After the big boom of the mid-to-late 1990s, the age of consolidation from 1997 to 2000, and the great downturn of 2001-2003, the rental industry is once again poised to enter a new era.
Will it be another major boom cycle? Most participants believe not, although economic conditions appear to be much more favorable for the industry in 2004 than the past few years. There have been quite a few casualties as many companies became so over-leveraged by spending too much on new fleet that they could not make adjustments to a change in business atmosphere. Those that have survived have done so by making adjustments, cutting costs, becoming more efficient. Many companies became leaner and meaner; others just became smarter.
The following analysis of 26 trends is based on our observations and the thoughts of dozens of rental people, manufacturing personnel, distributors, manufacturers' reps and service providers.
While crystal ball gazing is an inexact science, here are some trends our research uncovered that might make a difference in the coming years.
- Home Depot and Lowe's — only the beginning
As of RER's mid-December press time, Home Depot has about 770 rental departments in North America, a number that is increasing literally every couple of days. In fact, according to its Web site, a new Home Depot store opens, on average, every 43 hours. From May to October, the company opened nearly 70 stores, most if not all, equipped with tool rental departments. So when company officials say they will add several hundred more over the next few years, these are not just idle boasts.
Lowe's now has NationsRent departments in about 100 of its stores and is committed to growing that program as well.
When Home Depot first got serious about tool rental in the mid-1990s, a lot of rental people scoffed. Questions abounded about its level of service, its maintenance and repair, its ability to make on-time deliveries and the product knowledge of its often-transient staff. And while those issues persist — and its increasingly rental-savvy management is well aware of the need to address these issues — 770 branches later, the company has had an undeniable impact on the rental industry.
Flaws and all — and what company lacks them? — Home Depot is determined to leverage space to rent equipment, and with thousands of people walking through each Home Depot store every day, Home Depot is exposing huge numbers of people to the rental concept. The organization is committed to rental and has the resources and management capable of implementing improvements.
Many people try rental for the first time at Home Depot and now Lowe's, and many continue to rent. Whether or not they rent at a home-improvement center or a rental center may depend on the ability of rental companies to market their services.
Home Depot customers are mostly small contractors with fewer than 20 employees, the type of people who are the target customers of most rental centers. And the company is exploring handling larger equipment and targeting larger contractors.
While without a doubt these home-improvement giants have grabbed a huge chunk of the small equipment and tools market share, they don't have to be seen as the enemy. Many rental companies have worked out deals with local Home Depots to do service work for them. Many rental companies from small independents to national giant Hertz regularly receive referrals from them for equipment requests they can't handle. Some rental companies even rent equipment to them.
Home improvement giants are here to stay. Rental companies can fight against them, work with them, ignore them if they aren't directly affected by them or find a way to effectively compete against them. But they won't just disappear; they will only get bigger.
- Now Open Longer Hours!
Surveys indicate that rental centers are opening earlier than ever and staying open longer. They are doing it because the customer expects it.
Why? Because customers, be they homeowners or contractors, can't get everything done in the hours they have available to them. Demands on their time are greater and more complex than ever before. Traffic is worsening in both large metropolitan areas and smaller ones. And one of the factors behind the growing impact of home-improvement center rental departments is the convenience of their long and in many cases around-the-clock hours.
- Never on Sunday?
That may have once been a mantra of the independent rental center, but it's not the case anymore. Sundays used to be sacred no-commerce, family-time days, but nowadays you can do almost anything on Sunday. You can shop for clothes, go to the hardware store, or lumber supply or paint supply store, computer software store or bookstore. So why not rent equipment? Many rental companies still avoid Sunday hours, preferring to give good weekend rates as long as the customer picks up on Saturday and returns the machine on Monday. And rental companies that are primarily contractor-focused often remain closed Saturdays as well. Still, a trend toward Sunday hours is developing.
- Manufacturers will invest in the channel
Since the consolidation era in which national rental companies obtained such favorable buying terms from manufacturers, distributors have not had the power they once had. The primary method of getting equipment into the hands of end users is coming from rental and rental will continue to increase. So manufacturers will want to do everything they can to guarantee that their equipment has a channel to market. And while rental margins have slumped the past couple of years, the likelihood is they will still be higher than manufacturers' margins in the years to come.
