Renting equipment is often a sideline for many dealerships and a way to fill revenue gaps. For Pauley Equipment, rental is how they started their business and it continues to be a mainstay for their Kubota and New Holland dealership.

Pauley Equipment Co.

Founded: 1983

Location: Escondido, Temecula and Vista, Calif.

Employees: 55-60

Lines: Kubota, Mustang, New Holland, Gearmore and Land Pride, plus dozens of shortlines are represented in the rental division.

Revenue: $10+ million

“We rent because we started in the rental business. We don’t rent just what we sell. We rent everything, from a furniture dolly to large dozers and everything in between,” says Rob Pauley, vice president and co-owner of Pauley Equipment. The dealership, whose ownership includes Rob’s brothers, Mike and Tom, has locations in Escondido, Temecula and Vista, Calif.

The dealership has a strong rural lifestyle customer base. “San Diego County has more farms than any other county in the country, but the average size is 2-4 acres. There are a few thousand small farms throughout the county,” Pauley says. The base of small agriculture customers includes hobby farms and horse owners, large property owners, nurseries and vegetable growers.

Getting Started

While the Pauley family was established in the rental business, the three brothers set out on their own in 1983 when they purchased the Vista location.

“We just purchased a piece of property and started the business from nothing. The banking industry was different then and a business loan was much easier to acquire. We rented mostly a broad base of construction equipment because that’s what was in demand at the time,” Pauley says.

Rob Pauley is vice president and co-owner of Pauley Equipment. The dealership’s leadership team also includes his brothers Mike and Tom.

They had a chance to expand to Escondido, which is about 12 miles southeast of Vista, in 1992 when the local dealer approached the brothers about an arrangement to lease space from him and rent equipment at his location.

“Those were difficult times and in the midst of a recession. He needed the revenue and it gave us a low risk and relatively cheap way to expand. We had excess inventory anyway because business was down. We operated the rental yard separately from his dealership for a year and then bought him out completely and made it into a combination dealership and rental yard,” Pauley says.

“The original intent was more to benefit our rental business. It allowed us to acquire inventory at wholesale and then sell used inventory out of the rental department at retail. The retail side of the business was almost an afterthought. The location was primarily a Ford dealership and had a few Kubota tractors parked on the lot. Kubota was almost a throw-in. Since then, retail sales have become our highest revenue producer and Kubota is by far our #1 brand.”

They added the Temecula store in 2001, which sits about 25 miles northeast of the Vista location. “The Kubota dealer up there was struggling a bit. That dealership had always been negative pressure on our margins. With a dealer that close, we were constantly competing against him. The answer was to buy him out and we made it into a dealership and rental yard — so it’s rentals, sales, service and parts,” Pauley says.

The dealerships also carry New Holland equipment, but Pauley says demand is much stronger for the compact equipment that Kubota offers. “There is one New Holland Agriculture dealer for all of Southern California and that’s us.”

Rental Philosophy

The dealership rents more than 35 categories of equipment for construction, maintenance and agriculture. Pauley says their rental inventory has transitioned over the years as the area has developed.

Pauley Equipment’s rental inventory has evolved as the area’s development has matured. The dealership used to rent heavy construction equipment for roads. Now, its rental inventory is dominated by compact equipment, such as mini-excavators, for use in housing developments.

“The evolution of this particular area was at first heavier equipment. Then, as the area matured and developed, we changed to maintenance equipment. Now, we rent smaller equipment to get into backyards. The houses here in Southern California are 8-10 feet apart, so if you put a fence down the middle, that’s 4-5 feet on each side of the house. We just followed the demand,” Pauley says. “The smaller equipment is here to stay. It’s been an evolution away from tractor loaders and backhoes and toward skid steers and mini excavators, smaller compact equipment and multiple pieces of specialized equipment.

“The customer dictates demand. But even if we don’t have an immediate demand, I’ll talk with our rental managers and they will have enough input from customers that a particular product would be good to carry. It’s a bit of a gamble, but mostly it’s dictated by customer demand,” Pauley says.

The dealership only carries newer equipment in its rental fleet. “We like to keep our rental inventory new and sharp. There are many advantages to that. The customers like it and it lowers our overall maintenance and repair.”

Increasing Retail Revenue

Pauley says Kubota has been instrumental in the growth of the retail side of the business. “Kubota makes a great product for a good price, with good financing and the product sells itself. The tractors are conducive to the type of very small farms we have.”

Pauley says sales and rentals to local nurseries are a very important part of their business. “The nursery business is huge here in San Diego County because of the good weather. Most of the major growers that sell to Lowe’s and Home Depot are here. In addition, we have the small, compact construction equipment that Kubota makes and that is a segment of our customer base that is coming back. The last few months we’ve sold quite a few mini excavators and track loaders.”

Vineyard owners are one of the dealership’s customer segments with specialized needs, which are met with Kubota’s narrow M40 series of tractors. He says that market has been growing over the past 5 years because of water shortages. “Our water rates have basically doubled in the past 3 years and they’re slated to double again in the next decade,” he says. “People are chopping down their avocado and citrus groves and putting in vineyards and Kubota has products that are perfect for that market.”

