Editor's Note

This discussion was taped at an industry forum sponsored by Rental Management at the A.R.A. convention in Anaheim, Calif., in February. The discussion was led by Richard Paquette, 1999 president of A.R.A. and president of Pyramide Rental Centers, Chateauguay, Quebec, Canada, with four branches in the Montreal metropolitan area. Participants included Thomas E. Bennett, chairman and CEO, Prime Equipment and Rental Service Corp., Houston, with 500 branches; Stan Crumbaugh, president, Independence Rent-All, Independence, Mo., with five branches; Skip Evans, CEO of RentX Industries, Denver, with 69 branches; Mike Frost, Sunbelt Rentals in Douglasville, Ga.; George Gartner III of F.W. Gartner, Houston (six branches); Troy Gabriel, vice president ­ operations, NationsRent, Fort Lauderdale, Fla., with 182 branches; Carlos Ibañez, president, Carlos Ibañez Arriendo de Maquinaria, Santiago, Chile (nine branches); Jay Lageschulte, S & M Rentals, Phoenix, and 1999 A.R.A. chairman of the board; Tom Price, president of Grand Rental Center, Pueblo, Colo., two branches; Jeff Wearing, president of Ready Rent-All, Decatur, Ga., and chairman of the Construction and Industrial Services Special Interest Group; Frank Wilson, president, Frank Wilson's Tents & Events, Augusta, Ga., and A.R.A. president for 2000; Richard Young, president, Young Rental Center, Harvey, La., with two branches; and Jim Ziegler, former president of Rental City, Boulder, Colo., prior to its recent acquisition by NationsRent; RM Publisher Fred Anderson and Editor Brian Alm.

We encourage readers to join in the discussion. Contact:

Brian Alm, Editor

Rental Management

1900 19th St., Moline, IL 61265

e-mail: brian.alm@ararental.org

Topics of discussion included economic or market forces that may be forming to place new demands on construction and tool rental, the rate of growth of the rental industry, utilization rates, the outlook re. consolidation, the future of the independent, the impact of manufacturing companies' rental operations, product-support relationships with equipment dealers and the positive effects of cooperation between large and small rental companies.

Paquette: A lot of economic pressures are pushing the construction rental industry in different directions. Where is it going and what rate of expansion should we expect?

Evans: Although we may think that the construction and tool rental industry is mature, it's not. There are so many contractors out there, so many people that are still buying equipment. If you look at the difference between the U.S. market and the British market, everybody in the United Kingdom rents. Very few people own their own tools.

Paquette: Is that 80 percent number accurate?

Evans: Yes, 80 to 90 percent of the equipment on the job site is rented as opposed to owned. Absolutely. At some point we will get there and I think the way that everybody is going to get there is the majors have the capital to advertise and to get out the word that rental is available and it will help all of the small stores, it will help what we refer to as the Mom and Pop, the people under a million dollars. We are also an industry that is need-driven and also convenience-driven, so if a customer lives closer to this store and that store has it, that's where he's going to go. We will make that pie so much bigger that it will be enough for everybody.

Paquette: We're not a mature industry at this point. What would be the indicators if we were mature?

Evans: When 80 or 90 percent of all the equipment sold is to a rental house.

Bennett: There's a lot of comparison between the U.S. and the U.K. Look at the rural areas that we're dealing with compared to the U.K. - especially on the construction side. We're asked that question all the time, when will we get there. Is that really a relative question? Are we saying that some day everybody is going to be out of the ownership business?

Gartner: So are we talking about a shift of ownership - a shift from the contractor to the rental yard? We're not talking about more equipment being sold, right?

Frost: Well, not unless construction goes way, way up. That's what consumes the equipment.

Bennett: The question really is how big is the pie and of that how much is rental going to occupy. The larger corporations really like to create that cash and want to get out of the ownership business. They want to be able to use somebody else's tools and equipment on a just-in-time basis. For a refinery [for example] to own equipment today is almost absurd. I think there are some strong drivers in the market, so even if the construction market doesn't get any bigger, there's still a lot of opportunity in the rental market.

Paquette: It's been bantered around, the size of the rental market, but there have been no real studies that have come up with the answer. Are we a $20 billion industry in the United States? Are we bigger than that?

