Rental Industry Has Become a Clash of the Titans By Frank Manfredi
Article Date: 01-01-2008
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.
While manufacturers and national rental companies arm wrestle for control of this channel, 2008 looks to be a swing year, one analyst predicts.
The U.S. rental industry is changing in two ways. First, 2007 markets are still strong but will probably be the peak year with 2008 being a swing year. I expect the U.S. construction equipment rental industry revenues to top $37 billion in 2007. Rental companies' ability to increase prices is peaking.
I expect the 2008 rental industry revenues to be flat to down slightly. In deflated dollar terms, industry revenues are expected level with 2007. Rental rates are up marginally, fleet utilization is still high and rental prices have reached a peak.
A major rental demand driver is nonresidential construction. We are all familiar with the recent meltdown of the housing market, down more than 30 percent compared with 2006; however, nonresidential construction markets are up 10 to 12 percent compared with 2006. The consensus of opinions among construction economists is that nonresidential will continue to grow in 2008. It will eventually be affected by the housing downturn, but components of the nonresidential segment are still very robust: manufacturing sector up 60 percent; hotel construction up 75 percent; office construction up 22 percent. This all leads me to believe it will be OK in 2008.
The second change occurring in rental is how the whole industry is embracing and taking ownership of this market channel.
I've been following the construction equipment rental industry for nearly 20 years. AED members have progressed in their thinking about this channel-to-market from denial, to believing that it might be a trend, to outright adoption of rentals for their business.
Distributors were at first concerned with the entry of the publicly owned consolidators. United Rentals was one of the first. Prime, which changed ownership and names several times and morphed into RSC, was among the second wave. NationsRent, started by business magician Wayne Hysinga, who consolidated the waste-hauling business in the 1980s, jumped in soon after, but not soon enough. Rental companies and a fair number of distributors who sold out to the consolidators early got the best prices for their businesses. The more traditional equipment sales companies struggled with understanding the rental business model and then finally began opening rental operations.
Who will actually own these massive businesses? Carlyle owns Hertz. Lightyear Capital owns Neff. Ripplewood leads a group that owns RSC. Cerberus made a bid for United, but is trying to back out of the deal. Private equity firms are typically interested in three-to-five-year strategies for their acquisitions. They buy it, build it up quickly, and sell it to the next guy. The national rental companies that are more stable have private owners or are rental-focused companies that are willing to pursue long-term strategies. Examples in this group are Sunbelt, Ahern and Sunstate.
Clash of Titans
Today, the national rental companies on one side of the marketplace are squared off against the equipment manufacturers. It's kind of like a so-called "Mexican standoff" with both sides facing each other at point-blank range with sawed-off shotguns. They are both trying to become one-stop-shops for their customers.
Manufacturers are promoting rentals of their products through their "authorized" distributors. It took years for full-line equipment manufacturers to recognize rentals as a new channel-to-market. The more enlightened ones finally saw it as a means of exposing their products to the marketplace and increasing their brand population. There is a current effort by manufacturers to have their dealers become one-stop shops. Caterpillar and its dealers are promoting the Cat Rental Store brand as a means to sell their compact products, along with about 70 other brands that they do not manufacture but they believe their customers want. Volvo is franchising Volvo Rents outlets to sell their products and about 70 other allied brands. Komatsu is in the process of promoting its compact products through Komatsu Rents stores.
Facing off are the "national" rental companies. They, too, see themselves as the one-stop shops for their customers. They're not interested in promoting any single manufacturer's brand. They are promoting equipment utilization. When a customer wants to dig a hole, they've got the machine to do it. If it breaks, they'll bring out another one. They commoditize equipment. They want the customer to be loyal to their company not a manufacturer. One rental company, Sunbelt, paints all its equipment a bright green color; they are promoting their business as a brand, not the manufacturers' products.
Large rental companies typically buy large amounts of machinery every year to replenish their fleets. Collectively their annual equipment spend is enough to get the attention of most of the manufacturers. In 2005, the top 10 rental companies spent roughly $4.5 billion on new equipment (usually called capital expenditures, or Cap-Ex by Wall Street). It appears that 2005 was the peak year for rental company Cap-Ex. I expect the nationals' 2008 Cap-Ex to come in at approximately $2 billion.
Making large annual equipment purchases gives the rental companies tremendous clout to dictate prices and terms. In fact, in certain categories, the national rental companies dominate the market for equipment. For example, they purchase 70 percent of all the telehandlers and aerial work platforms sold in the U.S. Demand swings like that wreak havoc with a manufacturer's factory and their suppliers. Production schedules bounce up and down like a yo-yo. Some manufacturers have reported recently that their sales to rental companies are down as much as 70 percent. What's a manufacturer to do? They're trying to gain control over the rental business.
We can look to other countries for clues as to what might happen in North America. In Japan - where, for years, 65 to 70 percent of new equipment was sold into rental fleets - the manufacturers have slowly taken over the rental role by investing directly in the rental companies or through their surrogates, the trading companies. In the U.K., another intense rental market, rental companies provide their own service and parts functions. The equipment distributors' role there has been diminished to wholesale activities only.
The U.S. market is not going to change overnight. It's taken 20 years to get to where we are today. I believe the struggle between the rental companies' efforts to dominate their markets and the manufacturers' efforts to control their production, prices and terms are being played out right now.
I'm not ready to predict how long the national rental companies will dominate the U.S. rental industry. It may be forever. But of the top 10 rental companies, nine are owned by private equity firms, which, are usually impatient investors. Manufacturers are increasingly impatient with being whipsawed on price, terms and volume by the national rental companies. I think that in the next 10 years we will witness another reshaping of the channels-to-market with manufacturers attempting to gain more control of their brands.
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