According to the American Rental Association, there are approximately 1,100 companies in North America that are 100% construction rental businesses. It’s a booming-and changing-industry. In the past three or four years, the rental industry has attracted investors who perceive opportunities to profit from acquisitions, mergers, and consolidations.
From the late 1940s until very recently, nearly all equipment rental businesses were family-owned and established in response to the surge in construction after World War II. These early rental businesses offered the kinds of tools, such as power saws and pressure washers, that are sold today by retailers and hardware stores at very affordable costs. Rental businesses then branched out from general rentals to niche-market rentals, such as parties and events, construction, and industry.
Contractors have traditionally rented to supplement their equipment fleets for short-term needs. In 1986, tax-credit laws were changed, contributing to new growth in the rental sector as contractors lost an incentive to own. When purchasing equipment became a liability rather than an asset on the balance sheet, contractors began to take a closer look at rental as a profitable alternative.
Today some experts estimate that the rate of growth in the rental industry is around 10% a year-hearty by any standards. Rental firms and manufacturers of construction equipment who participate in the rental industry are offering a wider variety of sizes, models, and attachments to the contractor than ever before. In addition, some rental firms offer highly specialized services to their customers, such as trained operators and onsite repair services.
According to a survey conducted by the American Rental Association, regional and national companies now own 10% of rental businesses, while another 10% are franchising operations. Some 79% of rental businesses are still privately owned. The outlook for the industry as a whole is bright-this is in part a result of the vitality of the United States construction industry and the recent spate of natural disasters on the East Coast that has led to an increased demand for rental equipment.
More significant to the industry is that contractors have been steadily adapting rental as a profitable alternative to purchasing.
We wanted to discuss some of the above issues with representatives of the rental industry-both corporately and privately owned businesses. To this end, Grading & Excavation Contractor asked the following people to participate in a roundtable discussion:
Willie Swisher (WS), division vice president of marketing and sales, Hertz Rental Corporation, Park Ridge, NJ
Bob Miner (BM), vice president of strategic planning, United Rentals, Greenwich, CT
Troy Gabriel (TG), vice president of operations, NationsRent, Fort Lauderdale, FL
John Faress (JF), general manager, The Cat Rental Store, Austell, GA
Jay Maners (JM), owner, Taylor Rental, Mount Vernon, OH
Grading & Excavation Contractor (GX): The equipment rental industry has, until very recently, been dominated by the independent rental firms-e.g., the family-owned business. Lately,the industry has seen more and more consolidations and mergers. What do you see as the factors pushing this trend? How will it affect the shape of the industry in the years to come? Is it, in your opinion, a good thing, a bad thing, or something in-between?
BM: Consolidation has accelerated because customers want a wider selection of equipment, more availability of equipment (i.e., greater numbers of each piece), newer equipment, and better service. This requires commitment of significant amounts of capital, which is often difficult for smaller companies to generate.
In addition, larger companies have significant cost advantages over smaller companies-lower cost of new rental fleets as a result of greater purchasing power and the ability to increase utilization by sharing equipment among branches within a cluster of stores, to leverage overhead costs over a greater store base, and to cross-sell individual location special capabilities.
JF: Even with all of the mergers and consolidations we have seen over the past couple years, the equipment rental business remains very fragmented. I’ve seen numbers to suggest that, combined, national rental companies have less than a 25% market share.
Given the growth of the equipment rental industry and the degree of fragmentation, our industry is a perfect target for consolidators. In order for the market consolidators to be successful, they are going to have to grow their market share and become operationally efficient very quickly. At the same time, they have to figure out a way to merge different “business cultures.” Not everyone is going to succeed at this.
WS: The consolidation of the equipment rental industry is a natural progression of highly fragmented US industries, which is primarily fueled by the infusions of funds from Wall Street investment banking. This industry, which is estimated to have a $20-billion US market, has a clear upward path of growth as the shift from ownership to usership continues. This shift should accelerate as customers have options that are more viable in the marketplace.
TG: Industry analysts believe large rental companies provide services more efficiently than smaller firms do. Larger rental companies’ offerings are typically stronger in terms of price, product availability, condition of machines, and performance guarantees. They will experience significant growth in the rental industry in several areas, including improved purchasing power, higher utilization of existing equipment through clustering (i.e., sharing equipment without markets), and using capital to increase product offerings-something many smaller “mom and pop” stores cannot do. The fact is that many smaller rental companies lack the capital to open or acquire additional stores.
Manfredi & Associates projects the industry to grow to more than $40 billion in revenue in North America and perhaps $75 billion globally. Mergers and acquisitions will continue to consolidate independent stores and large chains within the industry, probably resulting in three major national or international chains operating alongside independent companies. Equipment rental will surpass sales as the dominant equipment distribution channel, accounting for more than 50% of the total construction fleet in the US and 60% globally.
