Dan Kaplan On The Dealer Side of RentalWRITTEN BY PAM GRUEBNAU
Article Date: 03-01-2007
Copyright (C) 2007 Associated Equipment Distributors. All Rights Reserved.
Consultant and former Hertz Rental CEO Dan Kaplan talks about the 2007 rental market, how dealers can compete in rental, and why he says the $10 billion rental company is imminent.
What are you forecasting for equipment rental in 2007?
Kaplan: I expect 2007 to be a good year; surpassing 2006 will be difficult, but possible. Revenues will be up, rental rates should increase in low single-digit range. The rental fleets will grow at a lower rate than we saw in 2006. Capex spending of North America’s 10 largest rental companies will decrease 22 percent in 2007 compared to 2006. There are three fundamental things that are very positive for the rental industry today.
Professional management: Rental companies have professional staffs today; they don’t have to be mechanically oriented. They are sophisticated sales people, software people, IT people and utilization specialists. They are Wall Street-oriented. They are not just looking at putting equipment out there and hoping it gets rented. Today’s rental company CEOs spend more time on investor conference calls, SEC issues, and quarterly earnings releases. They have to be articulate and financially astute.
Rental software: One of the major strengths of rental companies today is their software. Rental companies are using software to maximize utilization of equipment and to better manage and control pricing.
Increased penetration: As more end users move from equipment ownership to equipment rental the rental industry grows. In 2006, I estimate penetration was 40 percent and I expect it to reach 50 percent by 2010. The bigger rental companies like United Rentals, Hertz and RSC are driving it. Even companies like Home Depot are having an effect but on a smaller scale. As the larger rental companies expand their geographic coverage and provide bigger and more varied fleets, the need to own equipment diminishes. Additionally, these larger rental companies are becoming more professional, and providing a higher level of service to the customer. Their sales teams are actively converting the customer; they are increasing penetration.
CED: You work with AED dealers to help them improve their rental performance. What are the major challenges AED dealers are facing in their rental operations?
Kaplan: I use to be a stranger at AED. When I came to speak about rental, the dealers looked at me like I was from outer space. Now those dealers greet me as a friend and a colleague because they know rental can help them be more successful. I’m happily viewed as a friend. I always was, but they didn’t appreciate the message in the past.
Now dealers realize it’s critical that they have rental as part of their businesses to survive. Dealers are embracing rental and getting better at it. They no longer look at rental as evil; it’s now a fundamental part of their businesses.
Today, dealers are operating their rental companies the way most rental companies did in the mid-90s. That’s okay, but they’re competing with companies that have invested heavily in processes and become highly proficient. RSC has done Six Sigma on every aspect of the business. Dealers are going to have to become very professional in their rental operations to compete.
I recommend that the dealer’s rental operation be a wholly owned entity of the dealership and have its own operating statement, its own service bays, and its own mechanics. It should function as a part of the dealership and be measurable in every way. It should look and act like a rental company.
As far as software is concerned, AED’s Rental 2006 Study found 70 percent of dealers were not using rental-specific software. I find that amazing. The rental companies got where they are today because they were able to use rental software. I feel strongly that dealers cannot operate successful rental operations without rental software—not dealership software, general business software, or something they get from their manufacturers. I recommend that dealers purchase an off-the-shelf rental package. It’s not expensive; you can put it in for $30,000. It will pay for itself in four months, even if you’re running two separate systems.
Another challenge facing dealers is getting dollar utilization up. (Dollar utilization is rental revenue measured annually, divided by the original equipment cost.) Anything a dealer can do to improve dollar utilization will drop right to the bottom line. If on a $1 million rental fleet dollar utilization is 40.7 percent, you’re getting $407,000. But if your dollar utilization is 65.1 percent, you get $651,000.
Among the major rental companies Neff has a dollar utilization of 57.9 percent, Sunbelt is 61.4 percent, Hertz is at 65.2 percent and United Rentals is 65.1 percent. But a survey I read said the average AED dealer’s dollar utilization is about 41 percent. My estimate of the breakeven for a dealer rental operation is 37 percent. So they’re making money, but they can do better.
Dealers should strive to improve their dollar utilization. To do that, they have to get their rental equipment out for longer periods of time. This is an area where dealers can excel. They have the customer base already and it can be expanded. Dealers should remember their fixed costs remain the same. The more equipment they can rent in a fixed cost operation, the more money will drop straight to the bottom line.
CED: What roadblocks do dealers face when it comes to developing their rental businesses?
Kaplan: Manufacturers haven’t given dealers the support they need, except for Caterpillar and Volvo. Only Caterpillar and Volvo are embracing rental. The other manufacturers don’t have programs to help their dealers be successful in rental. Manufacturers need to step up to the plate and make sure the distribution system is successful.
Volvo has 72 operations as of today in North American and Cat has 449 stand-alone rent-to-rent locations in North America; 1,461 in the world. Caterpillar has made a science of rental.
CED: We’ve seen lots of changes with the larger rental companies, not the least of which is a move toward private-equity ownership. How do you see that impacting the equipment rental industry?
Kaplan: Private equity’s primary goal is not necessarily to grow market share and grow the business; they want to increase return on capital and returns to their investors. Today, private equity owns four of the larger equipment rental companies in the world – Hertz, Neff, NES and RSC. In 2006, RSC and Hertz had the best years in their entire histories for both revenue and profit. In 2007, both companies are reducing capex spending budgets to generate more positive cash flow.
CED: What about consolidation? Do you see the largest rental companies continuing to get bigger?
Kaplan: I predict some of the large rental companies will be significantly larger in years to come. For instance, look at Sunbelt buying NationsRent. I predict there will be more consolidation in the top 10; the consolidators will further consolidate. With that will come more efficiency at the operations level, more pricing pressure on vendors, and a larger rental industry overall.
United Rentals is now at $4 billion. By 2010, I predict we’ll see rental companies in years to come with revenues from $5 billion to $8 billion, and it’s possible that the largest rental company could get to $10 billion.
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