What All the Consolidation Means for Contractors

Looking back, the industry’s total revenue for 1984 has been estimated at $1.1 billion by the Associated Equipment Distributors. Contrast that, if you will, with a current total of $22 billion, which is the figure estimated by Daniel Kaplan, president of Daniel Kaplan Associates and former president of Hertz Equipment Rental.

Kaplan says the top 10 companies now take in 26% of the industry’s revenues. In recent years, those 10 companies acquired nearly all of the nation’s regional rental houses, many of which had revenues on the order of $50 million per year. Consider that United Rentals, whose $2.2-billion annualized revenue run rate makes it the largest rental company, was just founded in October 1997. And now the company has more than 700 stores in 44 states, six Canadian provinces, and Mexico. Yet despite all the consolidation, more than 12,000 companies today offer rental equipment.

Contractors Win

Construction contractors derive several benefits from all of this consolidation. The first is lower rental rates. In fact, fierce competition among rental stores has prompted what might be considered price wars in some areas. And to be sure, the resulting lower rates have fueled much of the growth in the construction industry.

Bill Wagy, equipment manager at Granite Construction Inc., says the level of consolidation in the industry is still such that the rental-equipment market is “fairly price competitive.” However, warns Wagy, “If it gets too consolidated, that advantage might go away once [a few large companies] control the market.” Based in Watsonville, CA, Granite rents $6.5 million to $7 million of equipment every year but owns the vast majority of its fleet.

Another benefit to contractors: They get better geographic coverage from larger rental companies that have stores spread over the nation. A contractor can bid and obtain work in territory that is new to him, based on the fact that his existing rental company – or another one – will have one or more stores in the new area.

What is more, contractors are going to receive later-model equipment when they rent from a major rental company. “Our fleet is an average age of 25 months old,” says Bob Miner, United’s vice president of strategic planning. “Contractors can do more with less because they’re going to get newer, more productive equipment from United Rentals.”

Improved product support and service are other benefits that contractors can realize from large rental companies, Kaplan points out. He says many rental companies offer 24-hour, seven-day-a-week repair service.

Another significant force in the rental industry is the manufacturers’ dealer organizations, where Caterpillar Inc. has emerged as a leader. Under the logo of Cat Rental Stores, Cat dealers have opened a total of 230 rent-to-rent stores in North America. The company’s goal: 350 locations by 2001. In all, manufacturers’ dealer organizations rent equipment from some 3,000 locations.

Time-Warp Speed
The pace of consolidation has been astounding. United became the largest equipment rental company in North America when it merged with US Rentals in September 1998. Including that acquisition, United has grown to 722 stores in about two and a half years. “It’s our belief that a lot of operating efficiencies result from becoming larger,” says Miner. “We obtain more purchasing power with the manufacturers by being larger. We can share equipment among branches and get greater utilization that way-another benefit of being larger. And you can sell equipment more efficiently.

“It was our desire to be a large company quickly in order to get these operating advantages,” he continues. “When you do a cold start [of a store], it takes time to build a customer base and become profitable. But when you acquire stores with good management-and we only look for stores with good management in place-you are profitable immediately.”

Another of the original consolidators is Rental Service Corporation (RSC). In six years, the company has grown from a $10-million firm to one with $400 million-plus in rental revenue. “It was done with a very aggressive consolidation posture, as well as same-store growth,” notes Bud Howard, RSC’s senior vice president of sales and marketing. “But absolutely the dynamic growth came from purchasing other rental companies. We bought Center Rents in Denver a couple of years ago and Valley Rents in Phoenix. We were buying five, six, seven companies per month.

“Don’t get me wrong – we’re still buying companies. We will still buy 15-20 companies a year, and maybe more.” Last August, RSC was purchased by Atlas Copco, which also owns Prime Equipment Company, another of the top 10 rental companies.

“We now have nearly 300 stores just on the RSC side,” Howard states. “Our policy is to focus on same-store growth, but we’re still actively and vigorously pursuing acquisitions. At last count, Prime had 183 outlets.”

Neff Rental, another of the top 10 rental companies, has 86 locations. In 1997 the firm acquired Buckner, which had 26 stores. And in 1998, Neff bought eight separate rental companies for a total of 26 stores. Last year Neff bought three companies for a total of nine stores.

