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Editor’s
Note: The following presentation was given at the
American Rental Association Convention in Orlando, Fla.,
in February by Dan Kaplan of Daniel Kaplan Associates
and former president of Hertz Equipment Rental Co. His
consulting firm advises corporations on strategies for
entering equipment rental and assists existing rental
companies from independent stores to multi-national
organizations on improving operations and financial
performance. This is the first of a three-part series.
Part I
A small rental company
can compete against a rental giant if it focuses on
fundamentals. However, I have been to more than 100
rental yards in the past three years, and I would say
that fewer than 5 percent are really doing it right.
People want to be competitive, but they don’t run
their rental operations efficiently and strategically
and don’t use the software and the assets they have.
So let’s take a very
fundamental, back-to-basics approach to the rental
business. I can assure you that if you do what I’m
saying — and it’s not complicated, it’s very much
basics — your rental operation will improve.
In one rental company I
saw a piece of equipment that I knew was a problem. The
company paid $200,000 for it, but didn’t have the
software to analyze the utilization rate and the returns
on it. When we went to the accounting department and
looked at the numbers, they were burning away $35,000 a
year — just as if they had thrown the money out the
window. The company was losing money and didn’t know
how to turn the situation around.
I went into a rental
company that was doing maybe $600,000 in annual revenue.
The owner was sitting behind the counter. The store was
not clean and it was disorganized. I said, “I can help
you.” The guy said, “There’s nothing I can do.”
Now, if you believe
that, you’re never going to improve. I said, “You
need a salesman. You have a salesman here?” He said
no, he couldn’t afford a salesman. I told him that’s
why he was never going to get out of the bind he was in.
We’ll get back to that.
But first, please
understand this: for the most part, your competitor is
not the giant rental company. Your competitor is the big
box. The giant rental company is after a big industrial
or national construction customer. They’re not after
homeowners or small contractors. You think you’re
competing with them, but you’re not. They’re not
into customers who are doing, let’s say, $15,000 a
year or less. They’ll take that customer, but they’re
not targeting that. They’re into larger customers.
The big box is your
competitor. The big box can hurt you. The big box is
after the same customer you’re after.
Let’s take a look at
how a large rental company is organized. There’s a
president and then several distinct areas of
responsibility — a chief financial officer; a VP,
marketing; a VP, fleet operations, who does all the
buying and selling of equipment; a VP, field operations;
and under that, regional managers, controllers, sales
directors and so on — experts in different areas, all
attacking the business. What they do that you don’t do
and you could do is ‰ From Page 41 they constantly
attack their business, trying to improve it — working
at measurements and finding ways of improving, looking
at utilizations, finding out what equipment is renting,
which equipment isn’t renting and doing something
about it.
Big rental companies
have between five and 10 regions and the regions are
essentially independent profit companies. Why do they do
this? To bring management intensity down to the store
level so they can see what’s going on and effect
change. In a typical region would be eight to 25
branches; or in a very large giant, a region may have
100 to 120 branches, broken down into districts.
But big boxes are
organized independent of each other. They do not share
equipment, they compete city by city and they do not
drive utilization. The rental giants drive utilization
by moving equipment between stores. They use their
software to move their equipment.
One of the real keys to
success in the rental business is driving time
utilization to affect rental rates and looking at asset
utilization and making moves. So they move it. The big
box has a fleet of equipment and the stuff sits. So they
really are working somewhat at a disadvantage in that
they don’t move the equipment to drive utilization,
and if something breaks they don’t really have the
capability of repairing it.
Also, they cannot store
the larger equipment outside. So they’re not going to
go into light towers and 185-cfm air compressors and
even mini-excavators and skid-steer loaders — they can’t
display and store it.
But they’re dangerous
to the small rental store because they are very, very
price-competitive and probably the low-cost producer —
but only for a limited product offering.
Can the typical A.R.A.
member — the independent rental company — compete
against the rental giant and the big box? Yes.
Let’s look at the
purchase price, the depreciation schedule, the interest
rate and then the time-utilization assumptions. I would
say that a rental giant buys on an average of probably
12 percent better than you are, and may be getting
extended warranties, some marketing support — some
enhancements you’re not getting. But the main thing
is, they are strategic buyers.
But you go to the A.R.A.
show, you walk around, you see something at a good price
— a show special — and you buy it. Next year you
come and see something and you buy that. You are
building a totally inconsistent fleet. You don’t think
about what you’re going to do, you don’t fleet-plan
what you’re going to do — and you don’t build
relationships with the vendors.
If you went up to a
vendor and said, “I’m a small buyer, but I’m going
to stay consistent from year to year and I want to fix
on your company. How can I work with you? I want a
relationship with you.” That vendor will work with you
— not just the rental giants.
