I recently returned from AED’s annual Summit in San Antonio, Texas. Not a bad place to be, but the message was tough to swallow. Let me give you a flavor of what I am talking about.
“The new normal is a lot lower than the old normal.”
“You are either a buyer or a seller.”
“Expect a long-haul recovery … 5-7 years before returning to '07 and '08 levels.”
“Both manufacturers and dealers need to consolidate.”
“Dealers can expect more rental risk going forward.”
These comments were made as part of an AlixPartners presentation on the state of the heavy equipment markets. Not good if you were expecting a strong recovery to bail you out.
They summed up their discussion with a checklist for equipment distributors. It goes like this:
- Balance sheets govern in a downturn.
- Distributors need to maintain price discipline.
- Distributors need to optimize their network.
- Distributors need regional inventory depots.
- Decide if they are buyers or sellers.
- Create incremental profit opportunities from their highest profit centers.
This is all pretty good stuff and realistic considerations to think about – especially the buyer or seller decision that every dealer needs to think about. Strictly speaking, if you are not willing to risk your equity base waiting out the storm, maybe you are a seller.
There also was a manufacturer panel that was pretty straightforward with its comments as well. Key comments included:
- The used equipment markets define 2010.
- Consolidation is a must.
- Dealers will have to produce any improvements in operating results because no help is on the way.
Taking the conversation to the customer level, all the panelists agreed that customers are in the same boat as everyone else and they also will work to:
- Shed financial risk.
- Rebuild their balance sheets.
- Find partners who provide solutions.
- Find ways to work around short production runs or lack of backlogs.
What these customer comments mean is that equipment users are going to be more interested in renting than buying, which means that dealers are expected to take on this risk even though they cannot afford to add another dime to the right side of the balance sheet.
In the end, these comments all point to:
- More risk.
- Slow recovery.
- More risk.
I think we can all agree that more rental business means more leverage that will play havoc with your debt/equity ratio, as well as other ratios you might find in typical lending covenants.
Lift truck dealers have always had the long-term rental with maintenance to offer, as opposed to an outright purchase. These types of contracts, however, might not meet current needs because they contain the financing risk that customers want to avoid. Customers do need the equipment and they will need the maintenance, but they will not want any long-term commitments as part of the program. Better be prepared to deal with the “off-beat” rental deals customers will throw at you, all of which are sure to leave the risk on your doorstep.
In a parallel life, I spend a lot of time in the rental business and am amazed at the number of rental methods customers are coming up with to reduce risk and lower cost. They want daily rates. They want hourly rates. They want the ability to call off units for a day or two. They want pro-rated rates. They want 30-day rental periods. Thinking about this will give you a headache, but it is worth getting the management team together to see if you can deal with these different rental contracts. One thing you can count on, however, is if you don’t, your competitors will.
Put this all together and what it comes down to is that dealers need to reduce their risk and increase profits to offset the expected increase in rental business this economy can throw at you. Dealers can do this by focusing on high-profit business, reducing inventory levels, buying used equipment for the rental fleet and developing new and exciting rental deals for customers.
Part of this process will be working with vendors for help in reducing inventory levels. For many reasons equipment depots are now a necessary alternative to help dealers shore up their balance sheets.
We are going to be discussing these risk issues at an upcoming CFO conference for dealer CFO’s on May 19-20 in Chicago, Ill. Check out the program at www.AEDnet.org.
Garry Bartecki is a CPA MBA with GB Financial Services LLC. You may contact him by e-mailing editorial@mhwmag.com.
| -End- |
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