***The Blame Game

Feb. 1, 2001
People love to blame the big guys. It always has been that way in every industry, and equipment rental is no exception. Years ago, Hertz and Prime were

People love to blame the big guys. It always has been that way in every industry, and equipment rental is no exception.

Years ago, Hertz and Prime were the favorite villains of small companies in most rate skirmishes. These companies haven't gone away, but names such as United Rentals, Rental Service Corp., Neff, Sunbelt, NationsRent and National Equipment Services — collectively referred to as “the consolidators” — are now taking their share of the blame whenever rate competition occurs. With its No. 1 status, United often is seen as the biggest bully on the block, but even regional and multiregional companies have been criticized for contributing to downward pressure on rates.

The very nature of the rental industry — in which listed book rates are, if used at all, generally just a starting point for negotiations — lends itself to rate cutting. Bargaining is the order of the day, with rental salespeople sometimes approaching customers with “I'll give you the machine for 10 percent less than my competitor” and contractors routinely opening discussions with “Your competitor is offering it to me for $600, can you beat it?”

The big companies are visible targets, but does the blame for rate competition lie entirely on their shoulders? While many owners of smaller independent rental companies say yes, there are other factors that have led to a competitive rate environment.

To begin with, there's expansion. New players in a market tend to use low rates to attract new customers and gain a foothold, often with the hope of raising them later. With several major players expanding to fill out a national or multiregional footprint, buying large quantities of fleet to qualify for better discounts from the suppliers, cutting rates to establish market share has become standard. In many markets, the phenomenon of several new players entering around the same time, all employing salespeople charged with the mandate of bringing in new business, has contributed to a “gold-rush” atmosphere.

Once established, they tend to want to raise the rates, especially if return on assets is below expectations. But rental center owners know how hard it is to raise rates once they've been lowered. And with increased competition, customers are confident they always can find a competitor with a cheaper rate.

There are other reasons national chains are seen as rate discounters. Most tend to rent larger equipment than the average rental company and approach more visible jobs. They also court large accounts that work on big jobs and do business on a national or international playing field. These accounts tend to be more comfortable dealing with large rental companies than with local players, and because they do business in large volume, many of these customers expect price consideration. High-visibility jobs — such as stadiums, airports, highways, malls and hotels — always have attracted fierce rate competition because everybody wants in on them.

The factors add up, the rates go down. Big companies competing with other big companies, chasing big jobs, offering volume discounts, with aggressive salespeople trying to establish their companies and earn as much commission as possible. And while their managers might tell them about the importance of promoting value-added services, many salespeople are more concerned with their next commission check. While $1,500 might be a sensible and responsible monthly rate in terms of return on investment for the company and integrity for the market overall, the salesperson still will make a commission if the machine rents for $1,000 or even $800, albeit a lesser one. And the branch manager, who has a revenue goal, will be $800 closer to meeting that goal rather than staring at the machine gathering dust in the yard.

Many small rental center owners have horror stories to tell of heinous discounting. “Rates were good until the big guys came in and started cutting everything,” says Brad Hemphill, branch manager for Murphy Tractor & Equipment, Great Bend, Kan. “We rent a 10,000-pound forklift for between $2,700 and $2,900 a month. RSC and Hertz rent the same lift for $1,800. Also, we rent a 5,000-pound lift for $1,800 a month. They rent it for $1,200.”

“We were our own worst enemies, cutting rates and fighting for market share at a time when demand was strong.”
— Kevin Rodgers, NES

Roger Vajgrt, owner of Home Rental Center & Sales, Marshalltown, Iowa, adds, “Four years ago, we used to rent a 20-foot scissor lift for $880 a month. Then United came in and offered the same lift for $320, but they were underbid on a job because RSC rented it for $280 a month. We used to raise our rates 2 to 3 percent across the board, but now we only raise them selectively.”

Not everyone, however, blames the major players for rate softness.

“There has been a lot of hype about rates, but not much has really changed,” a northern California owner says. “It's still the rental business. I haven't seen anything done by a consolidator that plenty of other companies haven't done in the past. The guys that held rates before still do so, and the more aggressive guys who cut for market share still do that. The only difference is they've been acquired by somebody else, and the color of the paint is different.”

The good fight

Local conditions and individual players are still major factors. “The big guys are improving the rates here,” says Bill Neundorfer of Nine Villages Rentals in Mesa, Ariz. “RSC is right across the street from me, and they're not budging on their rates.”

Upper management of some national companies is promoting efforts to raise rental rates, but the branch managers and salespeople in the trenches face a different reality on a daily basis. “While we're making a big effort to raise rates and have made a concerted effort to get our sales force on board with this, we may be a year-and-a-half too late,” acknowledges Kevin Rodgers, CEO of NES, Evanston, Ill. “I think it has dawned on everybody that we were our own worst enemies, cutting rates and fighting for market share at a time when demand was so strong.”

Bud Howard, senior vice president for sales and marketing at RSC, Scottsdale, Ariz., adds, “Major chains have certainly evoked fear in the competitive arena. The amount of fleet that the majors have brought into the market is the major contributing issue. I also believe that most of the majors have the tools and management systems to control pricing. … It becomes a matter of discipline and will.”

With more pressure on the major public companies to demonstrate internal growth, many agree that their concentration on raising rates will keep them from deteriorating further. But in the minds of many others, the quest for market share is a beast that cannot be tamed easily. But while smaller companies always will blame the larger ones, ultimately every company needs a respectable return on invested capital to remain profitable.

The big companies are visible targets, but does the blame for rate competition lie entirely on their shoulders? “We were our own worst enemies, cutting rates and fighting for market share at a time when demand was strong.”
— Kevin Rodgers, NES

United Rentals CEO Brad Jacobs sees the rate dilemma turning for the better. “Long-term, I think rental rates will be better,” he says. “The hidden hand of Adam Smith will set things right. Two years ago, salespeople were bumping competitors' equipment off sites for discounts of as much as 50 percent. But Wall Street was throwing billions of dollars to finance the buildup of rental fleets, and inevitably you ended up with over-fleeting here and there. But now people are focusing on profitable business and not just being macho about winning business at any cost. Two years ago, lots of companies didn't even have budget meetings. Now people are selling off fleet, moving stuff that's not [renting] instead of discounting it. The climate heading into 2001 is more rational.”

The owners of thousands of rental companies certainly hope so.