Atlas Copco acquired Rental Service Corp. and Prime, thus creating the second largest rental firm in North America; Caterpillar developed its own rental network that now, with more than 1,700 branches, is the largest network of rental locations in the world; Volvo established a franchise network that has grown to about 40 rental centers in two years; Ingersoll-Rand acquired a 3 percent stake in a new rental company in India, where rentals is just getting off the ground; and pump manufacturers such as Godwin Pumps and Thompson Pumps rent significant quantities of pumps through their dealerships and factory stores. Although Deere's recent divesting of its part ownership of Sunstate Equipment Rental might belie the trend, many manufacturers continue to study this issue seriously. Many see rental as the channel of the future and want to make sure they are part of it.
- Deeper penetration
Rental is the wave of the future. Dealers continue to grow rental capability, and contractors are increasingly attracted to rental as a way of reducing fixed costs. Research continues to show that the trend overall in American and global business is for companies to concentrate on their core competencies and attempt to outsource services wherever possible. The primary business of a contractor or construction company is to build buildings, repair roofs or construct highways. A manufacturing company's core business is manufacturing, not purchasing, disposing and maintaining equipment, all of which require an infrastructure, facilities and a wide range of costs for equipment that they don't use every day or even every week or month. Even if rental rates recover some ground from recent lows, economics favor renting.
- Invest in dotcoms? How about rental?
For a period of time in the late 90s, the rental industry was the darling of Wall Street. Those days aren't likely to return any time soon, but once again investors such as venture capitalists, hedge fund administrators, and Wall Street investment banks are taking a look at the rental industry. That interest made it possible for Nations-Rent to emerge from bankruptcy protection, and is likely to allow NES to do the same. That may be as far as it goes, but usually where there is smoke, there is fire, and this industry is still seen as one of investment potential.
- Consolidation is not over
Will we see consolidation like we saw from 1997-99? No. Capital for roll-ups is unlikely to be available again and most platform-type companies that were the target of consolidators have already been acquired. Besides which, the consensus is that most of the consolidators have more branches than they need rather than not enough, and over the past couple of years, their tendency has been to close branches rather than open new ones, although that could change with an economic turnaround.
However, consolidation is very likely to occur among the bigger players. It's typical secondary-phase consolidation: big players seek to maximize economies of scale even further and join together. It's happening with banks, media conglomerates, airlines companies and others. We've seen the joining of United and U.S. Rentals; Prime and RSC; NES and Brambles; Sunbelt and BET; ICM and Head & Engquist. We will see more in the years to come.
- Get it on E-Bay
E-Bay is a great place to buy tickets for sporting events, jewelry, collectibles, and cars. But, in fact, it's now a market for construction equipment, too.
In the third quarter of 2003, more than 59,000 construction-type items sold on E-Bay, including skid-steer loaders, backhoes, power tools, trailers, parts and building materials. Based on third quarter annualized results, the current run-rate of the construction category is $65 million in U.S. gross merchandise sales, representing a 211 percent increase over 2002.
E-Bay could be an additional outlet for rental companies to unload used equipment and also a place to pick up good deals on little-used equipment. According to E-Bay's Ben Hanna, vice president of construction equipment on E-Bay, construction buyers are typically small- and medium-sized builders, contractors and sub-contractors, as well as dealers and rental companies.
- Find a niche
With competition high in most markets, rates low, and an oversupply of equipment still available, rental companies will spend more time looking for and concentrating on specialized niches to separate themselves from their competitors. For example, one company recently got into the straw blower business because of an Environmental Protection Agency regulation that mandated that certain types of open-dirt areas be covered with straw to keep soil from eroding. The company took on a straw blower line and contracted with a straw vendor to deliver the straw directly to the job site.
Rental companies may also enhance niches by developing expertise in particular markets. Why not put together a special package for golf courses? Or a special package for roofing contractors, a special package for plumbers or tile-setters?
As manufacturers become rental companies, how about rental companies becoming manufacturers? For example, the British parent company of Denver-based RentX wanted an effective storage unit that could be more easily transported. Not finding one on the market, it chose to make its own, and did so for a fairly low cost. Las Vegas-based Ahern Rentals manufactures its own high-end flatbed trucks and reach forklifts, which it sells to increasing demand as well as uses in its rental fleet. Vineland, N.J.-based Trico is part owner of a separate operator-provided rental company that has been successful on a local level.
Companies will devote more effort and research into finding unique niches to differentiate themselves from their competition.
