Like a celebrity child photographed at one too many parties, the U.S. rental industry may be longing for a bit of its old, wallflower days. The voracious appetite of consolidators such as United Rentals, Atlas Copco and others has turned an unrelenting spotlight on an industry that has seen more evolution in the past five years than in the prior 20.
Along with the lure of inflated purchase prices and heavy corporate investment has come an underlying uneasiness about if, when and how the piper might demand payment.
Some of this uneasiness undoubtedly stems from a fear of the unknown. Before the 1990s, large-scale corporate investments in contractor rental by companies such as Hertz and Prime had none of the frenzied characteristics of recent roll-ups. And the few, uninspired whacks at empire-building in the general rental sector fell short.
Recent consolidators in the heavy-iron end of the business have carved their own path, often drawing heavily on roll-up experiences in other industries. Most are now tempering their initial acquisition heat with a focus on internal growth, and professing satisfaction with the results to date.
Like a medical treatment that produces immediate results but lacks the testing for long-term effects, contractor rental roll-up in the United States is still in its early chapters. The current sluggishness of share prices, for example, and the likelihood of imminent rental competition from equipment distributors and manufacturers may be the first signs of tarnish.
Yet much evidence, both internal and external, supports these companies' claims of success. And that raises an interesting question: Can a similar application of capital, management expertise and honed operations make it viable to pursue broad-based corporate involvement in the general rental sector?
Troubled past If you argue that the game has been played and lost before, you'll be right. In the 1970s, Taylor Rental built a substantial network of general rental franchises that peaked at more than 600 stores in 49 states. When Taylor was bought by The Stanley Works in 1983, there were about 500 franchisees and 10 company-owned outlets.
Stanley's strategy was to build a company-owned chain in tandem with its franchise program, but threw in the towel with its 1993 sale of the franchise system to ServiStar. At the time, only 225 Taylor Rental franchises remained in the system, and 65 company-owned stores (down from 110).
Stanley sold 40 of these company-owned stores to what would become known as General Rental. The Florida-based company, now Rental 1, has had no better luck; it began divesting locations several years ago and recently sought Chapter 11 bankruptcy protection for its remaining operations.
The list goes on. Over the years, Phoenix-based U-Haul International made several expensive and largely unsuccessful attempts to introduce tool and light-construction rental inventories into its trailer and truck rental dealerships. Denver-based RentX Industries limped away from a failed 1997 initial public stock offering and a financially challenged run at general rental consolidation before finding a foreign buyer last year.
What's going on here? What makes the contractor rental sector so apparently amenable to corporate chain development and the general rental sector such a struggle?
Three challenges An outside examination of prior attempts suggests that some of the problems were unique to the companies themselves, but others are perceived to be universal impediments to general rental chain development. And that's where things get interesting.
First of all, let's disregard the problem of under-capitalization since it can be overcome. Similarly, a lack of knowledge of the rental business is not an imposed impediment.
Rental customer bases, however, are perceived to be better suited to contractor rental consolidation than to general rental: Many contractor rental customers are large companies themselves, operating in more than one market. They can respond to national branding, develop brand loyalties and value services such as shared record keeping in ways the general rental customer may not.
Beyond that, what are the core issues that many believe make the general rental industry a poor candidate for broad-based development?
Reduced to their simplest forms for discussion, there are three:
First is the fact that many geographic areas in the United States still lack the market demand needed to support a high density of outlets - a prerequisite to realizing economies of scale. Then there's the popular belief that individual store revenues must meet or exceed $1 million apiece in order to make the necessary profit contributions to corporate overhead. And finally, there is the difficulty of incentivizing branch managers, financially or otherwise, to be at least equally as motivated as the independently owned competitor down the street.
Five years ago, we would be dissecting these issues on a purely theoretical basis. But thanks to what appears to be an embryonic renewal of corporate interest in general rental chains, there is now a practical base for discussion. Two British companies - HSS Hire Service Group and Meyer International - currently own general rental chains in the United States. And Stephenson's Rent-All, the Canadian leader in homeowner rental, is expanding its long-established network.
Their industry positions are vastly different and their philosophies often divergent. Yet the very presence of these three companies, together with others testing the same waters, is enough to resurrect the debate about whether a large-scale general rental presence is in the cards.
