Dealers Assess State of Equipment Rental Market

Mon March 31, 2003 - Northeast Edition
Pete Sigmund




The rental market, with rates unbelievably low, is “where the action is” in construction equipment.

Increasingly, contractors throughout the United States are renting construction equipment, rather than purchasing it, to protect themselves against the uncertainties of a weak economy.

As utilization of equipment falls dramatically in commercial construction, rental firms, fearing a glut of machines sitting idle, have meanwhile cut the rates which they charge customers to the lowest point in many years — so low that it’s hard to make any money.

Meanwhile, used equipment prices are down and the economic downturn of the past two years has all but stopped the wave of consolidations by large equipment-rental firms.

These are just a few of the features of today’s equipment rental market as the industry attempts to cope with mountainous financial stresses.

Construction Equipment Guide (CEG) interviewed top experts at industry associations to obtain a fuller picture of the dynamics of this market. Then it asked dealers in each section of the country specific questions, including:

Are their rentals increasing? How fast and why? Are they lowering rates? What are the main equipment rental trends?

Steady Growth

Historically, much more equipment has been purchased than rented. However, the number and value of rentals has been growing steadily.

Rental revenue grew to an estimated $23.5 billion for 2002 while equipment sales fell to about $18 billion.

“Rentals have been increasing; this is truly something which is driven by the customer,” said Dave Gordon, director of membership for the Associated Equipment Distributors (AED) in Oak Brook, IL. “Many customers prefer to rent rather than putting themselves in the position of owning something which, in a tight economy, they would only utilize for a short period of time.”

“Our 2002 rentals were better than 2001,” said Roland Mason, rental fleet manager for East PBE, a distributor in Newington, CT. He said factors influencing the rental versus purchase decision include the price of the machine and how much work the contractor needs it for.

Ken Felt, rental manager for Tracey Road Equipment, a privately-held large and small equipment dealer in East Syracuse, NY, said, yes, rentals are increasing but “at a slow rate; the weather and the economy are current factors.” Felt said availability, price and service backup are major factors in a decision to rent.

Frank Lang, general manager of TEC RENTALS, a division of Tractor & Equipment Co., a large rental company in Birmingham, AL, told CEG that rentals “are increasing at a steady rate of 3 percent to 4 percent each year.”

Approximately 80 percent of its revenue is from rentals and 20 percent from purchases.

Explaining the strength of rentals, Lang says: “We feel we have two types of customers: start-up companies that don’t have the capital to outright buy and maintain machines, and, secondly, established contractors that rent to supplement their existing machine fleet and for tax purposes. The economic slowdown affects their decision [to rent] because it brings uncertainty and because not as many contractors are [financially] able to make capital purchases. The rise in fuel costs also affects the decision [not to purchase].”

Kevin Eatherton, general manager of H.M. Dinzler Equipment Co., a construction and industrial equipment dealer (mostly small equipment) in St. Louis, MO, said that rentals account for between 50 percent and 60 percent of the company’s revenue. He said factors in opting to rent include: “Contractors don’t need to worry about maintaining or storing equipment or they only need the equipment for a short time. They also don’t have to worry about acquisition costs or insurance.”

The economic slowdown also favors a decision to rent,” he said, because “no long-term costs are involved” (in renting).

Mac Robinson, sales manager for APCO, an equipment dealer in Las Vegas, NV, said rentals this year are up 25 percent over 2002 and account for 60 percent of revenue, just the opposite of last year. He said customers are renting because of “the uncertainty of the economy, short-term usage, no long-term commitment and less problems with the insurance factor/bonding.”

David Keim, president of Four Seasons Equipment in Houston, TX, also reported that rentals are increasing, saying: “The demand is very good here in Texas.” He gave the following reasons: “The economy, maintenance provided by the lessor, short-term usage, and tax advantages with excellent depreciation.”

RECS Equipment, a dealership in Prosper, TX, is an exception. Though 90 percent of its revenues are from rentals, owner Corky Underwood said rentals aren’t increasing “due to large nationals discounting prices so far that profit-oriented customers cannot refuse the deals.”

