Maturing industry

Equipment rental market caught in economic shake-out

Air Compressors Article February 18, 2002
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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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