The American Rental Association this week introduced its new ARA Equipment Rental Penetration Index at the Rental Show in Las Vegas to more clearly define the concept of rental penetration. ARA convened a work group in September of last year to develop a plan for estimating an appropriate measure of equipment rental penetration for the equipment rental industry.
The work group, which included representatives of several rental companies and manufacturers, built on ARA’s development of rental-specific performance metrics to determine a way to calculate rental penetration that combines several factors, expanding further on the performance metrics it introduced last year. The ARA Equipment Rental Penetration Index is designed to create a way for rental companies to measure how much potential market exists versus the current market as well as for manufacturers to project demand for machines, and investors and analysts to consistently measure trends about equipment rental in construction.
“Rental firms tend to measure their performance on a cost basis and the most often used cost base for rental equipment is original equipment cost,” said John McClelland, ARA’s vice president for government affairs, who helped lead the work group. “The OEC-weighted approach allows the ability to derive several components of the equipment rental penetration calculation using well-established data and techniques.”
U.S. Department of Commerce data was used to calculate a value-based measure of the construction fleet, McClelland said. Using this value as the denominator and rental fleet OEC as the numerator, ARA can estimate an equipment rental penetration index that is value-based and accounts for flows of equipment into and out of the fleet and for the stock of equipment in the rental and total construction fleets.
“It is original equipment cost over revenue,” McClelland added. “So it’s simply manipulate that equation and if you have an estimate of dollar utilization, you can get the original equipment cost and so you have the denominator in this rental penetration index equation. You have the value of the construction fleet and the value of the rental fleet based on utilization and then you have rental revenue, which is what rental equipment is worth when it’s used in the marketplace. So that’s how we put this together.”
United Rentals CEO Michael Kneeland welcomed the definition as a “resource to help rental store owners and managers, manufacturers, and industry analysts and investors better understand the potential of the rental channel and its long-term prospects. While our customers continue to tell us that equipment rental increasingly plays a larger role in their business, with the Index we can better measure the extent of that growth over time. We also believe that the secular shift to rental may have at first been driven by macro-economic uncertainty, but that once customers turn to rental they appreciate the flexibility and convenience it provides.”
ARA used the index to analyze results covering 2003-2011, which shows rental penetration for construction machines was in the range of 40 percent at the beginning of the analysis to a little higher than 50 percent in 2010 and 2011. The result is consistent with the expectation that in recent years the size of rental fleets have increased relative to construction fleets.