Frost: We talk about the size of the pie. I think there's two ways that we're increasing that. One is lower rates [to] bring more people into the rental business. It's more economical for them to rent the equipment than it is to purchase it. That's one way we can increase the size of our market. Or another way is to find new areas where they are not renting equipment. I think that's what would be more profitable - that's what we have to do. As to what aspect, how much bigger our market can become, I don't think we know because we're all going after the same markets. We're not really diversifying into newer areas that we could be going into. We're not seeking those as fast because our economy is good.

Wearing: I think you've got to give a lot of credit to the big conglomerates that have taken over. They have made Wall Street aware of rental and they've done a lot to help us. We've got a lot to look at as far as future growth is concerned in the United States, if the statistics are true. What was it, 50 percent have still not rented? That may be because we still have a vast and comfortable economy - people can store and buy equipment - but I think that will change as time goes on.

Young: I think we can hope that companies like NationsRent and Prime keep spending these millions of dollars on marketing, because I think it's going to help us all.

Wearing: I feel a lot of the national chains [have presented] a better image for the rental industry [and] have helped the small individual, the small independents, in many cases, and [have brought] more awareness to the rental industry.

Bennett: Absolutely. No doubt about it. I think the level of awareness is positive for everybody. The customer awareness of this industry has grown. Now they have another option. I've been in this business for 35 years, and you know, we used to rent an old broken-down air compressor as long as we could - if we could crank it up and make it run, it went on rent. Today they won't accept that. The whole industry has changed. You know the home market has changed. They expect good-quality, fresh new fleet, on-time deliveries every time, and they expect it to be fairly priced. And [all] that has become a standard, so now it's a good option. Outsourcing [and the] industrial sectors [are] driving this industry, as well.

Lageschulte: Why did Atlas Copco decide to buy these companies in the rental business?

Bennett: Atlas Copco [Sweden] is a very large manufacturing company - multi-billion - with slow growth. The average growth rate is 4 or 5 percent per year, and investors are sitting over there saying we need to do something with this cash. We have to put it in play and it was a very strategic acquisition - they came in and looked at a lot of different things, not only equipment rental companies, and after studying the various options [for investment], after about a year and a half [Atlas Copco began its acquisition of Prime Equipment]. That was in July 1997. The real purpose was not to push their products into the infrastructure - it would take a lot of air compressors to justify what this company has done. Then this last July 1999, two years almost to the day, they acquired Rental Service Corp. They really wanted to use the product to touch the customer - they want to hear the wants and views of the end-user. That is their primary strategy. They have very large market share in other parts of the world. In the U.S., they haven't been able to attain the market share they want. But now with the infrastructure in the U.S., with 500 rental stores, I think that is going to enhance their position, over time.

Paquette: They think the pie is going to get bigger in the rental industry.

Bennett: Oh, sure.

Wearing: If it's true, as Brad Jacobs [CEO of United Rentals] said recently, that the growth rate of the rental industry is approximately 20 percent per year, would not [other companies] with that kind of money [like Atlas Copco] look into buying large rental chains and increasing their revenues - and look at this market from a good-investment standpoint?

Bennett: I think that's correct. You know when we talk about growth rate of some 20 percent on a compounded basis, that's historical. I don't believe the rental industry is growing at 20 percent today. I think that it's growing at about half that - about 1012 to 11 percent. That's just our opinion.

Wearing: It's still better than the 4 percent that you said [is typical of large manufacturing companies' growth] - I mean a lot better. That's three times better, basically. So they're looking at it from an economic standpoint and I believe that you will see a lot of big investors continue to invest in the rental business, [and that will continue to] make more people aware of it.

Paquette: Are utilization rates the key for the large companies?

Gabriel: Yes, I think that's definitely a very, very important factor. [But] I think utilization gets thrown around as a number - [like] "one size fits all" - and most of us know, depending on the fleet mix, what you have and the type of product you carry, your acceptable utilization is going to be markedly different, depending on whether it's heavy equipment or predominantly aerial lifts or mostly light equipment. I know [if we] acquire a company that has a particular product mix [and a historical utilization rate of X-percent] and we go in and lay in our additional product line - some backhoes, some forklifts and maybe a couple 60-foot booms - all of a sudden that utilization rate changes. I think the thing that we focus on daily now is, as we change the mixes of these business and broaden out their product line, we also have to change the rest of the cost structure of that business, to make sure that we don't have a cost structure from an employee base that fits an 80 percent-utilization company, yet have a fleet mix at 40 percent. I think that's certainly a huge challenge for larger companies as they do acquisitions, to make sure you get that balance created as you change this product mix, so you have the right cost structure to go along with it. I think we're all learning [that] the dynamics of this business are changing on a regular daily basis. And the customer is the one that's winning. All of us in this room are making this business more efficient by figuring out ways to get the cost out of our structure and deliver a more cost-effective product to the customer, which in turn is driving that expansion of the business. I think as we figure out ways to be more efficient, that will enable us to continue to grow the business, whether it's 10 or 20 percent. It's very difficult to get our arms around what that exact number is because of so many different players, whether they are the independents or the dealers that are participating in the rental business - is it a "rental purchase" or is it straight rental? It's hard to get our arms around that.