- Log me in, Scotty
Companies used to have to wait until the end of a quarter to measure their performance. Now they can look at the end of the day or up to the minute in real time. In addition to the day-to-day capability of programs that can determine the availability of items rented or reserved, run credit checks, keep track of maintenance costs and schedules, provide automatic quotations and handle e-mailed reservations, look up pick-up and delivery status, many of today's programs can run reports in spreadsheets or word-processing software from dozens of perspectives. Many programs can analyze utilization and costs of every piece of equipment in an inventory, thus quickly enabling a company to determine the degree of profitability of an asset.
These programs will only get better. Rental companies, however, need to do more to take advantage of the opportunities software packages provide them. As the industry becomes more complex and demanding, systems and processes will be more important than ever.
- Rentals.net
While electronic commerce hasn't yet revolutionized the equipment industry to the degree many predicted, it is nonetheless inevitably going to become a bigger part of the way we all conduct business. For example, it is becoming easier to order parts from many manufacturers over the Internet than by phone. For the manufacturer and the rental company, it is a way to cut costs.
How many rental customers own laptops or Blackberry wireless units? Far more than did a year ago, studies are showing, and the trend is pervading all fields of business.
At this point, not many rental customers are asking to be billed electronically, but the odds are that more will be interested in this service in the future because they may find it helps them cut costs. Interactive chat functions, which are catching on in a number of industries, provide opportunities for customers to communicate directly with rental personnel, ranging from questions about inventory availability to application consultation. RSC, for example, has a 24-hour chat function that enables customers to interact and converse electronically around the clock.
How many customers want you to submit bids electronically? Probably not many at this point, but this also may become common practice in a few years. Do customers want to reserve equipment electronically? While a few years ago, predictions were rampant that interest in this service would take off — and several companies that are no longer in existence invested millions of dollars on this expectation — sooner or later this will become a part of doing business and being prepared might not hurt.
RER's research detected a growing interest on the part of larger rental customers to be able to monitor all the pieces of equipment it is renting at a particular time and a few rental companies are already facilitating those requests electronically.
Paperless ordering, paying bills and ordering parts over the Internet can significantly reduce costs for both providers and users of those services. Manufacturers are figuring that out and that's why online ordering systems are becoming common. To those who believe their customers aren't interested in those services, just watch other industries. Rental customers need to reduce costs just like everybody else and part of becoming an indispensable provider is helping the customer to do so.
Many manufacturers are developing online training courses; industry software providers are working on the same thing. How about electronic organization of the back shop? Companies such as SmartEquip are putting parts catalogs online, along with schematics, operator manuals, parts catalogs and parts ordering, and a growing number of manufacturers and rental centers are signing on. RenTrain is finding a growing market for safety and training information online, especially as insurance and workers compensation costs explode.
As one executive of a top 10 rental company says, many customers ask in an exploratory manner if they could handle a particular request. “The industry is more interested in electronic services,” he says. “They are talking more about it, and they want to see if we're ready because they allow costs to be reduced. So in many cases they would say: ‘We would like to be able to have such and such an interchange electronically, could you handle that?’ And we would tell them yes or we are developing that capability.”
- GPS in view
A few years ago, we began asking rental people about their interest in GPS systems, both as anti-theft devices, tracking and diagnostic tools on equipment. At that point, GPS systems were considered far too costly to be taken seriously by most rental company owners. But prices are dropping and the likelihood is that they will be so common over the next few years that rental companies will expect manufacturers to install them as standard or at least have them available as standard options.
While many think of GPS systems primarily as anti-theft devices, their biggest contribution to the industry may be diagnostic and could play a major role in reducing downtime. The tracking of operating hours and maintenance schedules are useful monitoring factors that can alert service managers to potential problems. Tracking helps service personnel find machines when they come to service them on job sites. It also alerts the rental company if the machine is used after hours, or taken out of the agreed-upon perimeter of a job site.
Many rental companies are studying these systems and weighing costs versus benefits. But eventually the systems will become more affordable for rental companies, and more economically sensible for inclusion by manufacturers on smaller equipment.
- A courtesy call
People often praise large rental companies for having worked to expand the visibility of the rental industry. We predict that in the coming years, more rental companies of all sizes will improve their marketing efforts. Telemarketing is likely to play a larger role in this effort, with more companies hiring an employee or group of them who calls customers and potential customers with a script to advertise the company's services.