A manager of RSC (Rental Service Corp.), a large rental house in Scottsdale, AZ, said 80 percent of the dealership’s revenues are from rentals, which are increasing because of maintenance costs and because demand varies from day to day.

The balance can tip in favor of sales in a lot of circumstances, however.

George Maggiolo, president of Formula Equipment Co., Rock Tavern, NY, points out, for instance:

“Our equipment company has recently taken on Hitachi, Kawasaki and Gradall as new accounts, pushing us into more equipment sales.”

Rates Hit Bottom

Rental rates (the rental charges) are based on factors like the type of product, the locality, and the demand. National equipment rental companies have reduced their rental rates markedly because there is less demand for equipment as commercial construction has slackened.

“In 2001, commercial construction, including factories and warehouses, was down 10 percent; last year it was down 20 percent, and most forecasts I’ve seen indicate it will be down 4 percent or 5 percent this year,” said Frank Manfredi, publisher of Machinery Outlook, a highly respected industry newsletter in Mundelein, IL, adding:

“When you figure that 20 percent or 30 percent of national rental company business comes from this segment, this significantly impacts their bottom line.

To keep utilization as high as possible, they keep lowering interest rates.

Meanwhile, most of these companies are highly leveraged and have to keep feeding the interest rate beast, so to speak. They have to pay more interest (to their lenders) than their more credit-worthy borrowers (customers). If the utilization rate doesn’t improve, the rental firm will probably sell off some of its fleet. That will drive the utilization rate back up, but loses the revenue from the machines. It’s a real complicated balancing act.”

Daniel Kaplan, founder of Daniel Kaplan Associates, a consulting group in Morristown, NJ, who provides rental analyses in the “Advisor Rental” newsletter of the Association of Equipment Manufacturers (AEM), believes rental rates have “hit bottom.

“Rates are ridiculously low,” he told CEG. “For the contractor, this has been a real opportunity, fostering the movement from ownership to rental. It definitely doesn’t pay to own.”

Kaplan told CEG that backhoe rentals, which once were $1,800 to $2,000 a month, have declined to a range of approximately $1,500 a month while 6,000-lb. forklifts have declined from approximately $2,400 per month a few years ago to probably $1,600 to $1,800 a month. He said the situation is “cause for concern:”

“The rental rates are at a level that it’s not profitable for the rental companies to rent. They don’t want to buy equipment because they’re not getting the cash flow to do that. Manufacturers aren’t selling equipment because the rental companies aren’t buying it. Everybody is faring very badly. I don’t recall this combination of dropping rental rates and dropping utilization ever happening before, and I’ve been around awhile.”

President of Hertz Equipment Rental Corp. from 1982 to 1997 and a respected expert in the rental industry, Kaplan also sounds a hopeful note: “I would say rates are stabilizing compared to past years but stabilizing at a very low, discounted rate, probably holding their own versus the fourth quarter of 2002. I would say utilization also is stabilizing and sort of coming back because they [rental houses] have reduced the size of fleets by selling off. I also believe rates will improve. They are real low now and contractors will benefit for a long time, but they are not going to stay at these ridiculously low numbers where hardly anybody can make any money.”

Manfredi also is confident: “Right now, we’re at the lowest point. I don’t think it’s going to get any worse. I think the rental companies will probably struggle through this year. Dealers will find their business kind of at a plateau, at a low level but not getting any worse. I don’t think we’ll see rental rates decline much more. And if you believe in the psychological effects of the war being relatively short, then we’ll be out of this thing by summer.”

Dealers Cope

Dealers are creatively adjusting to the rate crisis. Many refuse to lower rates any further.

“We’ve had no increase [in rates] in the last three years, but no downward trend,” said Tracey Road Equipment’s Ken Felt.

East PBE’s Roland Mason said that “rates have been flat for several years; we may have had a slight decline on select items.” Formula Equipment’s George Maggiolo said, simply: “Our rates offer a good value to our customers.”

Gregg Erb, sales manager of Erb Equipment in Fenton, MO, said he has been lowering monthly rental rates “to meet the competition,” but not daily and weekly rates.

TEC Rentals’ Frank Lang, on the other hand, says: “We’re trying to keep rates constant; however, rates are sometimes driven by supply and demand. We have no plans to lower rates.”