Experience to the table None of the three companies is a rental neophyte. Of the two British companies, the Davis Service Group-owned HSS is the more experienced. Generally credited with defining tool rental in the United Kingdom, it is a leader both in market share with more than 340 rental outlets and in market diversity (its foreign licensees operate in seven countries).
HSS favors organic growth over acquisitions, in part because its strongly defined business model can be introduced more seamlessly into a new operation. Its current base of 13 rental outlets in South Florida consists of six new locations and seven branches acquired from General Rental in 1998.
Jewson Hire Point, the rental arm of Meyer International, opened its first rental operation inside a Jewson building supplies store in 1985. It now has 44 free-standing rental depots and more than 135 in-store rental departments in the U.K.
Jewson prefers to grow its free-standing network through acquisition of multi-store operations with developed management structures in place, as evidenced by parent company Meyer's acquisition of the 72-store RentX chain, No. 16 on the RER 100. Other Meyer divisions have ongoing U.S. interests, but this is the company's first foray into the U.S. rental market.
Like HSS, Jewson's rental industry position is defined by Great Britain, a rental environment vastly different from the United States in customer demand patterns, geographic diversity, rate structure and market maturity.
Stephenson's Rent-All, by contrast, has always operated in its native Canada. Changing hands numerous times over a sometimes rocky path of 50 years, it currently operates more than 50 free-standing homeowner and light-contractor rental locations. In 1999, it piloted in-store rental department programs in Cashway Building Centres and Revy Home and Garden home improvement stores. Toronto-based Stephenson's, No. 61 on the RER 100, now has a presence in Alberta, British Columbia and Ontario.
Penetration is pivotal In Great Britain in 1997, 8,500 rental outlets served a country of 58 million people, compared with fewer than 18,000 rental outlets serving more than 265 million people in the United States. The difference in market saturation is dramatically clear.
More than two years later, the percentages remain much the same. No absolute documentation is available, but many believe that the highly fragmented U.S. rental industry contains about 20,000 outlets with total annual rental revenues of just under $20 billion (reflecting construction rental, large and small, plus tool, homeowner and event/party).
Industry studies estimate that 59 percent of all U.S. rental outlets rent some homeowner/do-it-yourself/general tool equipment, while 53 percent carry some party/event items, and 72 percent have inventories that include construction and industrial equipment.
Furthermore, surveys show that between 75 percent and 80 percent of rental companies are still independently owned, with about 850 locations representing more than 200 independent rental companies swallowed up by consolidators during the height of the acquisition craze. The acquired companies are primarily in the heavy equipment rental sector and tend to have high industry profiles, sometimes obscuring the fact that the total number of outlets acquired accounts for only about 4 percent to 5 percent of the rental industry as a whole.
While some with a vested interest in rose-colored glasses predict rapid industry growth to $50 billion or even $100 billion in five years, an annual industry growth rate of 15 percent to 20 percent is likely more realistic.
To return to the kind of industry growth exhibited in the 1980s, the industry would have to grow dramatically through both number of rental locations and revenue per location. Most of the overall industry growth in the 1990s was driven through increased number of locations, with market demand for rental not yet at a pace capable of sustaining real, extraordinary average growth per location.
So where does that leave the general rental sector? Penetration seems to be the key, and the United States stills lags well behind markets such as Great Britain, where it's estimated that about 70 percent of all tools and small equipment are rented, a saturation level considerably higher than that of the United States.
The most recent consumer research on the subject appears to be the Gallup Poll commissioned by the American Rental Association in 1993, which compares results with similar polls conducted in 1982 and 1976. In it, only 41 percent of consumers state that they have ever rented equipment (excluded are cars, trucks, trailers and real estate), compared with 36 percent in 1982 and 35 percent in 1976. If you consider this to be a slow and steady growth of demand, you would have to put the emphasis on slow.
Of more concern is the response to Gallup's question: "If you needed some equipment for occasional use in the future, would you be more likely to buy it, rent it or borrow it?" Results indicate a slight consumer shift away from renting, with 32 percent responding "rent it" in 1976, compared with 27 percent in 1982 and 23 percent in 1993.
