It's known for making huge tractors and mining trucks, for equipping big-time petroleum and power companies, and serving the needs of large contractors that work on highway, airport and sewer-system projects.
Now Caterpillar wants to star on another stage: rental.
But dealing with high-profile purchasing agents is a far different game than dealing with the subcontractor looking to rent a concrete saw. Can Cat please them both? Can it feed the big and the small? Can it be a billion-dollar worldwide company as well as the rental yard down the street? Sounds like a tall order for Cat, but it may not have a choice.
As the century ended, analysts painted a less-than-rosy picture for Cat's retail side. Said one: "We do not believe Cat's sales, including the benefit of higher production of its compact products, will increase in 2000. Importantly, Cat's domestic construction equipment markets, including residential, commercial and industrial construction, are weakening."
In report after report, the message is clear. Machine sales in North America continue to soften, leading to lower-than-expected dealer sales to end-users.
None of this is news to some North American Cat dealers who, on their own, began eyeing rental years ago as an attractive profit center. For example, Denver-based Wagner Rents, a division of Wagner Equipment Co., began renting equipment back in 1983. By 1987, Wagner had fully embraced the rental concept.
"We saw a definite opportunity to extend rental beyond just the Cat equipment that we service and sell," says president Bruce Wagner. "With the economy so much better and contractors looking for more equipment, we began Wagner Rents to try to meet all their needs."
Caterpillar soon took notice of Wagner and a handful of others and recognized the need to get involved. "Around 1994, we began sharing our ideas with them," says Wagner. "When Cat started The Rental Store, I felt that it was the right thing to do. A lot of people travel from territory to territory, and unless Cat took the step [to give it a national identity], it would have been Wagner in Denver and Hawthorne in San Diego and Holt in San Antonio, etc. But by naming the rental program, Cat gave it continuity. The choice made perfect sense."
The initiation of The Cat Rental Store and its striking logo was the first step, but Caterpillar recognized that it was not enough merely to name it: It had to define rental for its dealers and help them envision a cohesive game plan, especially ones that were resistant to crossing the sales line.
Caterpillar did its homework, pinpointing the keys to rental success: product availability, locations close to the customer and the one-stop shop. Perhaps most important, Cat acknowledged that the rental business is partly counterintuitive to the old Cat way.
"Rental customers are different customers," says Kurt Thiel, manager for light construction equipment, North America. "They want something now. They want to know how to get the job done." So Cat had to revamp its image (see box, page 48) and its outlook.
"Our goal is to deliver solutions," says Thiel. "We now define our customers by the work they do, not by the equipment they own." He admits, though, that this concept was difficult at first for dealers to swallow. "There is some resistance with the dealers thinking the rental side will compete with the dealer side. We have to create a new conception among the dealers."
"To get closer to the customer and to create convenience in location, dealers had to set up a separate identity for The Cat Rental Store," says Mike Bruch, supervisor of rental services, North American Commercial Division. "To change the culture, many dealers hired general managers with rental experience to set up a rental organization."
While hiring rental people was one strategy, some early Cat dealers opted instead to acquire the whole operation. To date, 12 dealers have chosen the acquisition route, including, most notably, Toromont Cat, a Canadian dealer, which in 1996 acquired the assets of Ontario-based Battlefield Equipment, then ranked No. 60 on the RER 100 with a rental volume of $9.9 million (see timeline). Today, Battlefield Equipment has 23 locations in Newfoundland, Ontario and Labrador.
Cat says its letting its dealers decide. "The advantage [of an acquisition] is that you can get in quicker and you gain immediate expertise," Bruch says. "But sometimes it is difficult to integrate it into the existing business. And lately, they're sold at a very high price."
Either way, it seems that dealers are learning to sing a new tune. And if they haven't got the message yet, Cat made it loud and clear with the introduction of products aimed specifically at romancing the light construction customer. In 1985, Cat had seven models of light equipment; today, it has 37.
"Both [rental and light equipment] support each other," Bruch says. "We needed skid-steer loaders in our lineup. It's just a good strategic fit. And Cat needed to be more active in the short-term rental business."
