The struggling economy is having a significant effect on the rental industry. How great, and whether it is actually a positive or negative effect overall, is a contention among manufacturers and rental companies.
As with many businesses, a slow economy reduces the overall business.
Factors that directly affected the slump in the construction industry, according to Rental Service Corporation (RSC), include the tough winter and wet spring experienced by many parts of the country, and the aggressive consolidation and large inventories which remained from the economic boom of the late 1990s. “To exacerbate this problem, many of these companies were publicly traded and experienced stock devaluation and capital reductions,” said Doug Wilson of Vermeer.
According to Allmand Brothers, to reduce its capital investments, contractors try to make do with the equipment they have or rent equipment to handle their demand.
However, according to Toro Dingo, the past year’s economy probably had little effect on the rental industry, believing that from a contractor’s standpoint, the whole purpose of rental is to avoid long-term cash flow commitment, such as the cost of repair and downtime. Contractors inherently look to rental to meet their short-term equipment needs, increasing rental business.
In addition, equipment with highly demanding applications, like earthmoving equipment, will always be popular in the rental market regardless of the economy, sources said. This is because contractors want someone else to worry about repairs and maintenance.
“Rental remains a good option to help maximize machine utilization, lower capital to free up operating cash and lower the risks associated with project costing,” Wilson noted.
Allmand Brothers said that larger, well-established contractors who have plenty of work lined up will buy equipment rather than rent regardless of economic conditions. While they can take advantage of deals and financing offered by dealers and manufacturers, and walk away with a significant asset, “Smaller, less well-established contractors will lean more toward rental during economic slowdown due to the uncertainty that exists and not wanting to make the capital investment,” said Allmand Brothers.
“However, less overall work in a slumping economy means less overall equipment usage, decreasing rental business,” the company continued. “More dependence on rental allows the business to remain constant or at a slight growth, while many other businesses experience decreased revenue.
“Rental stores, realizing a drop in their rental activity are, reducing rental rates in order to create the desired level of equipment utilization,” said Allmand Brothers. The longer this situation persists, the more rental fleets depreciate and wear out.
Contractors that are not purchasing equipment, and rental stores that are not replenishing their fleets, also reduce demand for new equipment from manufacturers. “Consequently we are seeing more consolidations amongst manufacturers as they find it more difficult to handle the reduced volumes along with dramatically declining prices,” said Allmand Brothers.
According to Toro Dingo, while rental overall will experience minimal fluctuation from a slowing economy, there will be winners and losers. “The most successful rental stores are those that acknowledge economic trends and run their business accordingly,” said the company. “Investing in equipment that presents a growth opportunity for rental is one primary way to grow rental business in a slow economy.”
For Rental Service Corporation, the most important things to look at are costs and time length. “A good rule of thumb is if a customer is going to use a piece of equipment more than 70 percent of the time, he or she should probably own that piece of equipment,” RSC said. “Anything under that, leasing or rental options are the best bet.”
However, just like when purchasing a car, the investment will always depreciate. “So, a customer must make sure he or she is going to get the company’s money’s worth and get out of that piece of equipment what’s been put into it,” RSC noted. “A customer needs to make decisions that make his or her business money.”
According to Roger Euliss, president of MultiQuip, there is another factor closing the gap between rental and sales figures this time around. “Equipment auctioneers are having record sales of good used equipment, so the rent versus purchase ratio may not be so much different,” he explained. “It may just incorporate more used purchases in the mix.”
While contractors are more likely to forgo making long-term purchases and opt for the benefits of rental during lean economic times, “Due to the current strength in the used equipment market, the demand for rental equipment is temporarily lower,” said Wilson.
According to a number of companies, the key to the future of rentals for, dealers, distributors and manufacturers will be service. “Finding, more effective ways to provide service to our customers along with providing more reliable equipment will continue to be the key to success,” Euliss commented.
In the future, Wilson sees an improvement. “As the economy improves, the secondary markets will decrease in volume, the capital budgets of our rental customers will improve and they will begin to replace older equipment in their fleets.”
Euliss added, “The rental industry is still a strong one and an industry that has weathered the impacts of tough economic times before. There is no doubt in my mind that it can bounce back again.”
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