Granted these analyses are seven years old, but they still paint a lackluster picture of market evolution. So what would spark British interest and investment in the United States?
American opportunity A flourishing rental market such as the U.K. has its drawbacks. While growth is still to be found there, tool rental in particular seems to be increasingly attractive to companies that previously focused on building supplies, specialty and heavy equipment (plant) rentals.
"Inevitably, there will come a time when we will have achieved something near full coverage in the U.K.," predicts HSS managing di"3/23/00 10:14:13 AM","Inbound","[email protected]","[email protected]","1894","RE: Thursday" rector Lister Fielding. "We also see others attracted by the potential of the tool hire market, making new entries or refocusing on tool hire."
As some of the larger players widen their search for market opportunities, the sheer demographic size of the United States and its relatively high rental rates beckon.
In addition, the long-touted, sometimes refuted "recession-proof" aspect of the rental business may be more true in the United States than in Great Britain. Why? Because in a poor economy, lack of capital can force individuals and businesses that previously bought equipment to turn to renting. But in a highly penetrated rental market such as the U.K., little bounce can be expected from this source, particularly from the trade sector.
The typical British model for what we call "general rental" approaches the market somewhat differently than its U.S. counterpart. While the homeowner is not ignored, much more emphasis is placed on securing a customer base of small contractors, also called tradesmen.
"The U.S. market is definitely there," says Fielding. "It's a question of exploiting it properly. ... While we welcome the homeowner, we don't actively pursue him, and we also welcome the contractor and the sub-contractor." This policy echoes the evolution of the U.K.'s tool rental customer mix, which skews significantly toward the small contractor.
With some rental inventory categories appropriate for both DIY homeowners and contractors, deciding which prospect base will receive most of your marketing energy can have long-term repercussions.
The recent expansion of Home Depot's in-store rental departments, for example, seeks in part to capture the rental portion of what is seen as a burgeoning DIY homeowner market in North America. According to a 1998 survey by Statistics Canada, spending on building materials for home repairs and renovations in that country increased faster than spending on contractors, indicating a movement toward DIY home renovations.
So how much emphasis should a general rental chain place on the DIY prospect base?
DIY cuts both ways Chris McKay, Stephenson's chief executive officer, sees the DIY potential as a double-edged sword. "That's an expanding, exploding market," he admits, "but it's a market you have to share with the mass-merchandisers. We see it as a growing area, but one that will be largely served by rental departments within large home improvement centers." Far from ignoring the possibilities, Stephenson's has opened up nine leased rental departments within Cashway home improvement centers, a pilot McKay describes as "successful beyond the trial stage. We're looking to expand by 10 or more locations in 2000."
Stephenson's has implemented a similar program in Revy builders supply centers, which serve the small contractor market. In Florida, Prime Equipment announced an in-store rental department pilot at Scotty's Home Building Supply. And in its 1998 annual report, Home Depot describes the professional business customer market as "a key part of Home Depot's near- and long-term growth strategies."
Given that convenience - location and operating hours - has always appeared to strongly influence a prospect's choice of rental source, can a free-standing general rental store expect increasing market attrition of both consumer and trade customers? Based on sheer investment dollars, new RentX owner Meyer International has more riding on that answer than any other U.S. general rental player of the moment.
In fall 1999, Meyer opened a 30,000-square-foot Jewson facility inside a 100,000-square-foot HomeBase store in the U.K. (HomeBase is Great Britain's second-largest DIY chain.) It offers lumber and building materials and kitchen and bathroom fixtures for sale, as well as an inventory of rental items.
"It builds on a trend that we see on both sides of the Atlantic," explains Meyer chief operating officer Lindsay Poston. "People want to be involved in the buying of the materials themselves, to feel that they get value for money even when they get a skilled tradesman in to do the work. So we want to have that linkage through to the smart homeowner [even if] it is the contractor who rents."
Despite Jewson's expertise in operating rental departments within retail environments, Poston emphasizes that the company has no immediate plans to investigate that avenue in the United States. "Our core market is definitely the small contractor," he says. "And while the window is always open to finding multiple routes to that core, [a departmental alliance] is not something we're considering in the U.S."
Malcolm Boyce, managing director of Meyer's Jewson Hire Point division, was part of the team instrumental in orchestrating the RentX purchase. Like Poston, he does not foresee RentX diversifying its market development through in-house departments.
