The forces of change

Contractor preferences and rental house consolidation have spawned a boom in rental equipment that is changing the distribution marketplace

Fleet Maintenance Article December 28, 2000
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Equipment distribution is one of the most dynamic sectors of the construction industry. The Internet and e-commerce are forces that loom on the horizon. But it is the rental market that is changing the way the industry works today; so much that it is forcing the marketplace to reevaluate its traditional roles and find ways to work within this environment.

Although rental is nothing new to the industry, changing contractor preferences brought on by changing tax laws, bonding company policies and the highway industry’s move from new construction to rehabilitation are shifting the focus away from equipment purchasing in favor of short-term rental. In addition, the subsequent consolidation of independent rental houses, under the umbrella of nation-wide companies, has given the consolidators significant leverage in equipment purchase negotiations.

Five years ago, rental houses accounted for approximately 5% of all construction purchases. Today, that number has jumped to around 12% and soon could represent 15 to 20% of the market. According to industry analysts, in just five years rental could account for 40 to 45% of construction equipment purchases.

"Rental has become an alternate form of distribution that has fundamentally changed the way products get distributed in this country," said Frank Manfredi, Manfredi and Associates, Mundelein, Ill. Manfredi’s company has conducted three studies on the rental market for the Oak Brook, Ill.-based Associated Equipment Distributors (AED).

The shift toward rental is simply a case of economics, according to Bob Miner, vice president of strategic planning for Greenwich, Conn.-based United Rentals Inc., the largest equipment rental company in North America with revenues of $1.22 billion in 1998. "Generally, it is more economical for people to rent than it is to own equipment, unless they are going to use that equipment a large percentage of the time," Miner told ROADS & BRIDGES. "What renting does is it matches the contractor’s use of the equipment with the ownership of that equipment. If a contractor needs a piece of equipment 40% of the time, he can rent the equipment and only pay for ownership 40% of the time. He doesn’t have to pay all the penalties of owning it 365 days a year if he’s only going to use it 75 days a year.

"What’s happened is that over time, people are becoming more aware of the hidden costs of ownership and are doing a more economical evaluation of what it costs to own versus rent. They are finding that renting is a very attractive option. That’s what’s generating the bulk of the growth in our industry."

Storage, maintenance and down time are examples of the hidden costs of ownership while convenience, the ability to use the latest equipment models and safety are added benefits of rental. "Plus you can rent a specific piece of equipment that is best suited for a project instead of trying to make a piece of equipment [you own] fit the project," said Miner.

Opposition or opportunity

The reality of the situation for traditional equipment distributors became clear in September when AED held an executive forum on rental and distribution. The meeting was somber in tone as distributors heard discussion about the impact rental will have on the distribution market for years to come. "Their available market is shrinking," said Manfredi, "and rental rates are beginning to compete with the sale of new equipment."

"What you have on the part of dealers is a realization that they can no longer pass a product through without added value," said Al Cervaro, vice president of marketing and member services for the Construction Industry Manufacturers Association (CIMA), Milwaukee.

"You have to take added value to your customers," Tom Bennett, chairman and CEO of Houston-based Rental Service Corp. and Prime Service Inc., two large rental companies who were both purchased by Atlas Copco earlier this year, told those gathered at the AED forum.

Price, a broad-based distribution network, the ability for a customer to make one 800 phone call and have a transaction completed, as well as having a nationally recognized account supervisor, were examples given of how his companies provide added value.

"I think the dealership network is going to be forced to change," Miner said. "They are not adding as much value. The dealers need to rethink their business and perhaps restructure themselves as service and parts suppliers rather than order takers that don’t really add value."

Service, maintenance and repair of rental equipment are being identified as areas where dealers may be able to capitalize on the need for the large rental companies to keep their equipment in working order.

"You have a complete changing of the environment with certain types of product lines," Cervaro said. But while some dealers may opt to sell rather than meet the need for change, others will turn to partnering with their competing distributors. "Traditional distributors need to find a cost-effective way to provide major maintenance for rental companies," Cervaro said. "Rental companies are in business to do one thing: rent equipment. They have to keep their equipment serviced and new. I don’t see why traditional distributors can’t partner with other distributors to provide service for the consolidators on a regional basis.

"Most of the top five rental companies have $1 billion in equipment and add between $300 million and $350 million in equipment each year that they have to do heavy maintenance and repair on," said Cervaro.

Acknowledging that change can be disconcerting, Cervaro maintained that distributors should not deem rental companies as competitors, but as the source for further business opportunity.

Service contracts were cited as a viable plan for dealers by Bennett. "Service," said Bennett. "Who is going to service the equipment? What we need from the dealer body are services. This is a real opportunity for dealers."

According to Cervaro, the need for maintenance by rental companies and the talk of service agreements has given rise to the discussion of what is being referred to as a kind of "Jiffy Lube program." In effect, these programs would provide a prepackaged service product for the larger rental companies. The question is how the maintenance would be performed. Costs would make it prohibitive to transport equipment to a maintenance site. According to Cervaro, a system likely to result is one in which mobile maintenance trucks travel to the rental site to perform maintenance work.

