The rental industry continues to go through a time of transition in the midst of an economy of adjustment. Out of balance supply-demand ratios, shrinking margins for manufacturers and plummeting rental rates are just a few of the challenges on the immediate horizon. Still, industry leaders find optimism in a range of areas.
For the next few months, RER will interview leading executives among manufacturers, rental companies and industry service providers.
Strong Character, Thin Margins
Ron Johnson
President and CEO
Mitsui Machinery Division
Bridgeport, N.J.
RER: During the past few years, there has been a considerable amount of consolidation among manufacturers. Do you feel this trend has peaked or do you expect to see more of it in the coming years?
Johnson: We will always see consolidation, among manufacturers and distributors. We have always had an over-capacity in our industry. It has been an industry of the haves and have-nots. Suppliers to the rental industry are a “class society.” The successful will always try to be more successful, and they will always have the majority of the resources to make acquisitions.
Consolidation always comes in waves. Profits are, of course, at their lowest point ever. So, the only way to make the model work is to continue to strive for more market share. Sometimes, the easiest way to gain market share is to acquire another company. But, other times, an acquisition offers a supplier a platform for further product expansion. In our case, the acquisition of NAC provided a great platform for expansion into an entirely new class of products.
People remember the most recent consolidation of rental companies. But, the first big round was in the early 1980s. So, the short answer is yes. There is more consolidation on the way.
Are you seeing a lot of former owners who sold returning to the rental market? What do you see as their strengths, weaknesses and challenges?
As I predicted a number of years ago, there are many former rental owners coming back into the business. These guys are gritty veterans who are poised to be even more successful the second time around. They are using good and bad experiences to their collective advantages. As a supplier, we have had a strategy in place for several years to accommodate these professionals who are now returning to the business.
No matter how much consolidation takes place in our industry, there will never be a substitute for the savvy owner-operator who understands his or her hometown market. There is a lot more to the rental business than just buying power. We just heard that one of the large consolidators has now become a big liquidator, and will close a multitude of stores next year. I cannot help but think that some opportunistic owner-operators will be able to make a go of it where a rental chain could not. I still feel that some of the best businesspeople in the country are in our industry. Just about every one of the companies that sold out during the frenzy of a few years ago did so at an inflated value. That's the mark of good business people.
I am not taking anything away from the consolidators. Brad Jacobs has proven himself as a brilliant businessman. But, there will always be a place for both types of companies. The industry is simply seeking its optimum level and balance.
You've been in this industry a long time. Is it much more difficult for manufacturers to be profitable now than, say, 10 or 15 years ago?
As I mentioned earlier, profits are at an all time low. Believe it or not, there are suppliers in our industry that do not even know their cost of doing business, or are just finding out the hard way. The customers have no idea at what margins some equipment is sold. In some cases, manufacturers are supporting entire product lines from the profits generated by one or two models, or a singular product group. As low as interest rates are, there are still manufacturers “buying down” rates to make their rates even more attractive. It all costs money. But, there is tremendous pressure to make the sale, and keep equipment moving.
Here's something interesting: MMD is also in the forklift business, which is where I started more than 25 years ago. In 1978, an 8,000-pound capacity pneumatic forklift sold on the average for about $27,000. Today, that same forklift may sell for $25,000, or less. This is at a time when automobiles have gone up about 300 percent. It amazes me how much staying power some of the smaller suppliers have had. This is an industry of strong character. But, the margins are ridiculously thin.
What kind of electronic services are your customers expecting and how are you working to enhance your service to your customers electronically?
In addition to the normal Internet services, we have employed technology in doing things better and faster. For example, our parts service is better, and more responsive because our system makes it more accurate. Our sales people file an electronic call report each evening, which makes us more responsive to the needs of our customers.
MMD no longer mails invoices. We use a fax that is generated from our computer.
We can also get information to the field faster than ever. Better information facilitates more accuracy, and better service overall. Our inventory system has never been better. We rarely run out of product, which is of great benefit to our customers. It is our opinion that there will never be a substitute for the face-to-face relationship of a sales person and a buyer. But, we feel that technology can take care of many of the other necessities of doing business more efficiently. This helps us to be more competitive overall.
So many rental companies have reduced their equipment purchases over the past couple of years. Obviously you, as a manufacturer, want to sell as much equipment as possible, but how soon do you expect to see an increase, overall industrywide, in capital expenditures?
People eventually will start spending money again, even if it is at a declining rate. But, we have come to the realization that the U.S. economy may continue to become more like that of Europe or Japan. By that, I mean that people will not be as emotional in their buying habits. There will be more pride of ownership. Higher quality products will edge out the lesser quality ones. There will be more of a product orientation in the buying process. Less will be based on relationships.