And he minimizes any long-term negative impact of mass merchandiser rentals on free-standing market share: "You have to say at the end of the day that it will have enhanced the market overall. And it will be at the expense of the dealer. The manufacturer will have to get used to the fact that his client base is shifting from the absolute end-user. All in all, it can be only good for the industry."
Boyce does not consider U.K. market saturation to be a key reason that Meyer sought opportunities in the United States. "The market in the U.K. is shifting, consolidating, but it's still very healthy," Boyce says. "The homeowner side of it, the do-it-yourselfer, is still relatively under-developed.
"It was more a case of feeling that we had a really good idea working well in the U.K., and we thought it could work [in the United States] as well," he says, "as long as we met in the middle of the Atlantic with the best of both models. We're very much willing to learn from our U.S. counterparts."
Hefty price tag Market shifts in Britain, of course, are much more homogenous and subject to influence than in the United States, which is effectively a great many separate markets rather than a single national entity. Enormous applications of capital are needed to establish national branding and raise awareness of renting in the mass market, which is one reason why so little national advertising has been implemented. Still, the untapped potential of consumer rentals would suggest that market education programs could bear some fruit over time.
In a 1993 Gallup poll, 72 percent of consumers polled said they knew where to go to rent equipment, but only 23 percent said they would look to renting to solve any future occasional-use need. Will renewed corporate interest in general rental enhance the public perception of renting?
A visit to the Home Depot in Glen Burnie, Md., suggests that any enhanced public awareness of renting there comes through exposure to store traffic. Rental received only a mention in the Home Depot advertising fliers, and on-site promotions were contained in the rental and rental loading areas. Nevertheless, prominent departmental signage both inside and out ensured that a DIY shopper or contractor visiting Home Depot could hardly miss the rental option.
This type of exposure may help fuel a market shift over time. There's been no indication to date, however, that the mass-merchandisers have an interest in footing the bill for aggressive rental education on a national level.
In Chris McKay's experience, in-store rental departments exist primarily to provide a value-added service to a store's retail customers. "That's the focus of these mass-merchandisers," he says, noting that although his leased departments are branded as Stephenson's, "we're there to service their customers. We participate in some of their print advertising, but driving in new business and tracking existing customers are not part of the game plan." Apart from quarterly fliers, McKay's free-standing locations rely heavily on the Yellow Pages.
Aggressive advertising as a vehicle to drive in new business is not part of the current game plan for RentX, either, according to Boyce, or for HSS. Lister Fielding believes that many advertising methods are best cost-justified by commodities or impulse-purchase items.
"We never try to create a demand," emphasizes the HSS managing director. "We try to satisfy a demand that already exists. We are not going to spend money on awakening a demand for the benefit of everyone renting against us."
As for the DIY potential, he says, "I honestly don't think that the analysis went deep enough in the States. Very few [non-professionals] will tackle significant DIY work. ... They won't knock walls out; they won't put in bathrooms. There are some items that consumers will rent, but they are rarely products that fall within the core of professional tools."
The company has a healthy respect for the flexibility demanded by the diverse rental, retail and service cultures it operates in around the world. HSS foreign licensees ultimately make their own marketing decisions and may take a different tack.
Stephen Cadiz, recent HSS licensee for most of the Caribbean, launched his flagship store in Port-of-Spain, Trinidad, with localized radio advertising and fliers. "In Trinidad, there are no niche channels to reach the trade customer," Cadiz explains, "so we look at that prospect as a person living and working in the community who can be reached in part through public communications. We also think it's valuable to promote the rental concept at large." Early results of this strategy show a revenue mix derived from 60 percent contractor, 40 percent DIY customers.
HSS remains continually receptive to market nuances through inventory tuning. And company-owned or licensed, the company expects the facilities themselves to provide positive exposure to the public. Considerable thought and investment are put into both the location and appearance of HSS outlets, which are clean, distinctive and well-appointed. Slightly at odds with its trade focus, the company has chosen to operate in the United States as HSS Rental Stores, a branding with retail overtones and one that is vaguely reminiscent of rent-to-own.