At Sunbelt Rentals, new store start-ups have played an important role. “We’re not in the consolidation game,” claims Chuck Miller, marketing director at Sunbelt. “We’ve doubled our size in the past 24 months, but a large percentage of that growth has come through opening greenfield stores.” As its name implies, Sunbelt concentrates on the Southeast-from New Jersey down to Florida and as far west as Alabama, Tennessee, and West Virginia. In that area, Sunbelt has opened some 40 greenfield stores in recent years.

Is there a particular reason Sunbelt has chosen the greenfield route? “We’re good at it,” Miller replies. “We have clusters of locations in key markets. Three years ago we had one store in Charlotte. This year we’ll have eight. In the Washington, DC-Baltimore area we have 17 locations. In Atlanta we have eight locations. We could have 84 locations coast to coast, but we’ve chosen to develop a high concentration of stores in one region because our product mix lends itself to the customer mix in that region.” He says the cluster concept of stores is important to Sunbelt. With a number of stores in an area, the company can ensure that a wide range of products is available in a given market. “Our customers are homeowners, light contractors, construction contractors, and specialty contractors.”

“We have almost 1,000 products in our approved range,” Miller says. “Most of our stores have 600-700 different product types to offer. And when you have that kind of broad product and customer base, you need lots of locations positioned to service the customers. If you’re a customer in the Charlotte area, no matter where you are we can service you.”

How Construction Works

Having equipment that’s available for use right now fits with the nature of contractor demand, explains Miner. “It’s much more likely that a contractor who wants a piece of equipment from us can get it right now. We do a lot of equipment sharing among stores because customers need equipment immediately. That’s how construction works. Because we have clusters of stores in a given area, right now we can easily find a piece of equipment by looking at a computer screen.”

That advantage is what Howard calls “security of supply.” “In the old days, if a contractor was concerned about availability, he had to go buy a machine. Today he’s got options. We’re a bigger company and we’re more likely to be able to provide what he needs when he needs it because of the size of our fleets.”

Terry Fox, purchasing agent for Flatiron Structures Company, a Longmont, CO, contractor, says his company has a national agreement with Hertz Equipment Rental. Flatiron spends an average of $790,000 a month on rental equipment. “We get a rebate as a percentage of the rental,” explains Fox. “We rent excavating equipment, pumps, trucks, water trucks, traffic control boards, and more. Around the country we probably use 30 different Hertz stores.”

Is there an advantage in Hertz’s larger size? “I think so,” Fox remarks. “I think it’s a definite advantage. You get low rental rates across the board in the United States. Availability is good. You don’t have to call three or four rental houses to see what the best number is. You get your best number on your first phone call.” As for how Hertz’s rates stack up, he says they “come close” to being as low as Flatiron’s internal rental rates.

Fox likes the fact that Hertz has clusters of stores in many different markets. “In one area, there can be 10 or 15 stores. You might have one contact at one store, but as big as Hertz is, they will pull from their other stores in the area to meet your needs.”

In the Kansas City, MO, area, rental firms’ expansions have made it easier for an out-of-town contractor to come into the area and take work, says James Foreman, chairman of Victor L. Phillips Company, a local Case dealer and rental company. The availability of rental equipment “enables contractors to work in areas where they weren’t able to work before,” Foreman points out. He says a major contractor based outside the Kansas City area has obtained the contract to build a new stock-car racetrack in Kansas City, KS. “They’re doing it with rental equipment from a national rental company,” says Foreman.

Fierce Rate Competition

In some areas, consolidation has prompted hot competition over rental rates. “What I see happening is that there’s a big battle among companies that used to be independents,” says Steve DiLoreto, vice president of rental operations for FMC Rents in Downingtown, PA. The firm, owned by Komatsu dealer Furnival Machinery Company, has two rental stores and is in the process of opening a third store.

“In the beginning, one major national company bought up just about every aerial lift company in the area,” says DiLoreto. “They started to bring rates up in the beginning, but now rates are back down again. You have all these salesmen hitting on jobs.” He says his competition has rented a 60-ft. boom lift for $1,700-$1,900 a month, though it should rent for $2,800-$3,000 a month. And he cites the example of a backhoe that should rent for $2,000 a month but is being rented for $1,200 or $1,300 a month.