Products will be kept in rental fleets longer. It is already happening in the rental car business. Pricing will be more stable because profits will continue to be difficult to come by. There will be only so much that can be given away. Irresponsible manufacturers will fall by the wayside, and the industry will correct itself. The industry may become more commoditized, but it will be on a higher level. Let's face it, there are not many bad Japanese or German products. We need to get to the point where the quality in U.S. products is assumed. Just because a product is a commodity, it does not have to be sub-standard.
Are you under constant pressure to improve services such as speed of parts delivery and that type of thing? What services are under the most competitive pressure to improve?
The pressure to improve support performance is always there. MMD recognized the importance of spare parts as a result of our lift truck experiences. A few years ago, we started an aftermarket parts company that we call Parts Power Plus. Sometimes our normal suppliers do not understand how critical the demand for parts can be. So, we have built a network of alternate suppliers, all of whom vend high-quality parts for most of the machines we sell. We will go to great lengths to keep machines up, and on the job. Many times, we will even part out whole goods in order to supply hard-to-source parts. MMD is one of the few companies in our industry that has more people in its parts department than in the sales department.
There is also a lot of growing pressure for financial services. Customers want answers, and they want them fast. They do not have as much inventory as they did a few years ago. When a machine goes down, they probably will not have a ready replacement.
They are all looking at better utilization. So, downtime is more critical than ever.
How has Mitsui developed over the past year and what are the company's plans over the next couple of years in relation to the rental market?
MMD made an important acquisition in 2001 when it purchased NAC. While NAC was not a large company, it did provide a platform for growth. For example, it would have been difficult for MMD to have gotten into the concrete vibrator business before the NAC acquisition. But, now it would be easy to package that type of product with the compaction equipment we now have in our line. The forklift business is mature, yet important to MMD.
So, we have to find ways to build our dealer network, and find more success in supplying our quality forklifts to the rental industry. We see a lot of development in our parts business, and in financial services. But, we are also going to be aggressive in adding new products. And, we have our eye on another acquisition, or two. We feel fortunate to have been in a position to make an acquisition in such lean times. People say that business isn't fun anymore. But, if you are a competitive spirit, and enjoy a challenge, it has never been more fun.
I'd like to add one more comment. As Irv Levine, the founder of MQ, retires, I want to congratulate him on a productive and distinguished career. His impact on our industry is that of a legend. As a former employee, I admired his determination and his understanding of the marketing process. As a competitor, I loved competing against him, because he was so good at what he did. But, you always had to be at your best to beat him, even if you were holding all the cards. Even those who did not like him learned a great deal from him. Our industry is better because he walked this way.
Hunters, Not Gatherers
William Swisher
President and CEO
Texada Inc., Guelph, Ontario
Stephenson's Rent-All, Toronto
RER: Please bring us up to date on the development of Texada since you've been there?
Swisher: Since the start of 2002, Texada has had several meaningful developments. First, in May of this year, we were successfully listed in the “Toronto Stock Exchange - Venture Exchange” with our ticker symbol being “TXS”. Our goal of listing was to clearly communicate to our global construction rental/dealer customer base that Texada is an independent software company. As regards our customers, we now have an installed customer base of over three hundred worldwide, comprised of one thousand five hundred locations in six countries.
We continue to support all of the Volvo Rents locations on a global basis. Additionally, we have recently signed a new customer with more than 60 locations in the United States. Texada markets and sells three software systems — TSI, Systematic, RentOnTheDot — that provide solutions for rental companies that range in size from three locations to regional to multinational.
E-commerce was quite the buzzword in the industry a few years ago. In recent times, however, we do not hear as much about it. Is the development of electronic services still a major portion of Texada's business?
It still should be, but with all of the events over the last two years — beginning with the down turn in the stock markets, lack of funding for new technologies, and other more serious events — the buzz has certainly waned. E-commerce is a term that is defined too narrowly in our industry, reservations and ordering over the Internet. From my point of view, it involves a far greater scope of activities that can be transacted over the Internet.
The range of key activities we are focused on currently using our RentOnTheDot core technology is providing rental companies and their customers a variety of ways to communicate and access information over the Internet, such as access to rental contracts with signatures captured electronically, receipt of invoicing and payments, and business intelligence reports that allow the contractor to manage its rental activities with just a keystroke.
What kind of electronic services do you feel rental companies are looking for?