The rate mountain When it comes to moving any sector of the U.S. market toward renting, there are some hills to climb. The cost of purchasing some types of equipment is higher in the U.K. than in the United States, and storage space in Britain is at a premium. Both aspects enhance the attractiveness of the rental option.
There are also significant discrepancies between the U.S. rental rate structure and that of the U.K., making it reasonable to speculate whether the cost of renting is partly to blame for the low market penetration in the United States. In the U.K., for example, Jewson Hire Point offers a seven-day rental on a 2-inch submersible pump (electric, with hose) for the equivalent of about (US) $65, while the same rental is offered at RentX in Denver for $105. Home Depot in Glen Burnie rents it for $100 per week. Monthly rate differences in certain categories can be even more dramatic.
This is not indicative of every rental period, however, as Britain applies a front-loaded rental rate structure to many items, thus discouraging short-term use of equipment. Jewson's U.K. catalog, for example, offers a 24-hour rental on the same submersible pump for about $36, compared to Home Depot's $25. Home Depot's price sheet also offers four-hour rates on every rental item, most averaging 70 percent of the daily rate.
For a British rental company with U.S. interests, honing rates for maximum return on inventory investment can be a careful balancing act. HSS/Florida's site on the World Wide Web announced "over 30 specially selected rental equipment at lower rates" in May 1999; nevertheless, rates are generally higher since the company opened its pilot store in Fort Lauderdale, Fla., in October 1996, says Lister Fielding.
Fielding believes that the U.K. style of front-loaded rates in many categories "is the right way to price the tool industry. We educate the [U.S.] rental customer as best we can. We say, 'It's a fine piece of equipment; it's been carefully checked over; it won't eat your money; it's safe. And if you return it after a very short rental, we have the job of making absolutely sure it regains that condition.'
"Short-term renting of equipment is more expensive [for the conscientious store]," he says. "We compensate for that by charging more right at the beginning, and it gets less expensive as you increase the duration of the rental."
It appears that RentX will be adhering to the traditional U.S. rate structure for now, as might be expected with an existing base of 72 operating outlets. "We are keeping our pricing policies tailored to our home markets," says Malcolm Boyce. "If the [U.S.] market starts moving and demand patterns start mirroring what they are in the U.K. - less owned equipment, more rented - then you can't really predict what the pricing structure will be. But we are clearly not proposing to try to take a U.K. model to the States, with U.K. rate policies that are not familiar in the States, to see if we can change the market."
Life after rental? While various rate structures can influence renting behavior and return on investment, all rental equipment eventually ceases to become profitable. A piece of equipment that has outlived its effective repair life at Stephenson's is usually sold at auction in the United States. But used equipment sales do not figure into the return-on-investment life cycle, according to two British companies.
A typical British treatment of used rental inventory is to scrap it rather than offer it for sale, and both HSS and Jewson profess to follow this policy (RentX may be handled differently). In many cases, an item is actually crushed or cut in half before disposal.
Jack Shea, founder and president of industry software supplier Solutions by Computer, recalls a time when that was the conventional thinking in the United States as well. He served as chief financial officer for Taylor Rental in the 1970s and early '80s.
"There has always been concern that making affordable used equipment available to the end-user directly works against the rental alternative," Shea notes. "More recently, Web-based auctions of used equipment have added a new dimension to the issue. Over time, many rental owners have concluded that a person who is in the market for a used pump is going to buy it from them or find it somewhere else.
"In a country the size of the United States, there will always be plenty of used equipment for sale," he says. "It's considered by many in our industry to be the natural final stage of the equipment's profit life cycle."
And of the rental customer service cycle as well. If customers expect "full service" to include access to used-equipment purchases, some argue that it is the rental store's responsibility to satisfy that expectation.
Bottom line hub and spoke Given the present state of the market, can you develop a profitable chain of general rental outlets on a national level? Despite variances in their business models as noted above, all three companies interviewed say you can - and their histories would tend to bear them out. The secret lies in realizing efficiencies and improved ROI through centralized activities like inventory sharing and maintenance among clustered stores.
This concept, called the "hub and spoke" in the U.K., has been engineered in North America by various rental companies over the years (including Taylor Rental in an elementary form). But the British have refined it into an art form, buoyed in large part by market demand. When hub and spoke is fully implemented, the conventional wisdom about the need to do $1 million per store in average revenue ceases to apply.