“Sometimes a rental company will offer a lower rate and bump equipment off a job,” says DiLoreto. “It can happen when somebody comes along and offers a better deal-they’ll kick that equipment right off the job.

“The rental industry is still in the learning stages. Some rental companies are learning how low they can cut rates and still make money.” Sooner or later, he says, rental companies will look at the situation and say, “We’re not getting our money, we’ve got to get our rates up.” If rental rates continue at such low levels, companies will have to keep equipment for longer than they should to give it time to pay for itself. That will lead to rundown equipment that either won’t work or won’t provide good value for a customer.

DiLoreto says FMC Rents depreciates its new Komatsu earthmoving equipment over seven years and sells it after two years. “After two years, we know what an excavator will bring on the street, and we know what its value is on our books. We have generated a piece of used equipment for Komatsu to sell. We make money when we rent it and we make money when we sell it. And then we replace that machine in our rental fleet.

“Komatsu makes money when it sells us a replacement machine for our rental fleet,” continues DiLoreto. “So now Komatsu has two pieces of equipment in the market – the one that was rented and sold and the new machine that’s now being rented. And what’s one of the top priorities of manufacturers? Market share. So it’s a great deal for everybody.”

Hot competition on rates? “It’s always been that way,” says Miner.“If you look back a couple of years, you don’t see much price appreciation. This has never been an industry that’s grown significantly with price increases. We have a rather unique management system. Individual store managers decide rates. We compensate the branch staff on the net return on assets under their control. If a manager wants to lower prices and increase volume, he can do that. If the business is profitable, he gets a chunk of that profit. The manager has incentive to get the maximum return on the store’s investment in the equipment. So to the degree that he cuts his rates, he might be cutting his profit and earning less profit-sharing money for the branch.”

With regard to rates, “We also have a rapidly growing national accounts program,” Miner points out. “But we are not focused on providing the lowest-cost equipment. We provide a number of services, and they all cost us money – modern equipment, training for contractors in the use of that equipment, online access to account information, and more. We rent a wide variety of equipment, so we are not focused on lowball prices but rather on providing higher-value services at reasonable rates.”

When asked about rate competition in the industry, Pete Gladis, executive vice president of Neff Rental, had this to say: “Some of the larger rental companies attempt to discipline their pricing. Unfortunately, some [companies] are not integrated and do not make this a priority. Weakened pricing has accelerated the concept of renting versus ownership.”

The Importance of Service

So how do the major rental companies do in providing service for their equipment? “Service is the key, and it includes not only equipment maintenance, but credit, ease of transacting, sales support, activity analysis, and transportation,” Gladis states.

Remarks Sunbelt’s Miller, “It’s not if the backhoe blows a hose, it’s when the backhoe blows a hose that we have to be ready to fix it. We believe the ability to service the equipment is an important part of our business.”

Providing good service is one important reason for staffing a cluster of locations and several service trucks in a given market, Miller believes. “In the Charlotte market, we’ve got 14 service trucks. If you have a machine that breaks down, we can be there quicker than the next guy and that’s what’s going to separate the men from the boys in the future. It’s not who’s the biggest, it’s who can service the contractors the best and the fastest. [Those are the companies that will] grow in the rental business.”

Not everyone believes that the major rental companies are set up to offer a high level of equipment service. “The area where they cannot compete is in product support,” says Foreman of Victor L. Phillips Company. “We’re better at product support because we represent the manufacturers whose equipment we rent-Case, Ingersoll-Rand, Hyundai, and Kawasaki, to name a few. We have access to parts and current product-service training.”

Some professionals in the rental industry point out that newer equipment should not need as much service. “We expect that with a later-model fleet, service will be more available but less necessary,” observes Howard of RSC. “The field service requirements of newer equipment are fewer.”

What does the future hold? “We’ll continue to expand our fleet to generate organic growth and acquire and open stores,” says United’s Miner. “We continue to benefit from this long-term trend of equipment users turning more and more to rentals instead of buying to fill their equipment needs.”