East Tennessee is one of the smallest Caterpillar territories on the map. With a population of less than 2 million people, the mountainous region's major metropolitan areas are Knoxville, Crossville, Tri-Cities and Chattanooga, Tenn.

With such a small territory, one might expect Stowers Caterpillar to be one of the least significant Caterpillar dealers around and its Stowers Rents program to be a minor rental player. But anybody who has been to its facilities or has had to compete against them will tell you that “insignificant” is the last word anybody would use to describe Stowers. Stowers Caterpillar has one of the best market shares of any Caterpillar dealer when it comes to sales of compact construction equipment and is one of the most profitable and fastest-growing rental companies in the business, Caterpillar or not.

Stowers, (which rhymes with “ours,” also a reflection of owner Wes Stowers' “we, not I” philosophy) with only four rental branches — Knoxville, Chattanooga, Tri-Cities and Crossville, not including the three main dealership locations that rent heavy equipment, and a brand new rental branch in east Knoxville that opened this month — did $24 million in pure rental volume in 2005 and should top $30 million this year, good enough to be ranked No. 58 on the RER 100. The rental division will top $40 million in total volume this year and the company may top $200 million. Considering the company started its rental services division in 1999, the growth has been remarkable.

“I remember a few years ago when we talked about reaching $40 million, Joel [Harper, general manager of rental services] thought we were crazy,” says Stowers Caterpillar vice president of sales Mike McCormick. “Now we'll top that this year and $50 million is in sight. We underestimated the opportunity that was there.”

Stowers CEO Wes Stowers began thinking seriously about rental in the late 1990s when Caterpillar outlined three potential growth areas for its dealerships — agricultural, forestry and rental.

“We don't have much agriculture here in east Tennessee, and it's too hilly for much forestry, so rental was the avenue for growth that made sense for our dealership,” says McCormick.

Stowers was smart enough to know that rental had to be operated with a separate mentality from dealership operations. He was also smart enough to know that he needed people with rental experience; that he couldn't just rely on dealership staff to create a rental division with a completely different mindset and structure. One of his key early moves was to hire Joel Harper, a former Prime Equipment regional manager with, at that time, almost 15 years of rental management and sales experience. The hiring of Harper has proven to be a key decision in the creation of a successful rental business, which in 1998 had four employees and a trailer and now has 1,500 machines, five branches and plans for additional expansion in 2007. And the company earlier this year opened a state-of-the-art 42,000-square-foot rental facility in west Knoxville, with 16 service bays.

“We needed somebody who understood how to make this work,” says Stowers. “Somebody who understood the metrics and the numbers. This is a numbers business and you have to have a good feel and understanding for utilization and your products and how to organize your overhead. Joel had this experience with Prime.”

Stowers also brought in Henry Gray, a 12-year rental industry veteran with management experience at Care Supply and Hertz Equipment Rental Corp. Gray, who now manages the two Knoxville rental locations and the Crossville branch, brought additional experience and understanding of the rental mentality.

While Stowers Caterpillar was a tremendously successful dealership, there was much to learn about transitioning into the short-term, rent-to-rent business.

“The financial model is so different,” says Stowers. “On the equipment side, the turnover is more rapid. You bring in a piece, you sell it and you replace it. Although in some cases, we did rent, because a lot of our sales start out as rental purchases where the customers' intention is to purchase the machine, for us, the learning curve had to do with the sheer number of transactions in the rent-to-rent business. It can swamp your accounting department, so we had to change some processes. But more important was learning the rental mentality and the logistics: It takes the wisdom of Solomon, because all we do all day long is solve customers' problems.

“And we had to become accustomed to the rapid pace. It's fun, but it's different from a traditional heavy equipment dealership. The ratios are all different. It's a hard business. If it was easy, everybody would do it.”

The transition to rental was the logical next step for Stowers, especially as the compact construction equipment market was growing dramatically in popularity and demand. The company found that many of its customers regularly rented equipment and welcomed Stowers' entry into that market.

“When Stowers got into the rental business, there were a lot of customers that were renting from other companies because they didn't have another choice,” says Harper. “They were dealing with nationals and regionals, but as we entered the business, because of our reputation, the level of service, and the equipment we provided, it was easy for customers to transition to us to take care of their daily and weekly rental needs for allied and compact Caterpillar equipment. So one of the advantages we had getting into the business was there was an existing customer base out there that we've been able to expand on. And the smaller products allowed us to reach a different level of customer that Stowers in the past had not reached out and touched.”