What about having a person make 50 calls a day to potential customers, offering to set up appointments with outside sales staff to explain more about the company's service? The telemarketer can have a goal of opening a certain number of new accounts. It doesn't matter if they are small accounts, because small accounts grow. If you can't afford a full-time telemarketer, why not a part-timer? Why not have a counter person assigned to make such cold calls during down times?
- Training the solutions center
The ability of rental center staff to communicate properly on the phone is critically important. How many lost rentals result from failure to follow up a query with a question? If the coordinator is asked: “Do you have an excavator?” and he doesn't, how often does he just say no and hang up without asking what the customer wants to do and propose an alternative that might do the job just as well?
In the coming years, rental companies will put more effort into training both inside and outside sales staff. The philosophy that the rental center is in the solutions business will become more widespread. The awareness that the customer is calling because he or she has a problem that needs to be solved will be more widely understood with training. The customer is not just calling to see if the rental center sells a commodity such as a refrigerator. The customer needs to solve a problem — which product solves it is secondary. The rental center may have a solution outside of the initial question about a certain model of equipment. But this philosophy requires training and may require training of a more sophisticated level than just spending a few days watching existing staff.
- Manufacturer consolidation
There will be more of it, for the same reasons there is consolidation everywhere else. The same economies of scale that have led to rental industry consolidation will continue to encourage a manufacturing consolidation that has been substantial already over the past few years.
- Dealer consolidation
L.B. Smith, one of the country's largest dealers, was acquired by Volvo, the primary company it represented. Why? Because LB Smith was in trouble and since it represented Volvo in dozens of markets, it was much cheaper to buy it and try to salvage it than to have to build up that dealer network elsewhere.
Two Ditch Witch dealers in Southern California recently merged with two dealers in the north, because the costs of doing business in California are the largest in the country when it comes to insurance, workers comp, permitting and real estate. Two southern California Caterpillar dealers did the same and other dealers have merged or pursued joint-venture opportunities. The merger of ICM and Head & Engquist to create H&E Equipment Services created a half-billion dollar corporation, one of the industry's leading dealerships and a top 10 national rental company that enhanced its ability to service large national construction firms with multiple jobs.
Dealers will consolidate because the costs of doing business keep growing and economies of sale are required. Dealers will have to invest in improved technology, and reduce transaction costs. In addition to the pressures of doing business in states with elevated business costs, such as California, those in smaller markets with limited population bases will face additional pressures.
There will be more such mergers in the years to come, involving companies of various sizes.
- Bring in the feminine touch
How many people have found more women renting in recent years than in the past? Studies have shown that there are more female heads-of-households, which means more women doing work around the house and, therefore, renting. Studies have also shown that women are more sensitive to their surroundings than men when they go shopping. If a store is clean, and nicely lit, with clean floors and shelves, they are far more likely to buy — or rent.
In the coming years, rental companies will devote more attention to the way their showrooms are laid out, to lighting and display presentation. Rental centers can enhance the rental experience with creative displays that illustrate effective operation, and show off the wide range of items available in their inventory. If the customer doesn't see it, he or she may not know it is there. Even though the rental business is likely to become more of a delivery business than ever (see item #26), showroom display will grow in importance.
- Home entertainment center
With so much technology available inexpensively, why not use some of it to enhance the customers' access to safety and training information? With most manufacturers providing videos, DVDs or CD-Roms that inform potential users about effective and safe machine usage, why not make them available to the customer to use at the rental center? A number of rental companies are doing this and more will do it in the future. Why not have a row of VCRs or DVD players or personal computers for your customers to use on site to inform themselves about the equipment you want to rent them?
People learn in different ways. Some learn best through person-to-person explanation or demonstration. Others learn better via the printed word. But some learn best by viewing electronic demonstrations or explanations for themselves at their own speed.
These kinds of communication tools are not expensive, don't have to take a lot of space and give customers opportunities to learn about machines and tools, especially ones they haven't tried. They might also help from a liability perspective by cutting down on accidents and enhancing customer satisfaction.
- Fill the void
A lot of rental industry people say the national companies have de-emphasized service. So what is being done to fill that void, if it exists? How about beefing up the maintenance and service capability?
RER interviews indicate more rental companies are improving their service capability and will do so more as the economy improves and budget controls are loosened. Many dealerships, that include rental capability, are putting more emphasis on repair of customer-owned equipment. And many rental companies are seeing repair as a solid niche, with a few, such as Las Vegas-based Ahern Rentals, setting up separate repair-customer-equipment businesses.
