***How Do You Rate?

Feb. 1, 2001
Rates. They are the pulse of the rental industry, its lifeblood. If you want to get the competitive juices flowing, bring up the subject of rates. RER

Rates. They are the pulse of the rental industry, its lifeblood. If you want to get the competitive juices flowing, bring up the subject of rates. RER did and found that just about everyone has an opinion, a theory, a villain.

Rates, on the surface, should be a straightforward subject. What do you charge for your equipment per hour or day, week or month, and how do you arrive at that price? But it gets complicated quickly. For starters, dozens of factors go into setting a rate, from cost of product and depreciation to utilization and maintenance. Everyone does it differently, and no one can claim ownership to a magic formula.

Mix into the equation hypercompetitive markets, where too many managers and sales reps are under the gun to move too much equipment … well, even the best-intentioned rates begin to be compromised, if not totally abandoned. The finger pointing is never far behind.

In a perfect world, markets set the price of goods. If demand is strong, pricing is, too. But consumers who buy — or lease — a car, for example, don't also expect a driver, a mechanic and an instructor thrown into the deal. In the rental world, it's a different story. Contractors who rent a machine might or might not get value-added services, depending on the rental company and the quality of its people. But they definitely will have a choice of packages and prices. That's where rates begin to vary greatly, and philosophies of market share and margin begin to wander down different roads.

Unlike in a Hollywood classic, the good guys and the bad guys in the rate story aren't always easy to identify. In fact, they switch roles from day to day and customer to customer. A good rate, it would seem, is in the eye of the beholder. And a bad one is any deal that was lost.

A survey of large and small companies in every region of the country shows that rates, like politics, are a local institution — and about as hard to agree upon. Some owners and managers say rates are starting to move slightly upward; many insist rates are down and still falling; others say it all depends on the unit, the customer, the season.

“There are two different issues: Rates are flat, margins are down,” summarizes David Griffith, president and CEO of Modern Group, Bristol, Pa. “Other things besides cost of acquisition and rates are driving margins down. Fuel costs, liability insurance and medical costs are increasing. Don't confuse margins and rates.”

Indeed, behind every good rate is a good margin. How one company gets there can differ greatly from how another does.

“It's very simple in our view,” United Rentals CEO Brad Jacobs says. “One for one, dollar for dollar, you are adding or subtracting to your profit when you raise or lower rates. Of course, you also have to take into consideration how much you're paying for your equipment. For example, long-term aerial rates were down a bit last year, but our cost of purchasing aerial equipment was down much more. So even with a lower rental rate, our total return on assets was higher.”

Still, Jacobs and many others acknowledge that the equipment rental industry as a whole is leaving a lot on the rate-negotiating table, hurting margins for everyone.

“There is no question that rates, relative to previous years, have been deteriorating. Average rates for monthly, weekly and daily business are at an all-time average low across the country.”
— Bud Howard, RSC

“Everyone knows that certain categories of equipment have seen softer rates — some traditionally so, and others that have weakened in recent years. Aerial has been a particular problem,” says Bud Howard, senior vice president for sales and marketing, Rental Service Corp. “But we have seen the low-price plague spread into the other areas that have seen traditionally better margins. Larger equipment such as excavators and loaders has eroded over recent years. Even some smaller, less price-sensitive items such as mixers, welders and compaction are now in the fray, which will require strong management and procedures to repair this problem.

“We ask ourselves just how much of this erosion is driven by market conditions or lack of good management by the consolidators? We train our management to manage margin. Our sales force has had specific training on selling service to overcome the rate issue. We view our business as a game of margin, not a game of volume.”

Of course, the national rental companies have distinct and obvious advantages in protecting margins and building volume — starting with bulk ordering, which lowers their cost of equipment acquisition, and including the potential to move inventory from branch to branch, depending on market demand.

“By and large, we always try to persuade customers to place a higher value on our newer equipment, bigger fleet, first-class service, advanced safety training and so forth,” Jacobs says.

As the larger players tackle the rate problem from within their own ranks and wield their size advantage in the field, smaller companies have been forced to read and react to their moves in order to hold margins steady.

Sophisticated rental software is no longer the domain of the consolidators, and many smaller and midsize companies are growing as comfortable with the tools of technology as they are with engines and bearings. They're using computers, just as their larger counterparts, to monitor utilization and understand the yield on every transaction.

But the rental industry still won't be confused with Silicon Valley, and software savvy alone can't make a contractor pay more for a machine.

“We look to have a number of different revenue streams,” Griffith says. “We're putting a tremendous focus on the service business, and we have a great training program. It gives us the ability to survive low rates and still grow the business. It gives a reason for a customer to come back.”

At the moment, customers are the undisputed winners in the battle over rental rates. But as RER found in talking with managers and owners around the country, new attitudes are being forged and solutions to self-destructive policies sought. It is less easy, then, to identify the big losers in the battle over rates. They don't always have equipment sitting in the yard; they don't always wear black.

But in the year or two ahead, perhaps they will become a bit easier to pick out of the crowd. Not to say that the winners ever will see the rental rates of yesteryear, when equipment renting was more an act of immediacy than long-term strategic planning, as it is now.

“Five years ago, we would expect to make 10 or 12 percent profit before tax,” Griffith says. “The compression in rental rates is going to be with us for a while. The street has redefined the pricing level. All these people crying for a higher rate have to get over it and find a different way to make the same money.”