Maturing industry

Feb. 18, 2002

Chalk it up to youthful exuberance, but the construction equipment rental industry seems to have set itself up for a fall—with the worst possible economic timing. The days of fast growth, skyrocketing hopes and big multiples are over, and the days of lean economic times are here, though the economy may be already on the road to recovery.

Chalk it up to youthful exuberance, but the construction equipment rental industry seems to have set itself up for a fall—with the worst possible economic timing. The days of fast growth, skyrocketing hopes and big multiples are over, and the days of lean economic times are here, though the economy may be already on the road to recovery.

“There’s no question in the past years that rental companies have been growing very rapidly, because we have a general industry trend that more people are renting than buying,” Art Droege, president and chief operation officer of Rental Service Corp. (RSC), Scottsdale, Ariz., told Roads & Bridges. “And, of course, the rental companies have built up very large businesses, have been buying fleet from the manufacturers for rental at a very rapid rate and, as a natural result of this, our fleets have been getting younger.”

And the rental companies had good reason to buy: there was plenty of demand for their service.

Then the economy took a surprise turn for the worse and the rental companies wanted to reduce their capital spending.

“I think several of the rental companies bought a lot of equipment over the last several years thinking that the economic boom over the last eight to 10 years would continue, and it has slowed down,” Jerome Meier, president and CEO of Rentmaker Inc., Waltham, Mass., told Roads & Bridges.

“As a result, as a rental company,” he continued, “one of the first things you do in a slowdown is start to either age your fleet or sell some of it off.”

Aging the fleet is the rental industry phrase for increasing the average age of the equipment in the fleet, either by buying less new equipment, by selling less used equipment or by standing still and letting time pass.

“It shouldn’t surprise anybody that we took a similar road,” commented Droege, “where we had a relatively young fleet and we were going to age it a little bit. I think many of the rental companies have done this, and this has put tremendous pressure on equipment manufacturers.”

Droege said he had talked to some suppliers whose sales were off by 50% or more.

The rise of the independent rental company offering short-term rental of equipment has been the phenomenon that has gotten all the press, and the trend is likely to continue, but the manufacturer’s dealer is still a popular go-to guy for renting, according to a recent survey by Equipment World magazine.

The manufacturer’s dealer was the most popular place to rent six of the top 10 most popular equipment categories. A national rental company beat out the dealers for renting construction pumps (the third most popular type of rental equipment), air compressors (8) and telescopic handlers (10).

The other top popular rentals, where renters still go to manufacturers’ dealers, were backhoes (1), skid steers (2), excavators (4), ride-on compactors (5), wheel loaders (6) and dozers (7). In the remaining category, cranes (9), renters prefer to go to a specialized crane rental dealer.

The most popular manufacturers consisted primarily of the “usual suspects”: Case, Caterpillar, Deere and JCB for backhoes; Bobcat, Case, Caterpillar and New Holland for skid steers; Case, Caterpillar, Deere and Komatsu for excavators, wheel loaders and dozers; and Bomag, Caterpillar, Dynapac and Ingersoll-Rand for compactors.

Mike Bruch, rental marketing manager for the North American Commercial Division of Caterpillar, told Roads & Bridges that Cat dealers had been renting equipment for 30 years, but those were mostly long-term rentals to heavy construction companies.

“Five years ago, Caterpillar, working in conjunction with our dealers, worked on a strategy to develop what we call the Cat Rental Stores” that would focus on short-term rentals. “We also asked them to expand the products that they’re offering, so not only do they offer the Cat equipment but they also offer what we call allied equipment, which is really a variety of different products, none of which compete with the Cat equipment.” Allied equipment might include air compressors, light towers, aerial lift equipment and concrete equipment to fill in the other tools a contractor needs to do a job.

Cat also asked the rental stores to go after a broader customer base than the company traditionally had pursued.

Yours, mine and ours

The rental market is not nearly as concentrated as the manufacturing business. Rentmaker’s Meier estimated that the top 100 independent rental companies have 25-30% of the market.

“In the last, let’s say, two years, we went through a period where the consolidators bought up the best companies that were for sale,” said Droege. “There were also a lot of very good companies that just weren’t for sale.”

And the race to consolidate may actually have slowed, partly because of the recession and partly because the companies that were good prospects have already been acquired.

“The trend has stopped a little bit because, first of all, the multiples were getting too high,” said Droege. “This thing got a little bit rich.”

The multiple in an acquisition is the ratio of the company’s sale price to its earnings. Droege said the recent sale of Brambles Equipment Services to National Equipment Services (NES) went for a multiple of a little over two, whereas common multiples used to be more like six.

The sale of Brambles to NES might be a sign of a trend toward more consolidation at the top of the industry. NES was the sixth largest rental company on a list assembled last year by Rental Equipment Register. Brambles was No. 9. The top 10 biggest rental companies on the list were, in order, United Rentals, Rental Service Corp., Hertz Equipment Rental Corp., NationsRent, Sunbelt Rentals, NES, Maxim Crane Works, Neff, Brambles and ICM Equipment.

NationsRent, headquartered in Fort Lauderdale, Fla., filed for bankruptcy protection on Dec. 17, 2001. The company plans to restructure its debt and continue to operate.

NationsRent declined Roads & Bridges’ request for an interview about the company’s recent bankruptcy and reorganization.

May I cut in?

While the emergence of short-term rental may be a new phenomenon, another way to look at the rental companies is as a parallel distribution channel to traditional dealers. One aspect of being part of a distribution channel is that rental companies, like dealers, will have to give feedback to the manufacturers on what the customers are looking for from the product in terms of design features and benefits, and herein may lie a rub.

“I perhaps think that one of the weaknesses of the rental companies has been not to give the proper feedback to the manufacturers,” said Droege, who spent most of his career in a manufacturing business. “I think you will see a trend in the future where the rental companies will appreciate that they will have to start taking the place of how it used to work” between contractor, distributor and manufacturer. “I think we have to make a closer partnership to solve that problem, not only for the end-user of the machine but the manufacturer of the machine.”

It hasn’t resulted in a major problem, said Droege, but manufacturers have confirmed to him that the communication could be better. After all, the manufacturer wants to have the product the customers really want.

Cat’s Bruch also talked about communication between renters and manufacturers via rental agents. His view was that the ultimate customer was the same whether the piece of equipment is sold right away or after being rented for a while, so the rental process should not affect the product design.

And, of course, part of the Cat Rental Store transaction is to talk to the customer about the features and benefits he or she wants from the equipment and what the customer’s equipment needs might be in the future.

Hard lessons

“This is not helping the industry,” Droege commented, referring to the financial troubles of NationsRent and other rental companies. “But I think it’s maybe a signal to everybody that the rental industry is not foolproof.”

The flip-side of aging your fleet is that the fleet—surprise—gets old. As Droege put it, “It’s like lettuce in the refrigerator. Sooner or later, when it gets a little brown, you’ve got to replace it.”

Droege indicated that RSC might begin increasing equipment purchases in spring: “Sometime in March, we’ll start taking delivery on certain pieces of equipment.”

If the industry is lucky, the general economy will begin to pick up and last year’s interest rate cuts will begin to kick in at about the same time they have to start replacing their “lettuce.”

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