Pump Up the Volume Rental companies in the United States may need to take a closer look at their European and Asian counterparts if they want to reach a wider customer base. There is a perception that the rental industries in Japan and England appear stronger compared with the United States. Some estimate the percentage of equipment rented versus equipment bought in those countries to be about 70 percent to 80 percent, compared with 20 percent in the United States.
I believe this wider rental penetration is related to the cultures, rental rates and marketing programs in Japan and England. Space is at a premium abroad, and neither the contractor nor the homeowner finds ownership as attractive as rental. We have more space in the United States, so we don't mind storing things. In addition, rates in England are lower, making rental appear more affordable. When we do marketing studies here, high cost is always perceived as a major barrier to the concept of rental.
Some of the largest rental companies in England are sophisticated at getting the rental message out to the customer, something the U.S. industry has not done very well. But domestic consolidators are going to change this, at least as far as the contractor is concerned. Right now, TruServ is distributing about 14 million rental circulars each year, but this is just scratching the surface.
Regarding rental rates, I believe they are subject to the effects of supply and demand than just like everything else. When supply is up, rates go down. When there is more demand than supply, rates go up. In highly competitive markets, rates have gone down over the past 10 years. In other markets, rates have been stable or have gone up.
The influx of capital and larger companies will make the supply outpace the demand, for a while at least, so it is fair to say there will be a continuing downward pressure on rates in the larger markets. On the upside, lower rates could lead to a perception that rental is becoming more affordable. This may drive utilization and increase the number of people open to the concept of rental.
While rates have been down over the past several years, the profitability of public rental companies and small independents has been stable or increasing. While rates may be lower, the increased utilization of rental fleets is driving the revenue and the efficiencies of many companies.
ROI Can't Stay AWOL This is the only industry I have seen where business is booming; there are spot inventory shortages and the rental rates continue to decline. At times, it seems as if nobody wants to make any money.
Rental rates have remained flat for several years and have declined in many areas. This decline is fueled by the roll-ups from both domestic and foreign owners with deep pockets and excess inventories. Inventory is entering the United States from overseas and is going out into the market at any price. It appears the marching orders are these: "Buy market share now, and we will raise prices later."
As the economy shifts, the IPO frenzy will cool off, and investors will expect a return on their investments. The demand for inventory will decline, and there will be many major players left with excess, which will further impact rental rates. That adage will kick in: "Better a dollar on the street than nothing in the yard." When this happens, some will not be able to survive the lean times and will simply close shop.
Pricing pressure will continue to snowball. The builders squeeze the general contractors, who squeeze the sub-contractors. The subs squeeze the dealers, who squeeze the manufacturers. And the manufacturers squeeze the raw-material suppliers. Everyone is working on increasingly smaller margins. I hear people complain that they are doing twice as much business as they did 10 years ago, but are putting less money in the bank.
Dealers will continue to expect better discounts from the manufacturer, while maintaining the level of service they have come to enjoy. And they will compete with offshore pricing.
The Used Dilemma The value and disposition of used equipment will definitely play a role in how successful rental companies will be in the future. It may be the biggest issue in the coming years.
But it will be increasingly difficult to turn out equipment at a young age. Right now, orders to manufacturers are slowing down, and rental fleets are saturated. In the past, selling used equipment was easy. Smaller companies bought from larger companies, and they all had a trap-line. Today, disposition is taking place more at auctions - and those values are softening.
Everyone's solution is to retail more, but the market won't be able to absorb it all. Force-selling used equipment in the marketplace will erode used values and take away from future rentals.
Aging fleets also create another problem. They challenge a company's technical abilities, add cost and affect the depreciation life of used equipment. End-user customers want good-quality used equipment with good local parts and service support.
How to solve this used-equipment dilemma? I don't know; it's a fact of life and one of the risks of the business. At some point, you have to bring in new equipment. But manufacturers have about hit the wall on reducing prices, taking residual-value risks on leases and deferred terms, and taking trade-ins. Current rental rates don't support the hidden risk in used-equipment values.
Most manufacturers and major rental companies in the United States are betting they can dispose of used equipment globally, expecting European, Latin American and Asian markets to pick up the slack. If that happens, it will help. If not, it makes the problem much more severe.
