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“Our strategy has been to flank the competition in the tool market, not go head-to-head with them,” says Steve Nelson, who left his job as president of
TruServ’s rental business unit in December 1999 to buy the Taylor Rental Center in Bradenton, Fla., and try his hand at running a rental store according to a model he had developed over 25 years in corporate work.
“Their rates are too low to compete with. So our strategy is to forget the contractor unless we can establish a relationship with him and maintain that relationship without basing it on rates.
“In fact, we have raised our rates — and they were already high. We have focused on the homeowner and party business. And then in the equipment business, we take what remains on the table.
“Unfortunately, in the contractor business, most of the customers are price-sensitive. The price-sensitivity is being bred into them — not just by the consolidators, but by all the contractor-oriented rental businesses. Maybe they can operate at a level of efficiency to permit that, but in my opinion, that style of operation does not fit the financial environment of the small rental store.
“I think you need to set your rates where you can operate with a reasonable level of financial efficiency and you market to support those rates, but you don’t get so focused on price that it starts to override the financial productivity of your business.
“We’ve just raised our prices pretty significantly in the event and party rental business, recognizing that we have a premium product and we are after a premium customer and we want to get a premium price. We know we won’t get them all, but we are going to make more from those we do get.
“Less is more. We learned that in Florida the business cycles even more than it does elsewhere. The equivalent of winter in the North is summer here. Summer may be 50, 60 percent of what
you do in the winter. And there is another down cycle in January — they’re partied out from the holidays.
“So our first year, we experienced months that were $60,000 and others that were $120,000 in revenue — that’s a pretty big swing when you’re trying to maintain stable employment.
“And we discovered that you can make less money at $120,000 than you did at $60,000, because of the extra loads you place on the business.
“So we’re trying to stabilize this. We want to have months that don’t deviate very much from $70,000 or $80,000, which means that we will be passing on some business we were taking in the $120,000 months, and we will have to improve the $60,000 months with some more emphasis on marketing.
“Our operating system is engineered to support that $70,000 to $80,000 level of activity. When you stress it at $120,000, it operates so inefficiently that it really influences your financial productivity.
“Cash flow as a percentage of sales absolutely peaks at around $70,000, with 13 people and three delivery trucks — all the fixed components of our operating system. When we had a $120,000 month, cash flow dropped from 30 percent to 18 percent. We had a ton of overtime, twice as much manpower expense. To do that level of business you have to be at places like the Tampa Art Museum at 2 in the morning picking up a load — you have to go outside your market area, increase manpower and fuel expense — in fact, all of the variable expenses move up.
“The way I put it to our employees is that we were a little rental store trying to act big for a month, and what was it getting us? Nothing. Why do it? Less is more. Let’s look for 10, 15 percent increases in a month, not 45 percent. Let’s not try for that — let’s try to avoid it.”
And just how do you avoid it? How do you control the level of business? With rates, and that takes steady nerves, because it means you are going to purposely price yourself out of the market for perhaps a third of your potential volume. Nelson shrugs it off.
“The last $30,000, $40,000 of business is people who are all price-sensitive — they’re the institutional-type customers who want you to be out there at odd hours, want free delivery, all sorts of things that make that piece of business less profitable,” he says. “So if you raise your price, you knock those people out and you are left with the people who are willing to pay the price. If you have a $120,000 opportunity, you can probably do $80,000 with people who are willing to pay the price.”
Nelson is sticking to his game plan — revenues were $71,855 in January and $77,217 in February, right on target.
“So I have completely rethought the whole idea of growth for the sake of growth,” says Nelson. “All growth does is make me feel good at a cocktail party. You know, ‘Oh, we were up 50 percent in November,’ sounds good, but it doesn’t mean anything unless profits were up, too.”
“You might open a second warehouse to handle extra volume. But
you’d add a lot of fixed costs and operating expenses — building rent, utilities, management costs, trucks, employee costs — and you exacerbate the problem. You would do a lot more sales, sure — you would have to — and you might feel more efficient, but you would be making a lot less money.
“When you’re growing, you get excited. And the excitement leads to spending. And you lose your ability to tightly plan your business. You start buying things and that whole financial picture gets real fuzzy. It’s really easy to find yourself up 40 percent in volume, but see no matching growth in profit, because your growth and spending have taken control out of your hands.”
So to keep control in hand, Nelson monitors three key metrics — “There are three that are most important,” he says. “Out of these three come all the rest:
“1. Inventory utilization. That tells you how your marketing program is working. If you’re underutilized, that really tells you there’s a defect in your marketing plan.
“2. Employee costs divided by net revenues. Everything else in this business is either fixed or so standard that there really isn’t anything you can do to influence it. The only significant expense that you can use to control cash flow is your personnel costs. We’re riveted to that here, right down to the week. The manager has a dollars-per-manpower-hour that he’s expected to get.
“3. EBITDA — cash flow, the actual cash contribution to the business. We manage that very tightly. We’re planned at 26-percent EBITDA for 2001. It was 20 percent in 2000, but the 6-percent difference was stuff that was pretty much non-recurring. In 25 years of corporate work, I was always responsible for a profit center — always, my whole working life.
“But there is a big difference between managing profit and managing cash. When you have responsibility for the whole business and it’s your money, you’re mainly interested in managing cash. You never worry about that in a big corporation — all you have to do is turn in your profit. Not so in this [independent] business — cash is king. You can’t just issue a debenture and get operating capital that way. No, you’re into the old personal bank account!
“I’m on the counter 40 hours a week. I mean, that’s what you have to do if it’s your money!”
Before going to ServiStar, Nelson worked for the late L.S. “Sam” Shoen, who founded U-Haul. From him, Nelson learned a simple bit of wisdom that has guided him ever since.
“Sam told me that it doesn’t matter how big a business is, it’s really just the sum of individual transactions with individual people. You need to make each customer
smile — you have to know what you need to do to make those people smile — and you have to know, in every one of those transactions, where the profit is coming from.
“And then you have to put a whole bunch of those individual transactions together, whether you’re building a million-dollar business or a billion-dollar business.”
So Nelson has used that simple creed to put together a rental company that is pushing toward a million dollars in revenues and a 26-percent cash flow on a 2-to-1 sales-to-inventory base in the first year of operation, with one location and 13 people, and he’s perfectly willing to turn down $40,000 of monthly business if it means diminishing returns. Is this an average rental store?
“I think this is a perfectly average rental store,” says Nelson. “That’s what I want it to be. It’s all basics. I’m managing it to be a perfectly average rental store.” |