But you buy this, you
buy that, you have spare parts all over the place — it’s
inconsistent, you’re not buying intelligently. It’s
within everybody’s wherewithal to be a strategic
buyer. You just have to think and plan and not jump
around.
Whoever it is you want
to deal with, form a relationship and make a commitment
— I don’t care if you’re buying $100,000 a year,
stay in a strategic direction and form a relationship
and let them know that is where you are coming from, and
they will work with you.
All of the major rental
companies depreciate their equipment over the useful
life of the asset and many independents basically
expense the equipment. From an accounting point of view,
they have an advantage over you because they’re taking
like one-seventh of the cost with a 10-percent residual.
So from an accounting perspective, I think you are
putting yourself at a penalty. You really need to work
with your own CPA to understand how to establish your
books and account for the assets — and know what the
machines are really costing you. Your software can also
help you here.
The giants have an
advantage on interest rates. They’re probably on
average of at least 3 percent better than you are on the
cost of interest. And then they apply a debt-to-equity
ratio. So let’s say a company has $500 million in
assets. They have like a million worth of equity and
they borrow the rest, so if the interest rate is, say,
10 percent on a four-to-one debt-to-equity ratio, they
would be basically paying interest of 8 percent — so
they’re sort of mitigating some of their interest
costs. This is important when you figure out what it
costs to put out a piece of equipment.
Now, dollar utilization
is rental revenue divided by first cost of equipment.
The big industrial- or construction-oriented rental
companies run around 43 percent and the ones who are
less construction-oriented run in the high 60s. Their
time utilization averages about 65 percent. When I was
at Hertz, every single day I knew my utilizations. You
can’t run a rental company without knowing your
utilizations — I can assure you that all the major
rental companies know what they’re doing every single
day. They are able to drill down on any piece of
equipment and see the time utilization, the ROI rate, in
various sections of the country. You have the software
to do this, except you haven’t taken the time to learn
to use it to help you run your business.
I would say that the
average A.R.A. member’s dollar utilization is probably
around 125 percent. So if you have an inventory of
$500,000, your rental revenue is probably in the range
of $625,000 or $650,000. But your fixed overhead as a
percentage of revenue is much higher. Your time
utilization is very low.
A lot of rental dealers
pride themselves that they have whatever a customer
wants to rent, even if they rent it once a year. That
does not make sense to me. Why in the world would you
want to have something that you couldn’t put out and
make money on every day? I have dedicated myself to
looking for assets that have weak ROIs and get them out
of the fleet. I don’t want one thing that isn’t
going to make me money.
This is really the heart
of understanding the business. If you have a piece of
equipment out on rent, there are really two parts of the
cost — direct costs and indirect costs. Direct costs
are depreciation, interest, parts and labor. Everybody
has that. Let’s say you have a $10,000 machine and
that rents for $400 a month. Essentially $200 a month is
going to cover depreciation, interest, parts and labor.
The next 37 percent — or roughly $134 — covers your
indirect costs; that’s your operating expenses —
your facility, cost of sales, marketing administration.
You really need to
understand what it costs to put out a given piece of
equipment so that if you want to be competitive against
a large company on rate, you can figure out what’s
going on.
On an incremental basis,
if you didn’t charge yourself that indirect cost, your
cost to put out a machine or piece of equipment would be
less than it is for a rental giant. It just depends on
how one applies indirect costs.
So if you can raise your
fleet level — in other words, if you can go from
$500,000 to $700,000, get $200,000 more fleet in there
— your direct costs are going to move, your indirect
costs are not going to move, and you become
incrementally more profitable.
Dig into what I’m
saying, because it’s the fundamentals of how to
increase profitability in a rental center. If you have
one store or you have 500 stores, the same principle
applies: every day, figure out how to put more equipment
into that fixed-cost operation. It is very, very
important to understand what it costs to put out a given
piece of equipment.
Your rototiller may have
a basic dollar utilization of 250 percent, but because
of all of the costs involved in handling it, the
cleaning and how many rental agreements you have to
write and the processing of it, it may not be a really
cost-effective item. I could show you that I could put a
backhoe out at a 43-percent dollar utilization and for
the money, make more money than you can with rototillers
because I put it out in the month of March and I won’t
see it again until the month of December, and meanwhile
you would be processing a 100 rental agreements for the
rototiller, cleaning it 100 times, billing it 100 times,
writing rental agreements 100 times — and you would
need people to handle it all.
So really understand,
truly understand what your business is all about. Don’t
try to operate the business yourself. I see owners out
there erecting tents and fixing equipment. What they
ought to be doing is getting into this and thinking
about how they could improve the business — using
their brains to make more money instead of using their
hands to try to save a few bucks.
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