Although it is tempting to look at Europe as a single market, to do so in the context of equipment rental would be a mistake. The major United States rental companies, working in a vast country, are well used to regional variations in their markets, but these differences pale in comparison to Europe, where you have neighboring countries whose rental sectors bear no comparison in size and maturity, and whose economies display a similar variance.
So it is that Germany, with its €3 billion (U.S. $3.6 billion*) rental market, is neighbor to Poland, which probably has less than 100 rental depots in the whole country. Spain and Portugal, neighbors on the Iberian Peninsula, currently have starkly contrasting fortunes: Spain with one of the fastest growing construction (and rental) markets in Europe, while Portugal saw construction activity fall by 12 percent last year, taking rental rates and equipment utilization with it.
If the rental market varies widely country by country, it is also true that it is growing, and will continue to do so for decades to come. The traditional way of assessing rental development is to estimate the proportion of all construction equipment sold to the rental channel. The United Kingdom dominates the European rental market, with €5 billion (U.S. $6.1 billion) in revenues representing more than a third of the total market, and with a correspondingly high rental penetration figure of 80 percent — making it the most mature rental market in the world, not just Europe. Other countries see percentages of 40 percent or less, with even major European economies such as Italy and Spain having penetration rates of 20 percent or under. (See Table 1)
Rental in Europe
The U.S. rental consultant Dan Kaplan, owner of Morristown, N.J.-based Daniel Kaplan Associates — who consults for big rental players in Europe as well as the U.S. — thinks the trend is all one way, and forecasts that the total European rental penetration will double from 20 percent in 2002 to nearer 40 percent by 2007. (Table 2)
There are few who would dispute the fact that rental is gaining in importance as a sales channel, but the experience on the ground of rental companies in the past few years would belie this positive view.
In France and Germany, for example, high investment and growth in rental fleets in the late '90s and in 2000/2001 have been followed by a lean period, with rental companies experiencing extremely tough price competition and pressure both on rental rates and utilization. Germany's recession — and a slowdown in France — led to extremely difficult trading conditions for many rental companies.
Europe — Rental Growth
For Gerard Deprez, president of Loxam, the French rental company that is the biggest in Europe outside of the U.K., the slowdown was cyclical; “In the '90s it was the same. We had a decrease in '93 and '94, and a decrease in '97, so we have to manage cycles, seasonal and political cycles.”
The business may be subject to normal business cycles, but Europe's rental sector is also undergoing a transformation as it matures, with the rise of pan-European rental players now evident, and the equipment manufacturers playing a major role in developing the market.
Although the U.K. is home to the largest rental firms in Europe — including Hewden, HSS, A-Plant (part of the Ashtead Group, which owns Sunbelt Rentals) and Speedy Hire — it is continental European rental companies that are making the pan-European running. Loxam is heading the bunch — having established itself in Belgium, Germany, the U.K. and Spain — but is being matched in northeastern Europe by Finland's Ramirent, which is also vying with Sweden's Cramo for dominance in Scandinavia, Finland and the Baltic States. (Table 3)
The pan-European drive is also being led by specialist renters, including Lavendon with its Nationwide Access and Zooom access subsidiaries in the U.K., France, Spain and Germany; accommodation renters such as Algeco of France (recently acquired by a U.K. private equity company), GE Capital Modular Space and Portakabin; and power and temperature control rental companies including Aggreko, GE Energy Rentals and Energyst (the joint venture between Cat and its European dealers). Caterpillar said last year that Europe's power and temperature control rental market could double in size by the year 2009.
Top European Renters
One of the key problems facing European rental companies now is a shortage of investment capital. Financial institutions have become wary of the rental sector because of its recent problems — particularly in the aerial platform sector where there have been several high-profile collapses — and this has made it more difficult for companies to grow.
As a result, it is the manufacturers who have been making a lot of the running. Caterpillar's strategy has been to encourage its dealers to rent, and where rental markets are already mature, to buy large rental players. Hence Finning's acquisition of Hewden Stuart, the acquisition of Cramo, and, last year, German Cat dealer Zeppelin's takeover of rental company MVS (the rental business is now branded MVS-Zeppelin).