In our company, a couple years ago, we could pick up the phone and dispose of any excess rental equipment more quickly than we could retail. Now we don't have that "trap line" to wholesale because those buyers have mostly been consolidated. To keep up, we are increasing our retail ability, enhancing our used equipment, and continuing to provide the best parts and service support to bump up used-equipment values.
Fundamental Rental Marketing fundamentals - customer service, quality products that are easily serviced - are key to rental industry success.
We expect to see continuing rental growth in the first years of the new century. Successful rental operations will survive by finding their niche within the local markets. They will provide rental value that their competition will not understand nor be able to afford. Independent rental houses should not try to compete directly with the big chains. Instead, they should do what has made them successful in the past: providing personalized customer service and using only quality brand-name products.
The traditional distributors will need to rewrite their business plans for the new century because of the changing face of the rental industry. Successful distributors will build on their greatest business assets - strong parts inventories, complete service shops and those longtime relationships with area contractors. One of their most important marketing assets will be their field sales force, calling on jobsites.
Finding and keeping good employees will be our greatest challenge in the coming years. Many of our new people will be new to the industry and will need training from the ground up. Because of the high cost of training, some businesses will ask their suppliers, manufacturers and local associations to provide extensive product education.
We expect the new century to highlight the importance of our global economy. Manufacturers who market on a global scale will be among the first to meet world standards in ergonomics, sound attenuation and emission control. It will be a must to design construction equipment that is easier and more comfortable to use, quieter, and cleaner running.
Bang for the Buck Success in the rental arena today goes well beyond machines in the yard, parts on the shelf, and the ability to do on-site repair anytime of the day or night. Demand by rental customers for higher levels of service is more than a trend; it is a reality.
Rental customers come in many shapes and sizes. They run the gamut from the weekend handyperson requiring a small compactor to a building contractor needing an extra backhoe for a month to a large fleet operator looking to outsource part, or all of his equipment management needs.
Rental centers realize that to meet a wide spectrum of customers, their strategies must vary accordingly. A backhoe or compact loader for rent at the right price may be all that is necessary to meet the short-term needs of the small contractor or weekender. On the other hand, a full array of equipment and tools plus on-site fleet management, tracking and reporting along with guaranteed up-time is the only way to meet the needs of the large fleet operator.
To be successful, rental centers should decide which customers to target and try to understand the "value proposition drivers" of each customer segment. When the targeted customer value drivers are understood, then a specific rental management program can be customized.
In the near future, large contractors will outsource not only equipment and fleet management services but also manpower, renting the operator along with the machine. Contractors can then focus on bidding and managing jobs and leave the management of equipment and its utilization to a specialized provider.
As technology improves, end-users will pay for value-added services that give them the most return on their rental dollar. Automated machine tracking reports will help contractors balance fleet availability with demand. Global positioning satellite systems will become commonplace as a means to provide location, service-interval tracking and productivity reports.
Rental will continue to grow as a means for industrial operations, and contractors will improve their asset-management capabilities and reduce their fixed and variable expenses. As we move into the 21st century, rental will evolve dramatically toward a more complete outsourced management service.
Although there will always be a place for companies with small rental fleets, competing with equipment rental alone will become challenging as rental rates tighten. To become more competitive, rental companies must offer full service and a wide range of options such as rent-to-rent, rent-to-own, leasing, new and used equipment sales, financing, a shop and on-site service, parts, fleet management, and application consultation.
The key is to understand that different end-users make up the customer base. The more choices rental companies can offer, the better it is for growth.
Cyber-Rental More people will conduct business electronically tomorrow than today. United Rentals is positioning itself to be at the forefront of that trend by investi ng significantly in our e-commerce capabilities, including a new Web site designed for easier transactions.
The Internet provides a vehicle for existing and potential customers to learn about the benefits of renting equipment. With just a simple mouse click, it also gives current customers access to information - such as account status, product details, manufacturer information, construction trends and economic indicators - that is specific to their needs.
