As we begin Module 3, keep in mind what you have learned so far. Demand for rental equipment continues to grow. More and more customers are using rental as their primary means of sourcing equipment. Customers' expectations continue to increase. And for dealers to compete in the rental market requires a compelling offer of services, not just having the machine available. In light of the fact that the market is changing drastically with customers and their attitudes towards rental and their willingness to push risk towards dealers, I thought it would be interesting if we took a look at how the dealer business model is holding up in spite of these conditions. So, we're going to review briefly the AED 2015 Cost of Doing Business Survey, which dealers report in in a variety of ways their gross profit margins. And if you recall, the dealer business model is focused primarily on parts, sales, and service. And so, we're going to look at that and see what the trends are. And then, for those dealers that have already morphed into rental, we're going to take a look and see how they're doing in terms of profitability. So, to share a few of the numbers that came out of this survey, dealers in North America, new machine sales, their sales margins, gross profit margins are now on average about 11.2%. Gross sales margins continue to slip. They're sliding approximately a half or a tenth of 1% every year. And so, it's very difficult for dealers to think that sales is going to keep them afloat. That is one of the least profitable things that a dealership does is sell new equipment. Then, when we look at used equipment sales, the margins are pretty steady at 12.8% as a percentage. But honestly, there should be a greater distinction between the margin for new and used. What this tells me is that we don't have used equipment that is used enough. In other words, the holding period to create a used machine should probably be longer than what we're seeing in this survey so that you would have margins that were out closer to 18 to 20% for gross profit margin on a used machine, not 12 or 13. Parts sales, that is the heart of the business, and the margins are steady at about 27 to 28%. Most dealers are trying to get north of 30. That should be a target for you. And here is the backbone of the business. It's a service-driven business. So, where the money is really made is in the service department, and your margins should be over 50%, your gross profit margins. So, every dealer has to have a blend of revenue. They've got to have new machine sales. They've got to have used sales. They've got to have parts and service. And the mix of all of that activity needs to come out with a blend, usually north of 21%, for a dealer to be able to make money. So, as we saw in the last slide, the service department is where the biggest margins are to be had. But the only way that a dealership can really do parts and service business, it's focused on machine population. It is critical to the success of your service department. In other words, if you don't have very many machines out there, your opportunity to do repair and maintenance on your brand is slim. So, therefore, the part of the business that you can make the most margins with, you don't have any opportunity. So, the success of a dealer, long term, is really focused on machine population. You have to have it out there. So, growing rental fleets puts pressures on dealers. How so? So, let's just say you are a, whatever brand your product is, and there is a couple of rental fleets, rental companies down the street from you, or a neighboring dealer, and he is populating his rental fleet. Well, all of those machines going into the dirt, if you will, being delivered, going out to the market through rental, those represent future used machine sales. And unless that's your particular brand, that means that your opportunity for service work in the future is being diminished. And so, sales departments, if a neighboring rental store or a dealer decides to drop 20 new units into the marketplace, that puts a lot of pressure on your sales department to try to sell that many more machines to be able to keep up with your market share. So, especially when the gross profit margins are eroding. Some additional things that we found in the cost of doing business survey. The service revenues as a percentage of the overall revenue mix for a dealership tends to be in decline. A recent survey said 8% of total revenues was service revenues. Okay, there can be a number of different reasons for that. One of my takes on this is that since so much of the equipment in our industry is finding its way to the market through major rental companies, those rental companies are not bringing that equipment over to your dealership to have it serviced. They're doing it themselves. So, even though you may have machine population out there that has your brand on it, if it is down the street at one of the major rental companies, you're not getting a chance to do the service work on that equipment. So, therefore, it's in decline. In other words, your service opportunities are not keeping up with the potentially the machine population. Another reason that I believe that this is going lower as a total percentage of revenues is that the compact equipment, the mini excavators, the skid steer loaders, that type of equipment, oftentimes, again, you've got owner-operator type folks that try to do some of that work themselves. And honestly, on mini excavators, those types of machines do not drive a lot of service work. So, now we've got a situation where the part of your business that you can make the most margins, what we're seeing in the survey results is that it is flat or in decline as a total part of your revenue mix. So, that's a trend that needs to get your attention, that the way that equipment is being used out there in the marketplace, I believe the major rental companies are basically handling that service work themselves. Then, when we look at your parts revenues as a percentage of the overall revenue mix, that seems to be staying the same. So, that's good because we've got parts margins that should be around 30% or more. And so, that's very consistent business. We can count on it. Lastly, the sales revenues as a percentage of the overall mix is really pretty high. I mean, 68%. There's a lot of pressure on the sales department. Again, thinking about this in gross profit margin, according to the national average, for every dollar of sales, you're getting at about 11, 11 1⁄2%. If that was a parts dollar, you're getting about 28 to 30. If it was a service dollar, you're making over 50 cents on it. So, the sales departments are under a lot of pressure to produce, and they're having to do it on real skinny margins. So, all of this leads up to the fact that revenue mix is real critical to whether your dealership makes money or not.

dealer business model

rental equipment industry

customer expectations

gross profit margins

machine population