But H.M. Dinzler isn’t lowering rates, and doesn’t plan to.

“We are holding firm; we do not want a price war with the big [rental] companies,” said General Manager Eatherton.

APCO’s Mac Robinson says: “We are not reducing [rental rates]; in fact, we are thinking of increasing the rates due to supply and demand.”

B & R Equipment, Keller, TX, is not lowering rates because “all costs are going up and we need to stabilize the rates” while a small rental house in Alabama is “holding rates steady; actually, we’ve had increases in rates in the past three years.”

“We have no plans to lower rates,” said Four Seasons Equipment’s Dave Keim. “We don’t need to.”

The manager of a Mom and Pop store in St. Louis said, “Within the last couple of years, because of the nationals, rates are so low you can’t afford not to rent. We have adjusted rates on our main pieces of equipment to keep them active, but rates will start to come up a little now.”

RSC said it recently has been increasing rental rates, explaining, “Typically we match our rates depending on the demand. In the winter, we offer more of a competitive rate.”

Acquisitions Slow

The growth of large equipment-rental companies has slowed dramatically during the business slump. Between 1995 and 2000, these companies grew to comprise about 32 percent of the total rental market, and almost doubled their market share between 1997 and 2000 through aggressive acquisitions of “Mom and Pops” or other distributors.

The business slowdown which began in the second half of 2000, with declining stock values and shortages of cash, caused the large rental houses to rein-in their buyouts. A recent AEM “rental roundtable” discussion by key large rental houses said their operations now often include older fleets, increased in-house maintenance, low profits on used equipment sales and a move toward international operations and broader product ranges.

“Now, particularly for large equipment, the age at which it needs to be replaced tends to fall between six and eight years, on average,” said an AEM news release on the roundtable. Leading rental companies also have been reducing the size of their fleets, staff, and branches.

Views on Consolidations

Equipment distributors offer different perspectives about the movement towards consolidations and acquisitions by large rental firms.

“The trend will continue,” said Tracey Road Equipment’s Ken Felt.

“Consolidation has peaked,” said East PBE’s Roland Mason.

“Consolidation has seen its day,” said Formula Equipment’s George Maggiolo.

An anonymous St. Louis dealer said: “They’ve turned the industry upside-down. They’ve ruined the rates. They’ve allowed less-than-qualified contractors to enter the market, thereby driving down the profits of bigger contractors. But they’re experiencing their own dilemma right now that they have created. They have too much equipment and they don’t know what to do with it.”

Does he feel acquisitions will resume with a better economy? “No, I think they are hurting enough. Because of the rate of their debt, I think they’ll all go bankrupt and come out smelling like a rose just like they planned to.”

But the RSC manager said, on the other hand, that the movement towards consolidations is “a good move.” He added, “It gives the customers several options, depending on where they are at across the country. If they need to move somewhere else, they have an established account. It also helps the rental location itself because we have a pool of equipment we can pool from several locations rather than having to tie-up each individual dollar we have. Seasonally, we can bring equipment in or send it out to the West Coast when it is slow. That is a good thing for us. Before, we were just aerial equipment but now we have much more equipment.”

Said the owner of the small rental house in Alabama, who also requested anonymity: “Large rental houses have about destroyed the market. When the economy begins recovering, there won’t be a trend towards drastic acquisitions.”

Four Seasons Equipment’s Dave Keim said, “The Wall Street ’Roll-up Groups’ fell on hard times and then fell under their own weight.”

TEC Rentals’ Frank Lang said, “They [consolidations and acquisitions] are killing the market! Rental rates have dropped through the floor.” But he believes acquisitions will resume when the economy begins recovering.

Erb Equipment’s Gregg Erb said the movement toward more consolidations and acquisitions “is inevitable” and likewise feels acquisitions will resume in better times.

H.M. Dinzler’s Kevin Eatherton said, “Overall, they [consolidated larger firms] are hurting everyone because everyone is having to cut costs. Large rental companies are a thing of the past. It’s clear they have had difficulties staying afloat.”

APCO’s Mac Robinson said, “The large companies will not continue to overtake small and independents. The large companies are selling out of facilities and equipment. Large companies are in trouble with depreciating equipment over a 72-month period and the demand is not as great as their investment.”