Rental Supports Retail

Pauley says they follow the customer’s lead in terms of directing to rent or buy and give options for transitioning between the two arrangements. For instance, a customer can rent for a few days or set up a long-term arrangement and they can apply a percentage of the rental fee to the purchase price — and back out of that arrangement if need be.

“We’re very flexible and let the customer make the choice. In that way, the rental business helps the retail business,” he says.

Pauley adds that their expertise helps them earn and keep customers who could choose to go to a larger national rental chain.

“They can rent things so incredibly cheaply, but regardless, we don’t compete directly with them. We deal with the homeowners, landscapers and small- and medium-sized contractors instead of the big high-exposure jobs. We have really good personnel on the counter and in the rental yard. If a customer is doing a particular project, usually our guys have done it before and can offer good insight,” he says.

Rental drives retail purchases besides just a rent-to-own scenario. Pauley says they’re continually adding new equipment to the dealership’s rental inventory, which captures the attention of customers.

“When you’re renting new equipment, it’s great exposure. People see it and use it and it often spurs the question, ‘What does this cost?’ ”

Adapting Service Model

Pauley Equipment’s strong rental component also influences its service business. “Our absorption rate is probably not what it is for other dealers. Our customers are not like the typical farmer who is using that tractor from dawn until dusk. Our typical customer, outside of the nursery owners and construction companies, will put on 100 hours a year. We’ll sell a tractor and see it 2 years later for its first 50-hour service.”

A good percentage of Pauley Equipment’s service department work is related to maintaining its rental machines. However, the dealership recently hired a new service manager and hopes to expand service revenues by reaching municipalities and other customers.

A good share of the dealership’s service department work is related to maintaining rental machines. Pauley says that is just the “assumed cost” of being in rental.

The dealership now has 11 service techs and Pauley says they are aiming to expand their service revenues.

“We’re expanding our service department by acquiring higher quality techs and service managers that bring business with them. We’re already seeing the service revenues increase quite dramatically,” he says.

Targeting Promotions

Pauley says they have a good base of rural lifestyle and commercial customers, but they’re still situated in an urban area.

“Here in San Diego County, more than 90% of the people have no desire to look at a Kubota tractor, so marketing is difficult and we struggle with that.”

His marketing strategy includes direct mail, radio advertising and event promotions, such as sponsorships and equipment displays. Pauley believes direct mail, when targeted correctly, brings the best results. He researches customer demographic data to better focus his marketing efforts.

For instance, he searched data to locate those in San Diego County who owned 3 or more acres and had a household income of $125,000 or more. The result was 39,000 residents. “I searched on 5 acres or above and $150,000 and above and I still sent out 12,000 mailers,” he says.

Because of the good climate, Pauley says he is marketing almost year-round. “We have about a 3-month window in the winter when there’s not much going, but the rest of the year something is always going on. Seems like every other weekend we’re going to a rodeo somewhere or hauling tractors to some event.”

Pauley says equine customers help stabilize his revenues throughout economic ups and downs. “That customer base doesn’t seem to suffer the effects of a down economy quite so badly, so in the past few years we’ve relied heavily on that market,” Pauley says.

Pauley takes advantage of co-op advertising dollars from Kubota and tries to balance messages regarding promoting the manufacturer vs. the dealership.

“I want to advertise rental, sales, service and parts, and Kubota wants to advertise sales, so you’re always on the edge as far as your advertising,” he says. He uses about half of the co-op advertising available from Kubota, but that may change.

“The economy has been rebounding over the last few years and we want to reach those now making a decision to buy who were not able to afford to before,” he says.

Managing Dealership Structure

The dealership is family owned and operated and Pauley says management duties are split based on expertise, but they also cross over as well. Tom manages the Temecula store. Mike handles finances and Rob handles the sales side. Mike and Rob are based at the Escondido location.

“The smaller equipment is here to stay. It’s been an evolution away from tractor loaders and backhoes…”

“Fortunately, it just happened this way. Everybody has a different set of skills, strengths and weaknesses. Overall, it’s worked very well and almost all of our management is overlapping. I know that most family businesses don’t work out this way,” he says.

Pauley says they do have formal meetings to maintain the requirements of a corporation, but most of the decision making is done through daily conversations.

Pauley Equipment is located in an area with many small farms that use compact tractors and attachments to maintain properties, horse arenas, nurseries and vineyards.

The next generation of Pauleys has joined the business. Rob’s son, Bradley, manages the Vista location and Mike’s son, Jacob, manages the service and rental departments at Escondido. Mike’s other son, Jason, serves as general manger of the Temecula store.

“They have a lot of input. They are more on the front lines interacting with customers. They have a much greater grasp on the rental side and what customers need and the changes we need to make,” Pauley says.

Understanding the Market

The Pauleys’ understanding of the market and leveraging their rental niche has resulted in success, but Pauley also credits his sales team.

“Fortunately, we have very little turnover. Our salespeople have been with us for a very long time and they’ve built relationships with customers. We used to have a territorial system, but we got away from that because we found it didn’t work out well for the kind of customers we have. So, our salesmen can sell any product to anybody, much like how salespeople do on a car lot.

“They have a really deep knowledge of what works best in this area. They have an intimate knowledge of this region and everything that goes with it climate wise and terrain wise. I think that’s our biggest asset,” Pauley says