Paquette: So utilization is not necessarily the focal point but is one of the factors that you're running after.

Gabriel: It depends how you define utilization.

Paquette: Getting equipment out at all costs.

Frost: But you have to have utilization in conjunction with your return on investment. You can have 100 percent utilization and not have any return on investment. Then you could tell real quickly where your store is going - you'll be losing money every day.

Bennett: You can also have an 80, 85 percent return on investment and low utilization.

Wilson: I want to direct this to the three large companies. Take Sunbelt, for example - they paint all their equipment green. NationsRent has a great logo and they advertise well, and so does Prime. My question is, do you see yourself going to brand-name recognition, [maybe] buying the manufacturer and manufacturing your own equipment? [What is the importance of brand recognition?] Is it going to be Atlas Copco compressors or is it going to be Prime compressors?

Gabriel: I can tell you from our point of view, we do not envision having a "NationsRent" backhoe. What we do think is that by purchasing the top brands of equipment and co-branding them with our NationsRent brand, the customer ultimately will focus on the fact it's a NationsRent backhoe - that you have an associated level of service with that product. We don't think that it is necessary to have a "NationsRent-brand" backhoe.

Paquette: Why would you not want to capitalize on Caterpillar's millions and millions of marketing and advertising dollars?

Gabriel: Yes, we think there's tremendous leverage in leveraging off of the fact that Bobcat has established a brand name. We [have our brand] on some of the smaller items, consumable items that we do private-label - maybe it's a Target blade that will have NationsRent on it instead of the traditional Target emblem - that's more from a retailing perspective, retail merchandising. Some of the smaller equipment - pumps and generators - you may see [private-labeled] in the future. The customer associates more with the place in which he gets that product and service than with the actual product itself. [But] the larger equipment, I see that pretty much staying the same.

Wilson: Do you feel the customers now are more brand name-oriented? Do they request Bobcat, Caterpillar, John Deere by name?

Bennett: We are seeing less and less of that. Because of the quality in the manufacturing today, I mean let's face it - you can get a backhoe with Case controls, you can set it up just about any way the customer wants it. But I agree with NationsRent, you know - we're not in the manufacturing business. We're not trying to confuse the customer in any way. We take the highest quality and the most preferred product on the market and we're going to satisfy those customers that way - we don't buy the second- or third-tier product. But we do private-label a lot of the retail-type items and small things, because it's fun to do. I don't know if you can really measure how effective it is - our employees like to sell something, it's fun. But we are a service company - that's what we do. We stay focused.

Paquette: You think ultimately manufacturing will be something that larger companies will start looking for because it will help them deliver the product at a better cost to their rental customers?

Bennett: We would stay focused on what we do right. I really believe we're pretty good at what we do. We're a service company.

Gabriel: We want to be very good at [being NationsRent]. We want to minimize the distractions and focus our efforts and our resources [on rental services].

Evans: What we have found is that if we private-label something, the consumer expects it to be at a discount vs. a name brand. You take something as simple as a Stanley tape measure that sells for $15 and you take that very same tape measure and private-label it and you put them at a point-of-sale impulse [spot] on the counter, and you will sell all the Stanleys before you start selling your private-label tape measures, if the price is the same. Discount the private label to $14 and you'll sell about the same number.

Paquette: I'd like to ask Carlos about South America. Is Caterpillar in Chile?

Ibañez: Yes. It started three years ago.

Paquette: How are they doing? Are they competition?

Ibañez: No, they're only in big equipment.

Paquette: Are they bringing in used equipment?

Ibañez: No, it's all new.

Paquette: What happens to the used? Does it stay in the country?

Ibañez: Well, in Chile a machine can last for 12 years. We just repair them, repair them and repair them. Equipment is much more expensive than in the States and the rental rates are [much lower], so you have to make it stretch.