Caterpillar's Cat Rental Store network last year accounted for almost €1 billion (U.S. $1.2 billion) in revenues in the ERN-50 list — the 50 largest rental companies measured by annual turnover published by European Rental News magazine — a 15-percent increase over 2002 and representing a 15.6-percent share of the total top 50.
Other manufacturers are also getting in on the act. German company Liebherr has established its Liebherr-Mietpartner business in Germany, France, Spain and Italy, using its own locations in Germany and those of its dealers in other countries, and renting not just its own equipment (except cranes), but also other brands. This business reported revenues of €100 million (U.S. $122.8 million) last year.
Volvo is also trying to establish its Volvo Rents network in Europe, except in certain mature markets like the U.K., France and Scandinavia where it is already supplying the rental market. It has so far been having less success than in the U.S., with just three stores up and running — two in Portugal and one in Madrid, Spain.
The company recently said that it would revisit its European strategy. Chris Rees, Volvo Construction Equipment's president in Europe, said the “franchise consciousness is not as well developed in Europe as in North America” and that Volvo was looking again at how it will develop its rental operations, although he ruled out Volvo investing directly in its own rental depots. The focus will be in Spain, Portugal, Italy, western and northern parts of Germany, and, longer term, Eastern Europe.
Komatsu, meanwhile, is taking a country-by-country approach, encouraging its dealers in Germany, for example, to enter the rent-to-rent business, while JCB continues to hold its position that it is a supplier to the rental sector and not a competitor. Atlas Copco has so far resisted the temptation to acquire a big rental company like it did with RSC in the U.S., but it is nevertheless active in rental in Europe, mainly via its dealers, but also through some small- to medium-sized rental acquisitions, the most recent of which was Spanish generator and compressor rental specialist Guimera earlier this year.
It is Cat's involvement, however, that has concentrated minds among European renters. “The Cat strategy has changed the picture of the market,” said Loxam's Gerard Deprez last year. “They will exist, they are number one, but they will have some competitors. What has changed is that it makes it obvious that we need to have some big European companies in Europe to compete, and because it meets a demand. There will be a change from national companies towards European companies. We will be one of them, but we can have others. But Cat is not a threat because customers like to have choice.”
Longer term, European rental firms also expect to see more activity from U.S. companies. Hertz Equipment Rental Corp. is already present in Europe through Hertz-owned operations in France and Spain, but it is now relying on franchising to further develop its European network, a strategy that is unlikely to see it match the growth of the region's big rental players.
Much more significant is likely to be United Rentals' eventual entrance into Europe. The company has been investigating the market for several years and Wayland Hicks, United's chief executive officer — who has worked and lived in Europe — recently told Access International magazine that the company still held ambitions to operate on a global basis; “and Europe will be first — not in the near term but more likely in three to four years' time.”
Management resources will be key in timing the move; “When we go to Europe, I'll have a European management team but I will want to build a team that understands the business model that we run,” said Hicks. “To do that, people from America would have to be sent over to work within the acquired companies. Right now, that would be difficult for us to do.” He said that the time might be right when United achieved annual domestic turnover of $4.5 billion. The company's 2003 revenues were $2.87 billion.
United's forte, of course, is consolidation, and it is consolidation that remains a key feature of the European rental scene, with evidence that it is starting to happen even in relatively immature markets. In Spain, for example, a Madrid-based venture capital fund, Nmas1, has helped to create General de Alquiler de Maquinaria (GAM), a €60 million (U.S. $73.7 million) turnover company built out of three acquisitions in 2003 and now acting as a vehicle to consolidate Spain's fragmented rental market.
Consolidation has so far been limited mainly to equipment rental businesses, with the party and events sector still highly fragmented. Only two companies — De Boer in the Netherlands and French company GL events (formerly Generale Location) — can call themselves pan-European players, and in the U.K., for example, the largest party and events rental specialist, JHS (Johnson Hospitality Services), still has an annual turnover of little more than €15 million (U.S. $18.4 million).
For the moment in Europe, the general climate is optimistic. The slowdown in rental spending of the last few years is beginning to be reversed — although not to the same extent as in the U.S. — and the revenues of the largest 50 rental companies last year grew by between 10 percent and 15 percent, with total revenues reaching €6.2 billion (U.S. $7.6 billion). (Table 4)
Two of the most dynamic markets are Spain and Italy. Even in Italy, where sales of construction equipment are down, rental is growing. The Italian equipment rental market exceeded €0.85 billion (U.S. $1 billion) in revenues last year, according to a new report prepared for the Italian rental association Assodimi, and total growth of the rental market in 2003 was estimated at 21.8 percent, with a 14.9-percent increase forecast for this year.