The development of the rental division also allowed Stowers to attract customers who primarily rented and hadn't had a lot of exposure to the dealership. The Stowers rental program features a number of advantages over its national and regional competitors. Wes Stowers points out these advantages while being quick to express respect for the company's competition.

“I admire what the national companies have been able to do,” Stowers says. “They have good equipment and they've been able to attract some good people. Our very toughest competitors in this market are national players and they're tough. They have made us better. But we bring a lot to the table.”

To begin with, the Stowers organization had the benefit of being in the east Tennessee market for nearly 50 years with a well-known and respected name. Being a family-owned business, the company has the ability to make decisions quickly. If a customer needs something Stowers doesn't have, it can make decisions quickly and key executives such as Stowers, McCormick and Harper are easily accessible and responsive to the customer base.

The real key to Stowers Rents' competitive strength is the support it gets from the dealership, just as Caterpillar as a manufacturer is strengthened in its ability to sustain strong market share by the consistency and capability of its dealer organization. For example, parts availability is a Caterpillar strength. Cat has nine parts depots in the United States and Stowers personnel make nightly runs to Atlanta, three hours away, for parts. Stowers' main dealership store has a huge parts warehouse where it stocks about 50,000 line items, and a parts inventory worth about $15 million, according to vp of sales McCormick. What it doesn't stock, it can obtain from Atlanta. “Part of what Caterpillar hangs its hat on is being able to provide 98 percent of the parts our customers need in 24 hours,” says Harper.

Stowers has a highly trained service force. In an organization of about 400 people, more than 200 are technicians. Whether technicians who concentrate on the rental fleet or on the larger machinery side, the Stowers service staff is stable, well-compensated and supported by an organization that takes every opportunity to ensure that its technicians receive as much training as possible from every possible source.

“We have two full-time training instructors,” says McCormick. “Every week we have training classes going on. We are training young mechanics and training some of our experienced people also to keep them current. With all the new developments in technology, it is a challenge to keep everybody current. The technician shortage is our biggest challenge. We have a full-time recruiter who does nothing else, developing relationships with local technical schools, high schools and guidance counselors, making them aware of the opportunities we offer.”

Stowers' main dealership has advanced diagnostic equipment, a welding shop, a CAD design specialist for modifications on equipment the company does for customers, a hydraulic assembly and disassembly area, a hydraulic test bench, a chassis dyno, a track press, advanced engine-testing equipment, remanufacturing capability and more.

Another advantage is the availability of inventory. “Just about every model of Caterpillar equipment we have in our rental fleet is sitting in our inventory at one of our stores,” says Harper. “If we run out of skid-steer loaders and I'm 100 percent utilized and I need to add fleet, I can just go get one as long as it makes sense. If we're completely out of 315-style excavators and our market is growing and I need another one, I can call to the machinery store and if they've got one in stock that's not spoken for, we can get it that day and roll it into rental.”

The rental department also has access to obtain units from Stowers' used equipment inventory or even from other Caterpillar dealers if needed. Stowers Rents has a $39 million rental fleet, complementing the $50 million heavy equipment rental inventory that runs out of the dealership.

Rental has also benefited the Caterpillar dealership immeasurably. Prior to its involvement in rental, Caterpillar dealerships missed the small contractor segment of the construction marketplace. One of the strongest contributions Cat Rental Stores can make to Cat dealerships is how the small contractor, who may be starting a new business, will rent a skid-steer loader or landscape tractor or small backhoe. As his business grows, the contractor may decide to begin purchasing machines he utilizes regularly, so he is likely to buy from a Caterpillar competitor because he has rented those machines. If he grows his business to where he can buy larger machines, he'll already have the relationship with the competitor. Being able to attract the small contractor when he is still small helps Caterpillar dealerships to expand their customer base.

“We started rental to be a separate business and wanted to build a separate identity,” says McCormick. “We didn't want to start a rental company with a tractor-dealer mentality. So we populated the rental division with rental professionals. But now we're pulling the rental division closer to the dealership to leverage all the systems and overhead we have in place. Let's take advantage of the service expertise we have, not duplicate it. Let's take advantage of our parts expertise. Now we see some rental guys transfer to the machinery store and some machinery guys transfer to the rental store and that helps the organizations bond together.”