The next area that needs to be addressed is the back end of rental operations; that is, the transaction between manufacturers, distributors and rental companies. Simplification and streamlining is key, whether it is purchasing parts, complying with manufacture retrofits, or receiving and paying invoices. The rental industry needs the supply side of our business to step forward and begin to partner and develop technologies that are not disparate systems and can integrate with ERP technologies.
In terms of electronic and software services, where are we heading a few years down the road? What kinds of products and services are you and other software providers looking to develop in the coming years?
As noted throughout these answers providing business intelligence to the rental executive in a real time environment is critical path to running a successful business. We feel the rental industry will continue to ask the software providers to bring solutions that aid in reducing the rental operator's costs per transaction. Additionally, key development features coming down the pipeline are providing a fully integrated GPS functionality, online and integrated connectivity with manufactures/suppliers and remote POS access using Kiosks are just a few of the items.
You've worked closely with Volvo in developing rental software specifically for Volvo Rental Centers. Please tell us about that, where is that project going and what are some of the unique needs that Volvo had?
Our relationship with Volvo has been very successful for Texada but has presented unique challenges. The nature in which Volvo operates with its franchisees and the requirement for them to be operating on a single software platform must be global. Creating an “ASP” application software provider network allowing any Volvo franchisee to solve this challenge and operate from a single “mainframe” processor at Texada.
How are things developing with Stephenson's Rent-All? Have you moved away from the rental department model and moved toward the more traditional contractor-oriented rental center approach?
Stephenson's is going well and 2002 has proved to be successful and a very profitable year. We have either closed or divested all home-improvement center operations, moving the company toward a more traditional model of contractor-oriented rentals. Currently, we have 26 “high traffic area” spoke locations, with one hub location open and two under construction. More importantly, our customers have welcomed and embraced the changes and progress we've made and have rewarded with loyalty and a solid 2002. The employees have worked hard and have been smart to tear down old ways of doing business, reduce expenses, and significantly improve customer service.
The rental industry has evolved and changed greatly over the past five years? What changes do you seeing coming over the next few years?
I know many of us who have been around the industry for 20 years, as I have, speak of the business becoming a commodity. While it may appear that is the case, when reflecting on rental rates compared to just a few years back, we must look internally, at ourselves, in the industry and ask ‘what have we done to prevent this from happening?’
Pricing alone does not make an industry a commodity, but rental companies' failure to effectively communicate their value proposition does. Each rental operator has a choice, and my experience today at Stephensons Rent-All to my early days at Prime Equipment confirms that our customers respond positively if we demonstrate with clarity the value proposition.
As many of us, I've traveled a great deal and my former employer Hertz and their car rental division clearly sets a standard for the business traveler. They demonstrate through the Gold service program that superior service equals value.
How is the economy in Canada, Ontario specifically? What are differences from U.S., if any? What do you expect to see economically in the coming year?
Ontario has not been impacted by the slowdown as much as many parts of the U.S. and we find housing and commercial starts very active. The local economic forecast is a strong 2003, continuing at least into the first six months of 2004.
Originally, RentontheDot started with the request for quote concept, which does not seem to have taken hold very much in the rental industry. What is happening with RentOntheDot now?
RentOnTheDot has had a little transformation since its conception and is now a proprietary tool exclusively for Texada clients and their customers. It continues to provide quote and reservation features. It has now added powerful customer relations management tools allowing for Internet interactivity between the rental company and its customers.
Getting out your crystal ball and thinking ahead a few years, what type of services will software providers such as yourselves be offering to the rental industry, and what will rental companies be asking for from their software providers?
Rental executives must demand real time business intelligence from their software providers, allowing them to “ … get smarter”. Today's fast-paced business environment demands software tools that provide answers now, at the moment. Critical, rapid business decision-making requires access to intelligence on our operations now, not at the end of the month.
You have worn several types of hats in your career, from Hertz to Prime to Texada. Given your multi-faceted experience, what advice do you have to offer rental companies during this difficult economic time?
My advice is the tag line we use at Texada Software, “ … get smarter”. As a rental operator today, we must kick the door in on internal barriers that prevent the extraction and removal of operating expenses, gain visibility on under-performing rental assets, and opportunistic pricing strategies. All of this requires software to be much more than just a “point-of-sale” tool; it must be a powerful engine proving business intelligence in a timely fashion.
A gentleman I was privileged to work with for a number of years described this as the defense of a football team. You need a great defense to win the Super Bowl, but without an energized offense, you will lose that same game. So while we are vigilant at defense, we also must ignite the offense. My first week as president at Stephenson's, I said one thing to the employees, “We will be a team of hunters, not gatherers any longer,” and that one expression continues to permeate all of our team at Stephensons Rent All.
