Results confirm secular shift to rental
The American Rental Association (ARA), in its latest step forward in defining and analyzing the equipment rental industry, has introduced the ARA Equipment Rental Penetration Index™.
ARA used its new approach to analyze results covering 2003-2011, which shows rental penetration for construction machines reaching 51 percent in 2011, up more than 10 percentage points since 2003. The result is consistent with the expectation that in recent years the size of the rental fleet has increased relative to the construction fleet.
“The basic concept of the ARA Equipment Rental Penetration Index™ is to measure the amount of equipment that is rented as a percentage of total construction equipment,” says Christine Wehrman, ARA’s executive vice president and CEO.
“While our customers continue to tell us that equipment rental increasingly plays a larger role in their business, now with the index we can better measure the extent of that growth over time,” says Michael Kneeland, CEO, United Rentals, Greenwich, Conn.
“We also believe that the secular shift to rental may have at first been driven by macro-economic uncertainty, but that once customers turn to rental they appreciate the flexibility and convenience it provides, and appreciate the added value,” Kneeland says.
“The ARA Equipment Rental Penetration Index™ is the association’s latest resource to help rental store owners and managers, manufacturers, and industry analysts and investors better understand the potential of the rental channel and its long term prospects,” Kneeland says.
Wehrman says equipment rental companies are interested in understanding equipment rental penetration because it is a measure of how much potential market exists versus the current market. A relatively low level of rental penetration could suggest a significant opportunity for rental firms to expand their business while high levels of rental penetration may indicate a relatively saturated market that will only expand at the rate of overall fleet expansion.
Rental penetration of 51 percent for construction machines leaves significant growth opportunity for rental, Wehrman says.
At the request of ARA members, ARA convened a workgroup in September 2012 to develop a plan of work for estimating an appropriate measure of equipment rental penetration for the equipment rental industry. The workgroup built upon ARA’s development of rental-specific performance metrics to determine a way to calculate rental penetration that combines several factors to result in the ARA Equipment Rental Penetration Index™.
The result is designed to provide the industry with a new method for measuring and forecasting equipment rental penetration and leverages the ARA Rental Market Monitor™ and the expertise of the association’s industry research partner, IHS Global Insight, as the foundation.
The index can create a way for rental companies to measure how much potential market exists versus the current market as well as for manufacturers to project demand for machines, and investors and analysts to consistently measure trends about equipment rental in construction.
“Rental firms tend to measure their performance on a cost basis and the most often used cost base for rental equipment is original equipment cost (OEC),” says John McClelland, ARA’s vice president for government affairs, who helped lead ARA’s rental penetration index workgroup. “The OEC-weighted approach allows the ability to derive several components of the equipment rental penetration calculation using well-established data and techniques.”
U.S. Census data is used to calculate a value-based measure of the construction fleet. Using this value as the denominator and rental revenue as the numerator, ARA can estimate an equipment rental penetration index that is value-based and accounts for flows of equipment into and out of the fleet and for the stock of equipment in the rental and total construction fleets.
McClelland says equipment manufacturers have an interest in measuring equipment rental penetration because replacement cycles are much different for rental firms than they are for other owners of equipment fleets.
“Changes in equipment rental penetration could provide manufacturers information to help them plan production based on projected demand,” McClelland says.
The ARA Equipment Rental Penetration Index is another market performance metric that combined with the ARA Rental Market Monitor™ and ARA Rental Market Metrics™ can help rental companies determine financial performance and potential.
“The equipment rental industry continues to evolve and become more professional. We believe these tools developed by ARA can help all rental stores better tell the industry’s story in a way that bankers and investors can better understand,” Wehrman says.