Under hub and spoke, it's necessary to achieve a certain density of locations in a given geographic area in order to make equipment transfers and centralized repair and maintenance activities economically feasible. Density can also allow the cluster to become more distinctively competitive by offering services such as one-way rentals (pick up at one location, drop off at another).
General rental outlets typically need to be closer together than their heavy-iron counterparts for cost-effective inventory sharing, and they may carry a base inventory sufficient to meet everyday demand without excessive transfers. (And, as with any rental operation, it's critical to have good information technology driving up utilization.)
Examples of successful hub and spoke abound in Great Britain, and not solely among the major players. Paul Turney, owner of Spaceworks, a large event furniture rental company in the U.K., previously co-founded the six-store UniHire equipment rental chain with his brother. UniHire's first outlet opened on the outskirts of London with an inventory of tool and light- to mid-range contractor equipment. A second outlet was opened about 15 miles away.
"But the whole operation didn't become really efficient," Turney says, "until we opened a third store just north and midway between the two." He made this store the source of his centralized inventory program and streamlined the inventory dedicated at the other two sites. The "hub" store carried surplus inventory in some categories, which the "spokes" could draw upon as needed. More locations followed.
All the company representatives interviewed for this article employ hub and spoke with some variations. Jewson dedicates a baseline inventory to each store in its U.K. network, but centralizes a lot of its inventory sharing. Stephenson's Rent-All dedicates no inventory at all to its individual locations; neither does HSS in Florida, "subject always to sensible disciplines."
"We use a pooling approach," explains Chris McKay of Stephenson's. "We have a service center that's about 15,000 square feet, where all our equipment is serviced for repair. All our equipment is on one computer, all our stores are online, so that as equipment is picked up and brought to our service center, it's redistributed based on what we project the demand to be at the various stores."
Forget $1 million All things considered, streamlined operations and maximized return on inventory investment make it possible to run a profitable corporate chain of general rental outlets, say these company representatives, as long as you do it cluster by cluster and leverage the benefits of hub and spoke.
Boyce estimates the average annual revenue of a Jewson Hire Point to be between $500,000 and $750,000; parent company Meyer does not report Jewson separately. This is in line with the ARA's 1997-98 Cost of Doing Business Survey averages, which put the total annual revenue of a "100 percent general tool" rental outlet in the United States at $650,000.
Similarly, Davis' 1998 annual report lists $204 million (U.S. dollars at mid-January 2000 conversion rate) in revenue from 350 company-owned outlets in the U.K., Ireland, Germany and U.S. (not adjusted for discontinued operations and acquisitions). This puts the total annual revenue per HSS store at an average of about $580,000. Davis' six-month interim statement ended June 30, 1999, reports $98 million of from 355 HSS outlets in the six-month period, or about $275,000 average revenue per store for a half year of activity.
There is no question that these companies are making a profitable go of the general rental business at per-store volumes under $1 million. The 1998-99 Plant Hire Investment Report, written by Catherine Stratton in the U.K., expresses the annual rental revenue of 60 leading equipment rental companies as a percent of gross book value of rental inventory (original investment in inventory). HSS holds first place among the companies listed, at 153.9 percent.
In fact, every member of the top 10 listed financial utilization percentages of 90 percent or better, although footnotes indicate that at least one of these companies engaged in some inventory re-evaluation. Even with appropriate cautions and adjustments, the gross ROI of some of the U.K.'s big players appears to outperform parallel cost-of-doing-business averages such as 87 percent, pure tool rental; 86 percent, balanced mix of tool and contractor inventory; and 71 percent, pure contractor rental.
One challenge, of course, is to identify areas of the United States that will support the density and volume requirements required by the hub and spoke model. RentX is already geographically diverse, but lacks enough physical presence in some regions where it has made initial acquisitions. "It will be necessary to achieve a critical mass of rental outlets in the RentX markets," says Lindsay Poston. "We don't see any part of the network at the moment where it's not possible [to achieve clusters] through acquisition."
While some North American regional markets are simply not developed enough to support this concept, there are plenty of pockets of opportunity. Stephenson's effectively clusters its stores in Canada, with its Ontario locations contained within 70 miles of the company's Toronto maintenance facility.