Top 10 Investors
Eastern Europe also offers promise for the future, fueled by the addition of 10 eastern and central European countries to the European Union on May 1, this year. Around €22 billion (U.S. $27 billion) of EU money is earmarked for infrastructure spending in the new member countries in the next two years alone.
Timo Korhonen, managing director of Ramirent Europe, the Ramirent subsidiary that has rental businesses in Russia, Estonia, Latvia, Lithuania, Poland, Hungary and the Ukraine, says one of the real benefits of EU enlargement will be inward investment from Western European firms who now have the confidence to invest in the region.
“We are quite sure that it will add quite a lot of business,” says Korhonen, “First, there will be more infrastructure development, and second, we are convinced that more cautious Western companies — the pioneers are already there — will start to invest.” He expects rental in the region to grow at 10 percent a year or more.
Ramirent is still investing in the area: In January it opened its first Ukraine depot, in Kiev, and earlier this year it acquired the MVS portable accommodation rental business in Poland that had been put up for sale following MVS's acquisition by Zeppelin.
The U.K. also continues to be a strong rental market, although one characterized by oversupply, particularly in certain sectors such as aerial platforms. Tool hirers such as Speedy and Brandon Hire are expanding rapidly through acquisitions, and others such as Gap Plant — which rents both small and large equipment — are expanding to provide the national depot coverage that will attract the major accounts from the U.K.'s biggest building firms (some 40 contracts now account for around 60 percent of Gap's business.)
If Germany remains a subdued market, there are others in the same boat. Portugal, despite investing heavily in hosting the Euro 2004 soccer championships earlier this summer, has seen its construction sector sink dramatically since 2002, a climate that has caused problems for the still developing rental sector.
Manuel Magalhaes, technical director with the Portuguese rental group that includes Vendap (cranes), Levap (aerial platforms) and Comgerap (compressors and generators), says preparations leading up to Euro 2004 did offer some rental business, although not a significant amount, and that since the competition ended “we have felt that the market has dropped again. I am sure that something must change, but really, I don't see it.”
Revenue growth expectations 2004
Jorge Patricio, managing director of Volrent, the subsidiary of Portuguese Volvo dealer Auto Sueco that will operate the Volvo Rents operation, says the economic situations may have beneficial effects for rental. “In Portugal, contractors like to own machines,” he says. “Now we have a big economic crisis, and contractors are looking at the fleet that they have — at the leasing costs that appear every month. So we see an opportunity for rental.”
The aerial platform sector remains a particularly difficult one, with recent problems at French renter Acces Industrie and in the U.K. with Independent Access Supplies and U.K. Platforms emphasizing the problems.
However, Kevin Appleton, chief executive of Lavendon, owner of the largest fleet of aerials in Europe, recently said the prospects for growth remained good in Europe; “The past three or four years have been difficult, not just in the U.K., but in the European access industry, and there's no doubt that rental rates have come under huge pressure with double-digit percentage deflation in some areas. This was enough to put a number of large rental fleets out of business. However, the market for powered access equipment is still growing and the prospects are good. I believe we have bottomed-out; rates are unlikely to fall much further and demand is on the increase.”
Appleton's optimism seems to be shared by the general rental community in Europe. Late last year, European Rental News conducted its first ever Rental Confidence Survey. Some 56 percent of responding rental companies expected to increase fleet investment this year — 10 percent said “much more” — and only one in 10 respondents were expecting to reduce expenditure this year compared to 2003. (Table 5)
What was most heartening was that this investment is not just replacing existing equipment, but expansion, with 71 percent of all rental companies looking to expand their fleets. Europe may be diverse, but it seems that many of its rental companies are thinking along the same lines.
Murray Pollok is editor of European Rental News, a magazine published in Europe by KHL Group. Readers can obtain a digital version of the magazine (in Adobe PDF format), free of charge, by registering at www.khl.com. Pollok may be contacted at: [email protected].
*Currency conversions done with exchange rates from Sept. 27, 2004.