Wearing: The next market that Caterpillar wants to beef up is South America. They're going to concentrate on it very, very heavily. It's their next market - especially the rental portion of it. What would you say, Carlos, that the percentage of rental may be down there? Five percent, 50 percent?

Ibañez: We do four, maybe.

Wearing: And they [Caterpillar] look at it from that standpoint, so with their capabilities and money, that is the market that they're [going into] next. And it's my belief that [some other big companies, both manufacturers and rental consolidators] will concentrate on South America next. It's really the next natural step for them.

Bennett: I'm curious as to what other manufacturers are facing - what are their market shares here in the States compared to where they want to be? We talk about all this global expansion, and Atlas Copco does have a presence in most of the major markets in the world and they do rent compressors. But we're [Prime and RSC] at a point where we really are pretty well satisfied that we're where we need to be and it doesn't make a lot of sense to leave your home territory and go somewhere else and face all new problems there. [What would be] their expectations [re. South America]?

Wearing: South America was not very well aware of rental at all. They just go to a dealer and buy or try to find used equipment - you know when you go to these auctions, especially down in Florida, 90 percent of it goes to [Latin America] and [I think Cat's] feeling is that if the pilot program here continues to grow like they hope it will, and claim it is, that they could get a real good foothold in South America before any other of these big companies do.

Bennett: I was amazed. I went to Sao Paulo a while back and I was amazed at the level of rental people in that Brazilian market. There are pockets within South America where rental is very well-established. Other parts are obviously not.

Wilson: I'd like the larger companies to respond to this question. What do you say about the two-step distribution of large equipment - manufacturer to dealer or distributor and then to the end-user?

Bennett: I think the dealer has to add some value to something. The large rental companies are really in the parts and repair business out of necessity - they're having to support these big fleets. The dealer has an opportunity to add some things - the opportunity is to come in to Prime, come in to Gardner, come into Nations and support this momentum [in the rental industry]. I think they're at risk unless they identify what opportunities are available to them.

Wilson: You know if I'm reading you right, you guys really don't want to be in the parts business, you don't want to be in the mechanical business. You want somebody to support what you're doing. Because if you're putting money in parts, and you had to stock them, I'm going to tell you right now, it's not working on the bottom line.

Paquette: Well, over time we've seen better equipment, as you mentioned earlier, and I agree with you - the quality of equipment now [compared] to 20 years ago is phenomenal. Well, that said, what's going to happen in the future? Is it only going to be the specialist who can repair that equipment? The big rental companies will be contracting with them just like the little guy, to repair the equipment. [No one will] have the expertise to do it on an ongoing basis. Is that a reasonable assumption?

Bennett: There are dealers out there who have bought into this whole new concept and have been very supportive and you can see their business grow because of it. Some others have said they aren't going to be a part of it, and they're really at risk - there's not enough margin these days [to take that position]. We visualize how inefficient our processes are with 500 stores, trying to manage parts inventories. With support from the distributor, a lot of that [inefficiency] would go away.

Paquette: Can't you use technology to do that?

Bennett: We have invested millions and millions of dollars in that area. We barcode, we scan, we do maintenance - we don't want to be in that business, but we are, out of necessity.

Wilson: To just give you a glimpse of what Tom is saying - when RSC purchased my business and we went through [an audit of the] parts inventory, we had $40,000 worth of parts. And I'm sitting there saying, "Where did it all come from?!"

Paquette: Yes, we needed two so we ordered four, just in case, and wound up using one.

Frost: I don't see the larger companies getting into the manufacturing business - I see them using their buying power to influence the manufacturer. Why would they want to get into the manufacturing business when they can tell their manufacturers, "This is what I want and I'll buy so many of them if you make them this way"?

Paquette: There's not a heck of a lot [of rental companies left to buy] in that middle layer. The smaller ones, I think, can still survive - without any doubt they can still survive, because there's a market down there [that the large companies are] not going after.

Gartner: Do you feel the smaller guys are getting smaller?

Paquette: No, I think the market is getting bigger and everybody is growing - you can't get smaller or you're going to die soon. I think there isn't a fight [between the large and small companies] because the bigger guys don't do everything well.

Lageschulte: Yes, but the name recognition really concerns me as an independent. They're doing what Burger King and Pizza Hut and McDonald's have done in the food industry. Marriott and Hilton. They're building recognition. [Rental customers] are going to go to NationsRent or some other big name first because they've got that name out there. That's going to make it that much tougher for us, the independents.