JM: I think the evolution of the rental industry is consistent with what’s going on across the country. With the Internet and e-commerce, things are speeding up. A contractor who is working in several locations across a state wants to get online, find the necessary equipment, set up accounts, and get the equipment delivered on-site on time. What you’re looking at is convenience and time. The number-one commodity in the US today is time-nobody has it, and everyone wants it.
Overall, the industry is very healthy. The consolidations and mergers aren’t the end of the story; it’s a highly varied market.
JF: I think the jury is still out on how the consolidation frenzy will shake out. Some early observations are clear, however: Rental rates are declining. The increased emphasis that public companies place on cash flow is driving this. While it might appear that it’s good for the customer, we often see that the companies with the lowest rates provide a low level of service and the poor-quality equipment. Customers’ options will continue to expand as the demand for rental equipment grows.
WS: The consolidation is a positive for our industry, which requires heavy capital funding for continued growth. In addition, our customers also receive the benefit of newer fleets and equipment, more locations, and greater availability.
BM: In the years to come, we expect consolidation to continue for these same reasons. currently the largest company in the business still has only about a 7-8% share of the market.
For the customer, consolidation is very good because it increases his options, provides a better level of service, and allows him greater flexibility in performing his work.TG: I agree that it’s a great thing for customers. The “new” rental industry is lowering the barriers for entry into the construction business by eliminating capital requirements for contractors. Contractors can choose to either increase their profits or pass savings on to their clients. Large rental companies offer a full breadth and depth of equipment so contractors can get what they want when they need it. Equipment offered ranges from small equipment (e.g., chain saws, cutoff saws, jumping jacks, and pumps) to large equipment (e.g., excavators, articulated dump trucks, and large dozers).
GX: The equipment rental industry has two strong cards to play: short-term consumer use and equipment with a high price tag. Can you discuss both of these factors and describe how they influence your business strategy?
JF: This is one of the greatest benefits for the rental customer. Why invest a large amount of money in a piece of equipment needed for only a few days a month? More and more, customers are shifting the burden of ownership to rental companies and opting for the increased level of convenience that this provides. We recently had a customer who needed 135 portable light plants in order to replace a runway at Hartfield Airport in Atlanta over a period of 35 days. Obviously it was out of the question for the customer to buy this many light plants for such a short-term project. The rental option kept down the costs and allowed the stringent time frame to be met.
TG: Unless a contractor uses equipment 55-90% of the time, it is almost always cheaper to rent than buy. Equipment rental companies like ours can buy, finance, store, insure, and maintain most equipment more efficiently than the contractor can. This is one reason contractors are attracted to rental.
Short- and medium-term rentals account for 60% of total revenue for NationsRent. Contractors choose rental over ownership because it allows them to select the most efficient machines for specific, short-term jobs rather than using a less suitable, older piece of equipment they might own. Newer, better products are constantly being developed; renting provides access to these latest tools on a nonpermanent basis.
WS: The length of transaction in our industry is relatively short, which drives what I would refer to as a pooling of resources. This pooling of resources allows us to move fleet with demand, which satisfies our customers requirements and provides optimization of our rental-fleet dollars.
BM: The secret to success in this industry is customer service. We are using our ability to form a large network of locations, our ability to expand the quality and size of the rental fleet at each location, and our state-of-the-art computer network to give greater flexibility to our customers, no matter what type of business they are in or what type of equipment they use.
GX: Many contractors figure rental into their overall business plans today rather than using it as a fallback. Do you have customers who fit this category? If so, they are probably valued customers and you’ve established an ongoing dialogue. Can you elaborate on the advantages of this strategy from the point of view of these customers?
JF: How does rental figure into a customer’s overall business plans? Some of our largest customers do not own a single piece of equipment. They would rather pay us to deal with the hassles of ownership, such as maintenance, transportation, operator training, and taxes. By transferring the equipment responsibility to us, the customer is able to focus more of its efforts on running the business.
BM: More and more customers use rental as a primary means to fleet their projects because it costs less and offers greater flexibility. In general, unless someone can utilize equipment 70% of the time or more, it will be to his cost advantage to rent it rather than own it. Renting also gives the user the opportunity to employ the most modern and most productive equipment, rather than trying to use an existing piece of equipment for a different type of project.
WS: Many of our customers see us as an integral part of their day-to-day business. There are a couple of reasons that come to mind. First, it allows our customers to focus on their core business-construction. Also, management of fleet equipment requires use of valuable resources, capital, and manpower. Moreover, since the rental industry has never provided customers with more viable choices than today, more new fleets, a greater variety of fleets, and more locations can then support their needs.
