotter the spot, the more competition you will see. If you can plan to wait it out for another seven to 10 years, then you have to stay in the growth mode and avoid falling behind the competition. After another round of consolidation (sure to come) those in the remaining dealer channel should find themselves having a fairly good value proposition. Three final thoughts for dealers: n Update your understanding of customer needs. n Figure out what your unique sell- ing proposition has to be to get their business. n If you plan to get into the "rental" business, you better know what you are doing. GARRY BARTECKI (gbartecki@ aednet.org) is AED's vice president of Finance. November 2012 | Construction Equipment Distribution | www.cedmag.com | 45