Businesses and individuals can use the Web to spread the benefits of renting equipment, rather than buying it. The most basic roles of our e-commerce strategy are to be a source of information about why renting makes sense, the types of equipment that can be rented, and to promote our company as the best choice to supply that equipment.
On our Web site, we are providing a password-protected portal for our customers to access their account status. This is especially valuable for larger customers who may have several projects under way in remote locations. It also helps corporate customers keep track of their equipment usage. In conjunction with a national accounts program, the Internet is an effective channel for better serving these important customers.
We expect to launch our new Web site - www.unitedrentals.com - this month. Besides customer account management functions, other components include a user-friendly search engine for finding equipment and access to any of our branches (including direct e-mail connectivity to each branch, phone/fax numbers, branch descriptions and a street map) and to our regional used-equipment catalogs.
Customers can also do business with us through the United Rentals E-Rental Store, which acts as a virtual rental yard with an equipment fleet of more than 300,000 pieces, deployed across 44 states, six Canadian provinces and Mexico. Through our Web site, customers can communicate with trained equipment specialists 24 hours a day, seven days a week.
We set up the E-Rental Store to be more than a mailbox; it is a one-stop shop for the online rental equipment user. As more people and businesses become comfortable conducting business over the Internet, Web sites will become a more valuable way for customers to get the right equipment, right now.
24/7 Product availability will be key in the year 2000. Rental centers need units available seven days a week, 24 hours a day. If you can't repair equipment quickly, you need to put a new one on the job. But owners of big rental fleets are not necessarily dealers, so they don't provide warranty. This creates a real problem with how you treat a product that's out there.
Renting operators will also become standard in the United States, as it already is in crane rentals because of shifting labor costs and OSHA laws, which say that if you're going to operate equipment, you need to be certified. The downside is that the company will have to pay for training.
To increase their after-hours reach, more companies will offer online reservations, Internet-based solutions and different ways of marketing rental options. Modern, for example, uses computerized rental-rate worksheets, which allow its sales force in the field instant access to company data.
Financial management will be a bigger piece of the pie in the next decade. Big financial houses will increasingly offer alternative ways of acquiring rental fleets, such as financing with fairly aggressive refusal rates and rental sharing arrangements.
The Independent Equation The small "mom-and-pop" rental stores are facing some formidable challenges and opportunities in the next five years. Some see consolidators as their biggest threat, but there is good news buried in this area.
First, look at the number of rental centers out there. Estimates range from 12,000 to 20,000 locations. By taking a middle ground, we can show where the industry is going.
Today, according to conservative estimates, the rental industry's revenue is about $15 billion a year. Based on this, the consolidators, with an estimated 2,500 locations, are claiming a market share of about 20 percent or $3 billion a year. This leaves the 13,500 independents a share of about $12 billion - a little under $1 million in annual revenue per company.
Brad Jacobs of United Rentals has stated in industry speeches that he anticipates that by 2005, the rental industry's revenue will hit $50 billion a year, with consolidators claiming a 50 percent market share. This sounds bad for the independents, but let's look closer.
First, I believe the number of independents will remain relatively constant as the consolidators inch closer to the end of their buying cycle. Second, people who are returning after being bought out will replace independents who have been bought out. This means that in 2005, independent per-store revenue will climb to $1.85 million, a 67 percent increase, assuming no major downward changes in the economy.
For the independents to realize full growth potential, they must pay careful attention to all aspects of their business. Membership in local, state and national trade associations will be a big help in meeting legislative obstacles and learning industry trends. Computerization and e-commerce will be mandatory. They will also need to adjust their rental and sales product mix to meet the needs of the consolidators in their local market. They will need customer service at a level that will "knock their socks off."
Hiring and keeping the right personnel will be the biggest challenge facing all rental operators. With the labor market as tight as it is, wages and benefits will need dramatic increases to get and keep the people necessary. I hope the industry will be able to absorb some of these increased costs by becoming more efficient and raising rates to ensure continued profit levels.
The consolidators will face similar challenges and eventually further consolidate to three or four chains. They will also attain growth by going international so that they can serve the Fortune 500 companies seeking sole-source contracts for all their locations here and abroad. As a result, both the large rental chains and the progressive independents will prosper in the coming years.
