RM Online - A reverse auction?? Cyber-tool may offer rental a new way of doing business

Editor's Note: We heard about the concept of "reverse auctions" several months ago from Phil Goldstein, and asked banker and Rental Management financial writer Tol Broome to visit with him about it and let RM readers in on what this is all about. We grant that the concept is a bit avant-garde in this industry and may hold little value for many rental companies, especially in the short term. Goldstein, who watches industry trends pretty closely, predicts that by the year 2000, business done on the Internet will increase 1,600 percent. That's just a year from now. So for those who can put this concept to good use, and for those who need to start thinking about defending themselves against it, here it is.

Once upon a time (about three years ago), many rental business owners had never even heard of the Internet. And those who had probably thought of it as something only high-tech propeller heads messed with.

Today, the Internet is known by all and used by many. Search engines, e-mail and online services allow consumers and business owners alike instant access to a nearly endless wealth of information.

The Internet also is becoming a useful tool for many businesses to make a profit. We can order a winter coat from L.L. Bean, books from Amazon.com, cars from General Motors and equipment from rental dealers.

Yes, that's right. It's a new cyber-tool known as a "reverse auction." According to Phil Goldstein, a partner with Levitan, Yegidis & Goldstein in Middletown, N.Y., a business consultant and contributor to Rental Management, reverse auctions are going on in many industries - and rental may well be next.

"The automobile industry provides a good example," says Goldstein, whose CPA firm specializes in consulting equipment businesses and contractors. "Chrysler sells about 5 percent of its cars over the Internet now. By the year 2000 the company expects to sell about 25 percent, mostly through reverse auctions."

Here's how a reverse auction would work for a rental company. Let's say you are a construction equipment rental house, XYZ Rentals, in a major metropolitan area - Dallas-Fort Worth, for example. A contractor wants to rent five Case 580L backhoes. By reverse auction, he puts his order out for bid on the Internet with the exact specs needed. He might even include the price he is willing to pay. You and other equipment rental dealers (it might be one or 50 others) e-mail back with availability and rates. The contractor then chooses who he will rent from. That could be any rental dealer who can serve the client with inventory and service and wants to bid the work.

Goldstein says there are two key advantages for a rental company. First, reverse auctions can enable you to move your excess stock, particularly during slower periods. "You might be willing to turn something for less than you normally get rather than just leaving it on the lot to collect dust," says Goldstein.

The second advantage will be for the dealer who has high-demand, low-supply items in stock. By expanding your potential market to surrounding cities and counties and even other states, using the Internet, you might be successful in increasing your rental revenues on these tough-to-find items.

Larry Norton, who owns Modern Rentals in Lansdowne, Pa., is not convinced: "It sounds to me like something that will hurt the rental yard," Norton cautions. "I would be concerned about dealing with customers I don't know. I won't know their payment habits or how they will take care of the equipment. They also might misquote prices from other dealers to try to get my rates down. Why would I want to participate in something like that?"

Goldstein agrees with Norton that in any industry, reverse auctions will drive prices down by increasing the level of competition. He expects to see more rapid growth in this trend for rental companies in metro areas, because of the greater number of rental companies and available bidders, but he says that even in rural areas, rental companies should not ignore reverse auctions.

"Depending on the rental rates, how much equipment is needed and how long it will be used, customers could be willing to travel fairly long distances," says Goldstein. "Saving $100 a day on three machines for an extended period of time is significant."

This may not be the best news for party companies, especially for those that cover large geographical markets. "The bid process will give the customer more leverage with the local rental company," Goldstein predicts.

Don't look for widespread support of this marketing concept quite yet. John Best of Best Rentals in Durham, N.C., for one, has not participated in reverse auctions and doesn't plan to. "I don't see any reason to," he says.

Best doesn't use the Internet, contending that "it will be many years before businesses will use the Internet for conducting business like ours."

While Goldstein acknowledges that Internet use and reverse auctions are not key components of the marketing strategies of most rental companies at present, he predicts exponential growth. "Less than $10 billion will be transacted this year on the Internet," says Goldstein. "By the year 2000, this number is expected to be $160 billion. That's a growth rate of 16 times [in just over a year]!"

If you don't know anything about reverse auctions, it might pay to look into it. Goldstein is convinced that "as people and businesses feel more comfortable doing business online, reverse auctions will become a big issue."

For more information, check out the Web site <auctionguide.com>.