Paquette: What are some things that the small guy can do that the big guys can't? Right off the top, I think of quicker reaction time. We react quicker.

Lageschulte: Some places offer 30-minute delivery anywhere in the Phoenix market. I couldn't do that, with one or two stores. Big players can because they've got more locations. They can offer just about as good service, but they can't keep a Tom Bennett or a Skip Evans at the counter. But they can see me and talk to me directly.

Young: I think the small guys have a tremendous opportunity, as the big guys get bigger, if we start partnering with these guys like I've partnered with Neff and Prime. I do a tremendous amount of business because of Prime. They send me so much business - it's a great relationship.

Paquette: Do you feel comfortable about doing sub-rentals to the smaller guy? Troy?

Gabriel: Yes, we do some. I think what's happening in the industry is forcing that small independent owner to be much better, as well. Used to be, five years ago, you could do just about anything, have any type of facility, any type of equipment, and you could survive. I think those days are gone. Not only do the large companies have to be efficient and good at what they do, the small independent is forced to even be more. He doesn't have the purchasing power that the large companies do. What he needs to do is find his niche and have one notch better customer service. You need to be accessible to that customer when he walks in the door. That's the advantage that [the small independent operator] still has. If you don't take advantage of that, you could be at risk.

Young: I think sub-renting to the smaller guys is a no-brainer. When I rent a larger piece of equipment from Prime, you know, No. 1, they're renting to a rental company that probably is going to keep a close eye on their equipment, so that's got to have some added value there. Also, they're going to have Prime stickers all over their machine, so they're going to get some recognition out of the deal, too.

Wilson: In the tool business that I was in, my best friends were the larger companies. Why? Because they would send me business in those markets they don't want.

Wearing: It all goes back to relationships. Both with your customers and even your competition. You have to establish the relationship no matter where you go, even with the manufacturers. We're all businessmen here and we look to one thing and that is the money. If we don't make money and service that customer, no matter how we do it, we're not going to be around. The independents that are mad because somebody else moved in down the street, I think you're fighting a losing battle. You are doing nothing but hurting yourself if you don't start realizing the fact.

Gartner: I remember when my dad opened his store, he went to talk to the guy that was in town already and introduced himself and said, "You know, if there's anything I don't have I'll be happy to send the customer to you," and we had a great relationship for years in that town. And we both benefited from the relationship and our customers benefited from the relationship, too. And I think that's the key that we need to continue as the industry grows.

Young: I do a lot of business with the Prime store down the street.

Paquette: There's a lot more cooperation going on out there than anybody realizes.

Wearing: No matter what happens, I can only see good come out of this. Until you get down to the nitty-gritty, you don't realize what is really going on. All you hear in some of the magazines that we look at is there's all the big conglomerates doing this, doing that - and not really getting down to the nitty-gritty of the relationships and the good things that are happening in our industry.

Paquette: Is the rate of consolidation going to decline or stay the same for awhile yet? Is the pace is going to change or is it slacking off?

Gabriel: I think we'll continue to see consolidation. There are still companies available - certainly not as many as there were a year or two years ago, but we'll see consolidation continuing with some of the smaller single acquisitions, and I think that will continue on in perpetuity, whether it's Prime, RSC, Sunbelt or NationsRent - if there's a single store in your market that fits the scope [of your operations and plan], it's an easier way to build that market out than building a greenfield store.

Bennett: You don't see a lot of new stores - greenfield sites. We're [marketing] the businesses that were already there, in most cases, with this consolidation.

Paquette: So it will go on until the quantity of quality stores dries up. Greenfield stores don't look as likely at this point in time. Is that correct?

Gabriel: I don't want to go into a brand new town and open up a store - there is much more risk doing that. If we have [an established] presence there, and [existing] management, [we prefer that]. [But] I think companies will get better and better at their greenfield strategy.

Paquette: I am pleased to see that there's seems to be a lot of cooperation and sub-renting - a lot more than I perceived before. I think that's a really good message that's come out of our discussion today. And everybody seems to feel that there's a place for everybody else in this industry. The big guys have their place and their job to do and the little guys do, too, if they work hard like Jeff was saying and realize the fact that this industry is changing, and there's room for everybody. Those are pretty good signs that bode well for the industry.