If you can’t beat ‘em . . .

The saying goes, "if you can’t beat ’em, join ’em," and traditional dealers are looking to do just that. In addition to offering rent-to-own plans, equipment dealers also are considering renting equipment for the shorter term.

This being said, of the distributors surveyed in The CIT Group’s 2000 Construction Industry Forecast who said they provided rental equipment, more than half said they expect their fleet equipment to be part of rent-to-sell plans rather than the rent-only option.

"Nobody can be in the construction side of the business today without addressing rental," said James E. McCullough, senior vice president of Case construction equipment, Racine, Wis. "The rental guys understand what access and availability means to customers. Contractors are becoming very asset management focused, where they weren’t before.

"I’m convinced dealers can no longer play in traditional rent-to-own," he said. "Dealers today need to be more asset managers."

McCullough told ROADS & BRIDGES that Case is working with its dealers to help them enter the shorter-term rental side of the market, but the concept is not a new trend. "In California, for instance, you can’t be a dealer without being in rental," he said.

The West also provides a prototype for what may become a more common practice in the near future. According to McCullough, for years the Hertz equipment rental company in Las Vegas has acted successfully as both a rental company and a Case dealer.

On the plus side for distributors, The CIT Group forecast noted that more contractors expect to turn to distributors in 2000 than in 1999 for their rental needs: 18% versus 14% in ’99.

Kevin Rodgers, president and CEO of National Equipment Services, Evanston, Ill., supports dealers making their way into rental. "There’s an energy to [the rental] business that wasn’t there on the distribution side," he said.

The energy Rodgers spoke of is fueled in part by higher profit margins. "You’ll receive better return on a well-run rental business than a dealership," he told attendees at the AED forum. "You can make money at rental, but you need to provide short-term rental and long-term rentals."

Road side less affected?

While the rental boom is shaking the equipment distribution to its core, its impact may not be as significant when it comes to highway construction equipment. According to CIMA’s Cervaro, roadbuilding equipment is not as affected by the rental trend because much of the equipment used in road construction, such as pavers, compaction equipment and crushing and screening equipment, are not high rental items.

Lighter construction equipment used on road projects are popular rental items. "I have been on many construction sites where I’ve seen telescopic handlers and skid-steer loaders in use," said Manfredi.

The steady economy and the strong outlook for continued growth in highway construction as a result of federal surface transportation legislation, the Transportation Equity Act for the 21st Century (TEA-21), are further reasons given for the lessened impact of rental on the highway side. According to Cervaro, with funding for road construction remaining strong, road contractors are getting a high rate of utilization from their equipment, which lessens their need to rent. "The whole rental issue is driven by utilization," said Cervaro.

On the other hand, rental companies are being drawn to the highway construction sector for these same reasons. Rodgers’ National Equipment Services is targeting the highway market as a growth area for the company. "There is a lot of rental in rehab for roads and bridges," he said. "With the passage of TEA-21, we think that part of the business will be less cyclical versus residential construction, etc. We expect to get 20% growth, mostly in specialty equipment."

Out from the back 40

Consolidation of independent rental houses is leading the equipment rental market from The Waltons to Wall Street. "Prior to consolidation, people looked at those guys as being off in the back 40," said Cervaro. "The bar has been raised significantly because of consolidation. Instead of 15,000 customers, manufacturers now have 12,000; the other 3,000 now consolidated into five companies."

What is driving consolidation of rental houses? "Simple economies of scale," said United’s Miner. "We get a tremendous amount of purchasing power on what we buy. So we can buy a specific piece of equipment for 20 or 30% less than a small rental house can. We have a tremendous competitive advantage in that marketplace, simply because we can buy equipment cheaper, we can share it amongst our branches and drive the utilization of that piece of equipment up.

"We can get better margins. We can put in sophisticated data and management information systems that a small guy couldn’t afford. There are many benefits of size that give you competitive advantages in the marketplace—lower cost to capital, access to capital—all these things in a capital-intensive business are going to drive consolidation, and it’s kind of remarkable that it never happened in this industry until the last three or four years."

Consolidation is a phenomenon taking place not only in rental but on the manufacturer and dealer sides as well, according to Rental Service Corp.’s and Prime’s Bennett. "Large manufacturers are buying smaller manufacturers and large dealers are buying small dealers."

"I think you’re going to find manufacturers consolidating as well," said Miner. "When you go out to a trade show you don’t really need 23 vendors of the same concrete saw out there. You don’t economically need 15 versions of a skid-steer loader. I think the natural economics of industry will exert influences on the dealership network, the user network and the manufacturer network over the next five or 10 years; in dramatic fashion."

Can we expect the demise of the traditional distribution network? Not according to Manfredi. "As we move forward, I don’t think we will ever see the day when companies abandon their fleets, particularly those with a high rate of utilization," he said. "But the net result of this is likely to be that less equipment will be sold through traditional channels."

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