Personnel attraction

Being connected with a successful Caterpillar dealership also helps Stowers attract personnel. “People in this industry like to come to work for us,” says Harper. “We're stable. There has been a Caterpillar dealer here in Knoxville for more than 40 years and I guarantee that 40 years from now there still will be. Will the national companies, as we know them now, be around for even 10 more years? We don't know. And with a lot of the changes that take place in that industry, you have changes in compensation, in benefits, and all of a sudden what you enjoy doing changes in some form or fashion. So, this is a good place to work, and you're a part of a big organization that has management that's very accessible. Wes knows everybody's name that works in this organization.”

These were the very attributes that attracted Harper to Stowers.

Harper began his rental career in 1986 with Grace Equipment, which later became Prime and ultimately merged with RSC.

After graduating from the University of South Alabama, Harper went to work selling insurance and financial services, but didn't enjoy it. After a chance meeting in a Chinese restaurant with an acquaintance who worked for Grace, Harper became an inside sales rep on the rental counter and fell in love with the rental business. After a year on the counter, Harper progressed to outside sales. After a year in sales he became a regional sales manager in Baton Rouge, then regional operations manager, based in Nashville.

“I've been in the rental business about 20 years and worked in 18 or 19 different cities,” Harper says. With three young sons, Harper tired of the frequent travel and eventually got the opportunity to join Stowers and the marriage has been excellent for both sides.

Harper finds life with Stowers rewarding and is bullish on Caterpillar as well. “It's the value,” he says. “Look at the cost associated with a whole stream of expenses on a piece of equipment over its lifetime. You may pay more to buy a piece of Caterpillar equipment, but the resale value on the back end, the support while you own it, increased uptime, when you factor all of that in, it more than pays for itself.”

Harper says Stowers is never on the low-cost end of the business, whether it involves rental or the sale of compact construction equipment. “That's part of the challenge that our salespeople have to sell the compact construction equipment, to sell skid-steer loaders and mini-excavators. We are on the high end on every deal. Our sales people have to learn to sell value to the customer. There are plenty of manufacturers that make good equipment, but when it comes to support, they can't meet the same expectations.”

Bringing back Wes

Wes Stowers had no intention as a young man of eventually taking over the family business. As Stowers grew up, he developed an interest in flying. He attended the Air Force Academy and became a fighter pilot, mostly based in Europe, obtaining the rank of major. His father, Harry Stowers, who founded Stowers Caterpillar with his brothers Dick and Bud in 1960, eventually bought out his brothers' shares and took over the business. As Harry grew older and began to consider succession possibilities, with Wes' siblings pursuing other professional interests, it ultimately came down to Wes returning to learn and take over the business, or else the family would have to consider divesting it.

At that point, Wes had young children and was tiring of traveling. He separated from active duty and joined Stowers Caterpillar full time in 1988, eventually becoming CEO. Harry Stowers retired from day-to-day operations in the late 1990s, but still serves as chairman of the board and interacts with long-time customers. Wes Stowers now hopes that one day his daughter Lisa, recently graduated from college and now working on the counter in Stowers' West Knoxville rental store, will take over the family business. But the still-youthful, exuberant and healthy Stowers has many miles to run before that takes place.

Meanwhile, although the east Tennessee region is still small to contain the bountiful ambitions of Stowers Caterpillar, the company continues to carve out new niches and plans to continue to expand and grow within its market. It continues to explore locations for future rental facilities. The company also plans to develop an initiative aimed at commercial landscapers. Already a Finn and Toro Dingo dealer, Stowers will inaugurate special programs to sell and rent equipment to commercial landscaping contractors.

East Tennessee may be small, but the vision of Wes Stowers and his team is anything but.

Incremental Value

Wes Stowers laughs at times about how he and other Stowers Caterpillar managers continually underestimate the company's growth potential. “We've never built a building that was big enough,” he says. And while he says the company built its 42,000-square-foot rental and compact-construction equipment sales facility in fast-growing west Knoxville — opened in May of this year — with the idea that it would be big enough, he knows the same may apply to it.