B & R Equipment’s source does not expect consolidations to continue in an upturn: “They have had their day and did not know what to do with it except screw up the rates. They are not equipment people, but pencil-pushers.”

Corky Underwood of RECS said, “At the time, it [acquisitions] looked good to the sellers, but many took stock instead of cash and really lost their shirts when some of the nationals started hurting.”

Advantages of Large Firms

What are the advantages and disadvantages of large national rental firms?

Lang: “Advantages include coverage. Transient contractors can go anywhere and deal with the same company. Large rental companies also have a large backing of capital. Disadvantages include lacking customer service.”

Eatherton: “They offer more equipment to choose from but they lack knowledge and expertise. They are just out to get the business.”

RSC manager: “Advantages — the customers have access to several locations, making it a one-stop shop. We’re able to meet most of the demands of customers.”

Mom and Pop in St. Louis: “Advantages — huge inventory at cheap prices that we can’t compete with. Disadvantages for us are that the manufacturers are all catering to them and giving them great discounts.”

Erb: “Advantages — more of a variety of equipment, more of a one-stop shop. Disadvantages — historically, they do not have the large equipment but they are now starting to order more large equipment.”

Alabama dealer: “They have a large inventory to draw from but are lacking in customer service. It’s not a team-type effort, and the employees are there for a paycheck only.”

Advantages of Smaller Independents

What are the advantages and disadvantages of smaller independent rental companies?

Felt: “Local location; inventory is in our yard; personal relationship with customers.”

Mason: “Mom and Pops offer on-time deliveries and we can service what we put out on rent. As a rule, the chains cannot service what they rent.”

Maggiolo: “We offer better and faster service; we have factory-trained technicians; we offer a high caliber of equipment; and he [the customer] will see support from us down the road if he decides to purchase.”

Keim: “Independents provide personalized service to customers and their strength is based upon relationships with the customers.”

Erb: “Better service to the customer if they have the equipment. Quicker response time.”

Underwood: “Independents can make quick decisions and keep our promises.”

Eatherton: “Advantages include knowledge of personnel and ability to help customers make the right decisions. Disadvantages: It’s now harder to keep the business going.”

RSC manager: “Advantages include personal service that they are used to. They have a good understanding of what their customer needs are as it relates to their business.

The disadvantage is that it’s a tunnel-vision thing. They are only involved in that portion of it and they cannot financially put their neck out on the line. They can only look at the very short-term future. If we need to go out and acquire a million dollars worth of equipment, we’re pretty sure we can move it to another location. However, Mom and Pop, if they don’t have a need coming up within the next 30 days for that equipment, they are pretty much stuck with it.”

B & R Equipment: “Local independents can make decisions on the spot to work with a customer whereas the large nationals have to make a corporate decision.”

Robinson: “Independents normally have fewer turnovers in employees, which allows the customer to know the people with whom he is dealing. Locals can make immediate decisions where large nationals cannot.”

St. Louis Mom and Pop: “More personalized service, more customized service and purchases. We’d rather spec out a machine. Financially, our obligations are different. We are used to the up-and-down cycles. Most of us smaller guys have been around long enough.”

Lang: “They offer a better level of service, know their customers well, and many have extremely longstanding relationships with customers. The disadvantage is that customers are dealing with an individual who may not have the capital to back his inventory.”

Alabama dealer: “They are there for the customer anytime day or night and weekends too. The disadvantage is they have credit-line constraints and cannot provide huge fleets of equipment.”

Main Trends

Dealers were asked to identify the main trends in equipment rentals. Here’s what they said:

Keim: “Rentals will remain strong with individual independents. The national groups have caused a glut on the used equipment market.”

Erb: “The contractor rents the higher priced equipment and owns/purchases smaller equipment.”

Underwood: “Fewer machines doing more work with proper attachment.”

Eatherton: “Rentals will stay strong. The continuing issue of price wars.”

RSC: “The market is saturated with rental equipment. Therefore the market rates have decreased; therefore the return has decreased. The demand is less and less. The consumer is actually driving the rates. It’s a trend that has been spiraling down for the last couple of years.”