Being successful in this area may involve making sure mechanics receive advanced training from manufacturers, investing in more diagnostic and repair equipment, expanding shop facilities, and possibly improving shop organization. It may also involve more effective use of software, careful attention to scheduling and prioritizing jobs and tracking maintenance costs.
- Ask and you shall receive
Just as contractor customers are more knowledgeable about what rental companies can offer them, and thus, are more demanding, rental companies increasingly view manufacturers as partners, rather than simply sellers of commodity items. They are less afraid to ask manufacturers for product support such as online training, electronic parts-ordering, customized training at the rental company location or at the factory, and low-cost financing opportunities. And just as a contractor might ask a rental company: “what can you do to help me cut costs?” rental companies are asking manufacturers the same question.
An executive for a prominent manufacturer recently told RER: “If I owned an independent rental center doing $1 million a year, I would never look at a product as a finished good. I'd always ask ‘What can this manufacturer do to help me grow my business, to help me find my niche? Will they help me with financing? Will they offer us training?’ We manufacturers are looking to do that, we're testing these kinds of programs.”
Don't be afraid to ask.
- Ask your customer too
Customer satisfaction surveys are all the rage these days, but often they lack real substance and the important element of really listening to a customer. Surveys that ask “were you satisfied” and ask for yes or no answers lack true consultative qualities and do nothing to invite the customer into a deeper partnership that inspires loyalty.
More effective, and probably more pervasive in the coming years, are truly consultative efforts such as focus groups or genuine customer satisfaction questions that invite the customer to offer constructive criticism. Effective manufacturers design programs based on real interaction designed to really understand customers' needs. Rental companies who want to satisfy their customers will find a way to sponsor serious dialog with their customer base.
- Return of the king
Former owners who sold to consolidators are returning to the industry. Not in the massive numbers predicted by some, it is nonetheless a trend, widespread or minimal. At least one former RER 100 rental company owner is returning to the industry this winter, while others are considering it. Several former owners and managers are already making solid impacts in their home markets.
Former owners will tend to go into business on a smaller scale and grow organically although some are attracted to the Volvo-type franchise concept. They might be more likely to work in more outlying areas rather than major metropolitan markets. Those areas are more underserved and ignored, but that's probably where the action is. As one manufacturer observed, they have probably learned to stay away from elephants, that is the highly visible stadium and airport jobs that tend to attract low rates and brutal competition.
Many former owners have been missed, for their contributions to the industry, their intelligence, their skill as operators, and for their ability to compete with integrity. Although a massive flood of highly capitalized new companies would be hard for the market to absorb, the slower modest return of a few would probably have a favorable impact on the industry, if not on their direct competitors.
A number of former managers have started their own modest businesses, backed by small investors and armed with front-line experience. This trend is likely to continue.
- The thief within
Whenever internal theft occurs, most experts agree, there are more than likely several other employees who suspect the culprit. They don't want to “rat” on a fellow employee, especially without hard evidence, so they say or do nothing about it. One owner decided that if employees can share in the profits of a branch, why couldn't they share in the penalties if internal theft occurred at that branch? He instituted that system and within a short period of time, the occurrence ceased.
- Damage waiver up
A few years ago, rental companies typically charged about 6 to 8 percent for damage waiver. Now, just like the car rental industry, most national rental companies are charging 12 to 14 percent and many smaller rental centers are following suit. Especially in the wake of soft rental rates, look for damage waiver charges to roam higher.
- It's in the mix
Is your company a rental company? A sales company? A dealership? A repair specialist? Chances are it is some sort of combination of the above and many rental companies and dealerships are finding the answer is not in segmenting or specialization, but in a mix of services. If the customer wants a rental/purchase option, facilitate it. If the customer wants to buy several machines, why send him somewhere else? Let him buy from you and if possible, finance it for him or help him line up the financing. Do they want short-term rental, long-term rental, do they want you to include a service contract as well? A lot of customers want a mixture of these services, so why not do them all and never have to say no?
- A delivery business
Delivery is becoming increasingly important. David Griffith, CEO of Modern Equipment says his company has consolidated about five branches over the past five years without shrinking his coverage area because his business is increasingly delivery based. RER's research shows that rental companies are spending more per machine on delivery vehicles, fanning out over a larger area, adding service vehicles to help cover the extended trading area.