The rental network seems to have solved Cat's problem of attracting new customers and streamlining distribution channels. "We need to look at novel ways to introduce our broad range of products," says Thiel. "[The Rental Store] is the first time in 75 years that we've made a major investment in the dealer/distribution area. It's going to continue to represent challenges for us; to invest in the future costs a lot of money. But it is the way we are going to resolve one of the big issues: that of pursuing new customers when we really don't have a relationship with them."
A Dilemma? To meet all the needs of the rental customers it seeks, however, Cat knows it has to rent a wider range of equipment, including non-Cat brands, alongside its own. And that's where Cat, the king of heavy equipment, may lose its advantage.
"Individual dealers who are embracing the Rental Store concept don't have the purchasing power for products outside Cat's line that the larger consolidators do," says Credit Suisse analyst J. Blair Brumley. "Cat's line will make up 40 percent of the SKUs in a rental store and 60 percent of the dollar value, but they can't buy anything that doesn't have the Cat brand on it as effectively and price-efficiently as a number of people they are going to be competing against. Caterpillar's playing both sides of the fence." According to Cat, however, it has leveraged purchasing power by working with leading manufacturers.
Cat denies that there is an inherent contradiction in the Rental Store strategy. "We need to simplify, but we're learning how far we can take that," Thiel says. Cat continues to allow its dealers flexibility in choosing how to develop their rental presence.
If all goes well, Cat hopes to have 350 stores by 2001 - a network that, combined, could soon join the exclusive billion-dollar-revenue rental club.
Caterpillar * Employees worldwide: 65,824
* Countries doing business in: 200
* Assets: More than $25 billion
* 1998 sales revenue: $21 billion
* Primary businesses: construction and mining equipment, diesel and natural gas engines, and industrial gas turbines
The Cat Rental Store * Locations in Central/ South America: 42
* Locations in Europe: 68
* Locations in U.S. and Canada: 230
* Cat dealers worldwide: 195
* Cat dealers in North America: 70
* Cat dealers with rental stores: 61
* Average dealer sales per year:
$180 million
* Average dealer assets: $120 million
Cat, the big-iron lion, is moving more like a panther in the construction jungle, stalking lighter prey these days. Here's a look at the key moments in the manufacturer's ongoing transformation:
January 1996 Caterpillar announces record profits of more than $1 billion in 1995 and attributes the gain to brisk overseas sales and efforts to emphasize rental through the dealer network, which expanded its rental fleets to a combined size twice that of HERC, then rated No. 1 on the RER 100.
February 1996 At the American Rental Association trade show, Caterpillar announces the launching of a program to support its dealer-run rental programs.
Toromont Cat, a Canadian Caterpillar dealer, acquires the assets of Ontario-based Battlefield Equipment then No. 60 on the RER 100.
Ohio Machinery Co., a Caterpillar dealer in eastern Ohio, acquires Miller Tool Rental, a full-service contractor rental company with four locations in the state.
March 1998 Caterpillar unveils a new line of compact machines, including a compact wheel loader, mini-excavator and nearly 60 work tools, at Bauma, the world's largest construction equipment show, in Munich, Germany.
April 1998 Caterpillar and York International form a strategic alliance in the temperature-control rental business, including rental generator sets, mobile chillers and related equipment.
September 1998 Caterpillar introduces the 301.5, its first mini-hydraulic excavator, to North America.
October 1998 Caterpillar forms a strategic alliance with ASV, a manufacturer of low-ground-pressure, light-construction vehicles.
January 1999 4. (cover of Cat annual report) The Caterpillar annual report features a Cat Rental Store on its cover.
Caterpillar unveils a skid-steer loader line.
March 1999 Caterpillar says it plans to increase the number of dealer-owned rental store locations by 50 percent to 300 by the end of 2000, and intends to add 100 rental locations each in Europe and Latin America.
September 1999 Second-quarter earnings for Caterpillar plummet 37 percent due to weak demand for large machines and large engines in mining, oil and gas segments, according to the company.
Caterpillar shuts down its East Peoria, Ill., manufacturing plant for five weeks, due to reduced demand for mining equipment.
November 1999 Caterpillar says it will cut $1 billion from North American dealer inventories over four years to free up capital for dealers to invest in rental fleets.
December 1999 Analysts release a report stating that "Cat's domestic construction markets, including residential, commercial and industrial construction, are weakening." But rental growth remains on target, company officials said, and the rental network now stands at more than 200 locations in 40 states and Canada (see map, next page).