B & R Equipment: “Rental is a continuous trend. The European countries are at 75 percent to 80 percent rental and we have a long way to go. Bonding, insurance, maintenance etc. all affect the rental market.”

Robinson: “Longer terms and fewer rent-to-rents.”

St. Louis Mom and Pop: “Very unpredictable; don’t have an explanation for it. More trends towards smaller equipment and attachments.”

Lang: “There seems to be a trend in specialty rentals; i.e., only specialty equipment, not a one-stop shop — finding a niche market.”

All the dealers said they offer rentals with purchase options. Many, but not all, said this was increasing in use. Robinson said it is increasing “with some restrictions such as a six-month window to purchase.” Underwood and B & R Equipment said it is not increasing.

The RSC manager said options to purchase are increasing “because we have reformatted it to make it more attractive to the customer strictly because of the way the economy is. They don’t have the dollars to tie-up immediately. They will choose at some point to buy it and we try to make it attractive at no obligation and they are not penalized either way.”

Dealers also identified other, special market forces affecting rentals.

“One market force is that new equipment dealer organizations are writing up deals that are known to be rentals as sale,” said Underwood. “The customer is able to rent at a discounted rate due to the holdbacks on an equipment sale.

Also, the UCC is signed as well as the warranty showing a greater share of the market. Then the machine comes back into the dealer’s rental fleet if the renter does not purchase.”

“A lot of contractors have become general contractors,” said the St. Louis Mom and Pop owner. “They have gotten out of the equipment business for the most part where the subcontractor has to supply the equipment, specialty jobs and specialty equipment.”

Surviving

Using terms like “absolutely,” “most assuredly,” and “most definitely!!!,” almost all interviewees, both from large national firms and small independents, said traditional rental houses can survive the competition, especially in the earthmoving field.

“We can survive but we have to work harder and smarter,” said Erb. “We have better knowledge; they have higher turnover.”

“Yes, if they are smart about the business,” said the RSC source.

“Yes, if they have enough financial backing,” said Lang. “They’ll be around when everyone else packs it in.”

“Only by dancing with the Devil,” said Underwood when asked if traditional rental houses can survive the competition.

Product Support

The related last question was: Can independent operations offer as many products, introduce new models as fast, and provide as good or better product support as the large national rental houses?

“We beat the chains in all those areas,” said Felt. Mason also nodded, “Obviously we can. We have been doing it for 10 years.”

“Yes, because we specialize and we are the dealer, we bring the new products to customers faster than chains ever will,” said Maggiolo. “Because we have the manufacturer’s support, we will always offer better product support.”

RSC gave the large rental house viewpoint: “No, economically they can’t because they are tied into certain products they are used to carrying and products they are comfortable with, as opposed to making a risk experiment because of the financial burden.”

Lang, also heading a large rental firm, said, “No, by virtue of smaller capital. National companies can move equipment from branch to branch anywhere in their national network. Small companies don’t have the capital to do this, unless some vendors are real aggressive and can help them out.”

Keim gave an opposing viewpoint: “The local independent, especially one that represents a brand name, is better, due to having the readily available parts, and our service technicians have been factory-trained. We deal with a product line — not multiple samplings of everything that was bought at a bargain price.”

Corky Underwood, who has been in business for 20 years, stated: “The average independent has more dedicated staff with longer tenure, which promotes more professional service. It’s not profitable to have an excavator tech working on a water pump. We try to turn the large chains into customers by offering specialized equipment not offered in their fleets.”

Erb said his company could offer as many products “but we don’t want to; we want to focus on our core products; in fact, we are eliminating the less-profitable products.”

B & R Equipment said independents “are typically much better due to understanding the needs of the equipment — having better-trained mechanics, more field service and better check-in procedures with seasoned employees — not some kid that does it part-time.”

APCO’s Mac Robinson said: “Independent dealers can charge less since there is no intermediary. Our techs are factory-trained and we have trained ’rental return’ where large independents typically don’t. At this time, we have three units in-house to be fixed for National.”

“It’s kind of iffy on offering as many products and introducing new products as fast,” said another dealer from Alabama. “However, I think independent operators can offer better support, which the people like, and can respond to getting the machine in someone’s hands quicker.”