Can dealers and national rental companies peacefully coexist in the same market? Are they competitors or partners? What can manufacturers do to ensure healthy competition at a minimum and foster cooperation wherever possible? These questions have faced manufacturers of construction equipment ever since the entrance of national players forever redefined market dynamics.
From our experience, dealer relationships with national rental companies span the full gambit from adversaries to competitors to partners. While the weaker relationships tend to be based on mutual distrust and low willingness to cooperate, the best relationships focus on creating win-win arrangements. For instance, dealers fully support national rental companies with their post-sale service and re-rental needs, as well as provide equipment-related training. In return, they receive an on-going service revenue stream. These dealers view national account rentals as a venue to increase the installed base of their primary brand and brand visibility to the contractors. They expect that this will ultimately lead to additional new equipment sales and a greater market share.
While dealer sentiments toward national rental companies may vary, most dealers today have accepted the core premise that national accounts are not a transient entity. They are here to stay. Therefore, the solution to the question of coexistence, its ways and its means, has become particularly vital.
Convergence of business models
In the early days of coexistence, one could observe a clear difference between business models of dealers and national rentals. Dealers were mainly in the business of selling product, while rental companies had a rent-to-rent model of operations. Over time, dealers developed a sophisticated rental component to their business. Initially, they fostered new equipment sales through rent-to-purchase programs. Then, they developed limited rent-to-rent operations, focusing primarily on weekly and monthly rentals. Dealers built their rental fleets with a few equipment lines representing a depth of equipment models, while national accounts focused on the select few highly utilized models for a wide variety of equipment. Some dealers even stayed away from those highly utilized models to avoid direct competition with rental centers.
These differences in business models allowed equipment manufacturers to control conflict between national rentals and dealers through product authorization. Only dealers were allowed to sell new equipment. National rental companies' authorization included selected equipment models. Over time, these have become standard conflict management mechanisms.
Today, equipment dealers have grown their rental fleets considerably, with rental revenue often accounting for up to 30 percent of the dealers' businesses, and even more in some instances. Most sophisticated dealers have organized their rental business into a separate operation to better manage costs and ensure profitability. These dealers have expanded their rental product line offering and diversified into daily rentals. They employ sophisticated fleet management practices to ensure high financial utilization of their fleets. They no longer stay away from equipment models with high utilization. In effect, these dealer rental operations have fully evolved to a rent-to-rent model.
National rental companies' activities demonstrate a migration in the opposite direction. Initially, they expanded equipment sales activities from rental fleet sales to occasional rent-to-purchase in cases where contractors wanted to buy the piece of equipment they rented. For a while, most national accounts refrained from new equipment sales since a much higher cost structure accompanied by lower margins would have been required to support such operations. This would have considerably disturbed the low-cost, higher margin rent-to-rent model of national rentals. National rental companies fulfilled their growth objectives through continued acquisitions.
Today, as the acquisition flurry has slowed, national rental companies look for new opportunities to grow organically. For many, that means expanding into new construction equipment sales. A number of manufacturers report pressure from national accounts to allow authorization to sell new equipment. United Rentals leads the way. Some of its locations are already offering a variety of new equipment for sale — from such major manufacturers as Komatsu, New Holland and Bobcat.
This convergence of business models between dealers and national rental companies has created tension in the marketplace. The area of coverage overlap has increased considerably. Manufacturers struggle in their enforcement of conflict management mechanisms based solely on product authorization principles. These are too simplistic and no longer effective. In this new, more complex environment conflict management must become strategic.
Conflict management toolbox
As conflict intensifies, manufacturers need to respond by managing more complex strategies. Drawing from our experience with the rental equipment industry, we created the following checklist that will allow manufacturers to resolve this challenge successfully. Implementing these strategies will ease some of the stress existing between dealers and national rental companies. It will help the relationship between these two channels evolve from tense coexistence to healthy “coopetition.”
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Clearly understand contractor sourcing behavior for both equipment purchases and equipment rental of your products and brands. Preferred sources of equipment vary considerably between smaller and larger contractors. The former tend to source their equipment from dealers and small independent rental companies, while the latter usually prefer to go to dealers and national rental firms instead.
Furthermore, in the case of compact equipment, rental companies tend to be a preferred source for daily rentals, while dealers are a popular source for weekly and monthly rentals since they typically carry newer equipment in their fleets. Therefore, in any given market a manufacturer needs both channels to ensure appropriate coverage and presence to the opportunity.
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Conduct comprehensive audits of existing channels. Understand — with objective input from dealer principals, national rental companies, and district managers — the focus and the capabilities of the current channels. Specifically, the audit should include evaluation of the following components of a channel partner's business model:
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Customer window (the customer segments that represent 80 percent of the channel's business)
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The channel's value proposition and how it varies by different customer segments
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Services that the channel partner offers to support its value proposition
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Resource availability in the areas of sales, rental, and service as well as specific resource allocation practices
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Scope the degree of coverage overlap between dealers and national accounts.
Healthy channel competition in the areas of overlap is inevitable. Overlap of 25 percent or more between local players can be destructive to everyone's business. If the ‘coopetition’ is healthy, focus discussions with your dealers on cost management and cohesive defense strategies grounded in contractor needs and sourcing preferences. Focus resources on growable and self-growing dealers within your dealer network. Manufacturers may need to determine which dealer size will become a scale threshold for a winning business.
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Understand differences in channels' margin management practices. While both dealers and national rental companies manage time utilization of their fleets to a similar targeted range of 70 percent to 80 percent, their financial utilization practices vary. National rental companies tend to achieve their financial utilization objectives by aging equipment longer than dealers and negotiating significant volume discounts with manufacturers. This allows them to offer contractors lower rental rates on equipment.
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To ensure profitability, most equipment dealers have to charge higher rental rates, but provide newer equipment in their fleets. Therefore, any significant difference in acquisition cost between dealers and national rental companies resulting from higher volume discounts for national accounts negatively impacts dealer bottom line if they attempt to maintain competitive rates.
Use input from the channel audit and channel economic analysis to structure channel compensation based on functional performance. Functional compensation pays for value, not just volume. Functional performance criteria should line up with needs of the customer segments being served. Offer both dealers and national accounts equal opportunities to participate and make necessary investments. This will level the playing field between the channels.
Where applicable, help equipment dealers diversify into segments outside of construction. Examples include industrial, lawn and garden, and landscaping.
In the past, most dealers have sold into these segments on an opportunistic basis. In today's environment, dealers need to learn how to manage these segments as separate businesses. This will include understanding segment differences in product and support needs, financing, and rental rate sensitivity as well as costs to serve individual segments. Managing costs and revenue by segment will help dealers capitalize on less traditional growth avenues, take extra costs out of the supply chain, and become more competitive with rental companies. This strategy is particularly important in the context of the current slowdown of the construction industry.
Evaluate opportunities for creating products designed specifically for rental channels. This will redefine traditional product authorization-based conflict management practices.
Markets evolve, and we can't stop them. Rental companies are selling equipment. Dealers accepting this message are changing their business model, and looking for ways to work with, or around, rental companies in their geographies.
Jeanne Fec, principal, and Irina Fursman, manager, serve commercial clients for Frank Lynn & Associates, an international channel and market strategy consulting firm headquartered in Chicago. The authors may be reached through the Client Services Department at 312-263-7888. Address e-mail inquiries to [email protected] or [email protected].