JM: The rule of thumb is that if you use equipment a certain percentage of time, you should be purchasing the equipment. I don’t find contractors doing that, though. The contractor doesn’t want to have to do the service and maintenance on the equipment; he wants to focus on his own business. A contractor might rent a skid-steer from me 30 times a year. He could buy that piece of equipment on a lease for $300 a month, yet he’s going to pay me $150 per rental 30 times a year. That’s $4,500 a year for the rental versus $3,600 for the lease. He’s paying me so that he doesn’t have to change the oil, change the tires, or repair the hydraulic lines.
In addition, contractors build the price of rental into their pricing. They can write off a rental at 100%. We see a lot of contractors who bid jobs with our price book in hand. They bid the job knowing that they can get a long-term rental package from us, secure the equipment, have it delivered on-site, and send it back when the job is done. They are using rental as an integral part of their business strategy because they can’t be sure they’ll need a particular piece of equipment after they finish one job or when they will need it again. Most jobs are bid with time frames. If they get the job done early, they get a bonus; if they are late, they are penalized. So they don’t want a $40,000 piece of owned equipment breaking down-they have to pay to repair it and pay for rental of a replacement while their equipment is being repaired.
GX: Service is key to a successful equipment rental business today. Discuss what this means to you and your business. Are you, for example, providing trained operators along with the highly sophisticated equipment as part of a rental agreement? What kind of repair and maintenance advantages can you offer to the contractor renting your equipment? What about delivery and reprisal?
WS: Finally, service becomes the distinguishing factor in which customers choose their equipment suppliers. While at Hertz we do not offer operators with our equipment, we provide the necessary support and expertise. We provide full delivery and mechanical support 24 hours a day, seven days a week, thus allowing the customer to focus on his project.
BM: At United Rentals, service means giving the customer the most choices, giving him the assurance that we have in stock (or can quickly get) the equipment he needs today, having the equipment we provide be modern and well maintained, providing instruction on how to best use it, and providing advice on what types of equipment will be the most productive for his needs. The types of equipment we typically rent are not rented with an operator. We understand that the equipment we provide must function well, and if there is a problem, we will promptly repair or replace the malfunctioning equipment.
TG: Strong customer service is key to any successful business. We’re differentiating ourselves from our competitors with innovations designed to increase customer satisfaction. We seek to offer equipment that is always available, faster check-in and checkout procedures, shorter required lead time for rentals, on-time equipment delivery and pickup, onsite repair service, 24-hour customer assistance, and a library of audio, video, and written instructions materials for equipment usage and safety. Also, as part of our plan to provide one-stop shopping to customers, our locations sell parts and supplies to complement equipment rentals and sales.
We are supporting our customer-service efforts by developing an innovative state-of-the-art management information system capable of monitoring operations at several thousand locations. This system will permit customers to reserve and rent equipment and access their account information from their own computer terminals via our Internet Web site.
While we do not provide trained operators with our rental equipment, we do offer audio, video, and written instruction materials for equipment usage and safety. We provide onsite repair services and 24-hour customer assistance. In addition, NationsRent locations sell parts and supplies to complement equipment rentals and sales.
Our size allows us to make sure that the latest, most appropriate equipment for the job is available when crews need it. Our retail-influenced, consumer-friendly showrooms offer convenient drive-through and delivery service. We seek to offer faster check-in and checkout procedures and require shorter lead-time for rentals than our competitors.
JM: Generally, people don’t really rent equipment; they rent relationships. A contractor who walks in here wants to talk to someone, wants to discuss the job, and wants to know that we’ll take care of his needs.
Look at Wal-Mart. When customers walk in a store and see the same guy that’s been at the door for two years and he recognizes them and asks how they’re doing, people like that. I think relationships are going to be the make-or-break point for the larger companies. The midsize company will continue to provide that personal relationship factor that people like so much.
We have a 24-hour emergency pager system, and if that doesn’t work, all our business cards have our home telephone numbers and addresses on them too. We once had a customer doing a night-pour of concrete in below-freezing temperatures, and we had a whole crew from Taylor Rental on-site at 2 a.m. with every heater we could get our hands on in order to save the job.
JF: Certainly service is key. There are many equipment rental companies out there, and the level of service that each one provides is different. I feel, as with anything else, that you get what you pay for. The equipment rental industry is no exception. We at The Cat Rental Store don’t claim to have the lowest rental rate. We do, however, feel that we offer the lowest-total-cost solution.
We provide late-model, low-hour, well-maintained equipment for our customers. In addition, we offer 24-hour service (at no additional charge), operator training, prompt delivery, and a pleasurable, hassle-free experience.
A customer might be able to save a couple hundred dollars a month on a piece of equipment, but if that equipment is old, poorly maintained, and the service response from the rental company is slow, lost productivity will quickly erase any savings on the rental rate. currently we don’t provide trained operators with the equipment, but it’s something we might consider in the future.