Mirror Tells All Nothing reveals the reality of rentals in the new century more than staring at our own image in the mirror. It is an image wrought with worry lines, most of which are self-induced. And many manufacturers of equipment are doing terribly. Fortunately Terex is fine, but I am in a constant state of panic.
Just look at the manufacturers of aerial work platforms. Some are for sale; some are looking for money; some with high-yield bonds are trading at 50 percent of the issue price, which signifies financial stress; and some have ballooning working capital, signifying extreme terms given to customers. Why should a rental company buy equipment today when it is essentially on loan with a great buy back? Is it important to have underutilized equipment on the lot with the right brand? What nonsense.
Many of these same companies added bricks and mortar to what is not a highly technological business. The business is and always will be cyclical. To deal with consolidating customers, for a manufacturer at least, is to consolidate yourself and lower costs so that the leverage between buyer and seller remains balanced.
Do not blame the customer; look in the mirror. The AWP business is not the only troubled manufacturing group in the equipment world. Examine the global trends. Manufacturers are beginning to cooperate. The Case-New Holland merger is positive, and I forecast others to follow suit because technology is driving us to change the way we work.
I predict online sales of new equipment to become commonplace, the expansion of regional service specialists and the discovery of "parts rip-off schemes" by major manufacturers and customers' revolting against them. I also predict the growth of consultative selling on the part of distribution companies as a way to assist customers with their needs.
Look in the mirror, and you will see your past. Then reflect on the image and capture your future.
Differing With Darwin A major component to the growth and success of Shepherd Rentals (see cover story, page 42) is the strong support from Shepherd Machinery, the dealer. Much of the supportive atmosphere stems from the philosophy of owner Bill Shepherd. RER recently sat down with Shepherd at his office in Whittier, Calif., and discussed his views.
RER: Both the dealership and the rental company provide a vast aray of services.
Shepherd: One-stop shopping has become a cliche now. I think there are certain advantages to providing a lot of things that customers need. When customers come in the door, they can leave satisfied whether they wanted financing, product support, parts, rental, purchase or rental/purchase options. We think we'll have the broadest offering over time.
RER: It seems that you made the right first step by recognizing how different the rental business is from a dealership.
Shepherd: Service, service and more service - that's what the customers need. Customer support agreements are most important. We'll provide not only the equipment, but also the support for it. How much support do you need? We'll tailor a package to suit your needs.
RER: When did you determine that rentals would be a big part of Shepherd's future?
Shepherd: We've been expanding that area since the downturn in 1990, which was almost of biblical proportions. In the 80's, we had the seven good years, and then we had the seven lean years. It convinced me that rentals were important.
Right now we see so many opportunities, we just don't have time to say grace over all of them. There is incremental growth in a lot of areas with respect to service and components in machines outside the arena that the OEM's have tackled. But rental service is our big growth initiative right now and will be for some time to come.
RER: How do you manage to get the various parts of the dealership and the rental division working cooperatively together?
Shepherd: We have a creed called communication, cooperation, teamwork and mutual respect. And so although our business has lots of departments - parts, service, sales, finance, accounting and traffic - we try to operate on a common set of values so we don't have competing fiefdoms.
In other words, a service manager can never make his mark in this company by getting the best of a parts manager or a sales manager. All of those natural frictions have to be put to rest. I look at these as Darwinian approaches, such as the "survival of the fittest" and "winners and losers." I like to think of the whole team as winners because we either win or lose as a group.
RER: How does that philosophy work in reality?
Shepherd: It permeates every decision that's made. For instance, you post a job, such as a parts manager's job, becoming available in a branch store. Say a field mechanic shows some interest. There can be friction over that because a lot of people think the scarcest commodity in the world is field mechanics; however, a good parts manager is hard to come by, too.
But the service manager who manages this guy thinks: "What's best for the organization? Might we lose this guy? Is he to the point where he doesn't want to pull wrenches anymore, and if we don't find the career path for him, we're going to lose him?"
We're a diverse company, and this is a diverse community that we live in. So either you celebrate that diversity and capitalize on it or it can be a problem. I buy into the American dream, and I think diversity is a great strength.