HSS has chosen to pilot its U.S. program in Florida, a rental-receptive state that supports 850 rental businesses. After generating losses related to getting its greenfield sites and General Rental acquisitions settled into full hub and spoke mode, "all branches have been refurbished and restocked with hire equipment, and centralized transport and maintenance facilities have been established," states Davis' June 1999 interim report, "Accordingly, with our structure now fully functional, we intend to focus on turnover [revenue] growth."
Employing entrepreneurs Profitability goes some distance toward solving the employee incentive issue, as it can allow for reward structures that keep attitudes competitive with entrepreneurial motivations. A successful general rental store can require higher transaction volumes and a more constant selling effort than heavy equipment rentals, where a limited number of large-scale contracts often account for substantial revenues. Competition can be fierce and extremely service-intensive.
The largest national presence of entrepreneurs falls under the TruServ umbrella, the most prominent buying cooperative in the United States. Steve Nelson, former president of rental businesses for TruServ, sees the rental entrepreneur as "ultimately motivated, typically a bright person who may settle for less than ideal compensation at the beginning because he's looking down the road, looking at the long run. It's a very difficult thing to get and keep that caliber of person as a paid employee in a company-owned store network."
Most tool rental businesses "aren't structured to support the necessary incentive programs," Nelson says. "The scalability of the business just isn't there."
"It's like with our [building supplies] business here in the U.K.," says Meyer's Lindsay Poston. "Often when people ask me, 'Who is your biggest competitor?' they think I'm going to name one of our major national competitors. But it's always the good local guy who has that knowledge of the local market and is flexible and fast in response.
"Although we have certain ways in which we operate, there are times when our local managers need to respond very quickly to the marketplace and act like an entrepreneur," he says. "We know that when they do that, they will sometimes make mistakes. But we also know that if they don't react, we'll lose a lot of business. It's a delicate balance. ... We want our people to feel involved in their own outlet's success, but we also want them to think of ways to satisfy demand that go beyond their own inventory's availability at a given moment, to think about total utilization of the cluster's rental equipment as a whole. We've built a good model in this regard."
"That's certainly the riddle," agrees Stephenson's Chris McKay when confronted with the issue. "And everybody is trying to address it, to understand it. How do you provide an environment that motivates performance? No. 1 is the caliber of the person you hire; you have to spend money on recruiting and make sure you have a professional doing the job for you. Then you have to institute the proper incentives in areas where that person has control, not just bottom-line responsibility but real control."
Franchising, of course, can circumvent some of these challenges while building a national presence on individual investment. With hundreds of franchised operations in its heyday, Taylor Rental came as close to succeeding in that regard as anyone. "Where the program fell down was with the company-owned store chain," says Matthew Villamaino, who was vice president of advertising and promotion for Taylor Rental under The Stanley Works. "As a corporate owner, you need to establish realistic goals and strategies at all levels of management, and be accountable for these initiatives."
Taylor Rental and Grand Rental Station franchises are still available from TruServ, which believes the brands carry enough market equity to make them viable choices for prospective franchisees. Neither HSS nor RentX (Meyer International) are actively pursuing franchise programs at this point in the United States.
New horizons For every argument against a broad-based, company-owned presence in general rental, there is now - finally - a possible answer. There are also new questions to consider:
What effects will consolidation have on this sector? How will the creation of corporate-trained rental staffs affect the employment market in our industry? Might unanticipated aspects of the American mentality work for or against the successful British models? Could an increasingly consolidated general rental industry disrupt trickle-down, intra-rental sales of used equipment? Might it eventually discourage new entrants and entrepreneurs? Or will large companies raise the bar on standards of service, training, safety, maintenance and marketing to the betterment of the entire industry, making it a more attractive arena in which to invest and work?
Yes, there is definitely something new going on here. And it starts with the single-mindedness of purpose and clarity of rental vision that all three companies exhibit - this despite the fact that the two U.S. players, HSS and Jewson, are wholly owned by companies that derive most of their revenue from outside the rental business.
Too often, corporate interest in general rental has been fragmented by conflicting agendas or derailed by too thin a rental background. Neither problem seems inherent here. It's nice to see some answers in action.
