Whether it is sales, service, parts, or a rental operation, every department of a dealership...

Whether it is sales, service, parts, or a rental operation, every department of a dealership should be expected to turn a profit and stand on its own as a revenue generating profit center.

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For auto dealers with no or little experience in car rental, making the decision to conduct retail rentals within the dealership is a commitment. A solid strategy and proper planning are needed to ensure profitability. 

Here are some points to consider that will help you succeed in starting a rental department within your dealership.

Treat it as a standalone business

Whether it is sales, service, parts, or a rental operation, every department of a dealership should be expected to turn a profit and stand on its own as a revenue generating profit center.

Start by hiring an experienced manager who knows the rental business. An experienced manager will know how to determine the right number of vehicles you need in your fleet, and what the right mix should be. A balance of a good vehicle utilization and daily dollar average (DDA) are important factors to keep in check.

In order to identify the profit potential and ensure long term viability, it is important to keep meticulous track of revenues and expenses. 

Use rental as a sales tool

Opening up retail rentals at a dealership means exposing product and inventory to a new set of prospective customers who may not already have been in the showroom.

Make it known that rental vehicles are available for sale at any time. It is recommended that each rental vehicle include a marketing flyer (hang tag) reminding customers that the rental vehicle they are driving is for sale.

Additionally, dealers can promote the “Try Before You Buy” concept and offer to deduct the cost of the rental from the sales price of the vehicle.

The new and pre-owned departments can generate demand for rentals and the rental department should generate sales for those departments, creating great synergies that would not be available to traditional rental car companies.

Aside from selling more cars, there is also growth potential by marketing your fleet to the general public. Family vacations, business trips, or hauling the soccer team to an out of town game are great reasons to rent a car. 

By marketing the rental department beyond the existing customer base, dealers can make more money renting vehicles and attract more customers to your dealership in the process.

Acquire tailor-made pre-owned inventory

A rental fleet also makes for an easy supply of profitable used vehicles to sell. 

Acquiring a proprietary rental fleet for resale eliminates the uncertainty of buying vehicles at auction and saves transport and other fees. 

Vehicles should be ordered so as to differentiate the fleet from other models in the market, focusing on the resale of the vehicle. 

Own the customer

Rental operations are right where the demand for a replacement vehicle exists — no need to shuttle vehicles or customers to another location. 

Service customers appreciate the added benefit of renting a vehicle at the same location where their vehicle is serviced. 

Like with a loaner car, dealership employees will be in charge of the rental experience from beginning to end. There is no need to turn the dealership’s customer over to another service provider.

The charge for the rental vehicle can be billed to the customer through the repair order. 

Offering another service, in this case retail rentals, at your dealership strengthens your foothold in the community. 

Lower the cost structure

In contrast to a standalone operation, the dealership model lends itself to a lower cost structure with an existing facility. Operating expenses, including rent, utilities, internet access, telephones, security systems, and copy/fax machines are already in place in support of dealer operations. 

Traditional rental operators don’t have the flexibility in staffing that dealerships are afforded. The dealer can use other employees, such as sales staff, lot attendants and the service manager to support the rental operation during peak demand periods. 

Dealers should be able to maintain their fleets at a lower cost than traditional car rental competitors, as well as experiencing less downtime while rental vehicles are being serviced.

Airport operators face high rental taxes that a dealership does not experience which gives them a competitive advantage.

Shift the free loaner mindset

This mindset requires a major cultural change for dealerships that have traditionally provided free loaners. Many dealership fleets serve as little more than a source of free — but expensive — loaner vehicles for other departments. 

All rentals should be paid for, even if they are paid for by another dealership department.

Commit the necessary resources 

The typical dealer knows little about running a profitable rental operation. Understanding the KPI’s and tracking the profitability of the fleet is a critical component. Human and capital resources must be made available to support the department.

The department must operate as a profit center and an investment must be made in advertising (lead generation), training and the right size fleet. 

Results must be tracked, and the manager must be held accountable for profitability.

Keep the used car manager away from control of the fleet

Both the rental car manager and pre-owned manager should work together on ordering vehicles for the rental fleet. 

Avoid this scenario: At many dealerships, the pre-owned manager orders the fleet vehicles, choosing models and option packages that he or she wants on the pre-owned lot, even if they don’t make for the best rental cars. 

Later, when the pre-owned manager needs a particular vehicle for a customer, the vehicle may be immediately transferred to the used car department at a price set by the used car manager, even if the vehicle is still needed for continuing rental operations. 

Having both parties involved ensures that the inventory is acceptable to the rental customer and eventually the used car customer.

There are many methods of calculating the price of the rental vehicle at the end of its life cycle. Here are some best practices:

  • The general manager should be involved in determining the sales price of the vehicle. 
  • The profit or loss on the sale of the rental vehicle should be allocated to the rental car department as they incur the operating costs throughout the lifecycle of the vehicle. 
  • Whatever additional monies are obtained over and above the predetermined price of the vehicle set by the GM would be realized by the used car department. 

View rentals for more than just service

There are many reasons why someone may choose to rent a vehicle. And dealers must train their staff to ask for all of a customer’s rental business. 

Base pay on profitability

Pay should be based on the profitability of the rental operation. Dealers with a larger fleet opportunity should consider hiring a full-time, trained professional.

Adjust rates to the market

Being aware of market conditions, availability and adjusting rates to meet demand are critical elements to a successful rental car program.

Expand your fleet mix

When exploring growth potential for your rental department, don’t overlook vehicle mix. If an opportunity for a certain type of vehicle such as work trucks, off-road vehicles, minivans or convertibles comes up, then consider having these vehicles available to rent. These specialty vehicles typically command a higher price and can be a sweet spot for profits. 

Knowing what your competition offers is an important determining factor in your selection of inventory for your rental fleet.

About the Author

Lori Tennant is senior director of manufacturer strategy for Dealerware. She has over 40 years of experience in the automotive and car rental sectors, with expertise in the area of courtesy cars and rental at auto dealerships.