In the June 2009 issue’s editorial (“The race to the bottom,” page 5), I included several quotes from Erik Olsson, RSC’s CEO, who told analysts in a conference call that he was disappointed that the rental industry had not shown more discipline in managing rental rates during the first quarter and that RSC’s rates had declined 4.1 percent in the quarter. I also received more feedback — positive and negative — concerning this column than for any others I’ve written for RENTAL MANAGEMENT.
Simply put, rates are an awfully touchy subject with everyone in the rental industry. There are many who believe discounting — particularly cutting rates for every piece of equipment — is a practice that can kill a business and do irreparable harm to the industry. Others see prudent discounting to encourage rentals for slow-moving equipment as a way to increase dollar and time utilization for that particular line of equipment.
Some even believe that increasing rates during tough times is the smarter move because then you can offer specials and other incentives to different customer segments to potentially grow your business.
If a chief competitor in your market, however, cuts rates across the board and you need cash flow to stay in business, what else can you do but follow suit to keep your customers or win new business in your area? The problem is what this can do to your profit margin, the ability to keep equipment properly maintained, consider new capital expenditures or spend on safety training, but walking away from business in this environment can be tough.
I still believe that cutting rates across the board is a terrible idea. I also think that giving a last-minute customer a discount is rewarding bad behavior and will encourage people to wait to book a rental.
However, is the rate all you should be looking at when making a deal? Michael Kneeland, the CEO of United Rentals, says there are other considerations and metrics to judge. After all, don’t most people offer a daily rate, a weekly rate and a monthly rate and isn’t the monthly rate cheaper than the per day charge? United Rentals reported an 11.5 percent decline in rates in the first quarter, but in the last year, the company has been targeting industrial equipment rental and other long-term rental contracts where customers would get a preferred rate that is less than what the company may have received for short-term rentals the previous year.
Dollar utilization, Kneeland says, is the key indicator to help a company determine whether or not to do a deal. By doing more monthly deals, the math can show that a company’s rental rates have declined, but if both time and dollar utilization increase as a result, then is that really a bad thing?
It will be interesting to see what the public rental companies say about rates when they reveal quarterly results during the rest of the year. At the end of June, RSC already reported that its rental rates in April and May were down 6.8 percent compared to April and May, 2008.
I don’t pretend to have any or all of the answers, so besides focusing on risk management and how to instill a safety culture in your company in our cover package starting on page 20, this month’s issue includes an article about how to calculate time and dollar utilization by Fred Hageman of Hageman, Stansbury and Associates.
We also have an exclusive interview with United Rentals’ Kneeland, who answers questions about rates and explains the pricing strategy of United Rentals. Separately, Tim Cahall, CERP, chief operating officer of the Main Event, Mount Airy, Md., who also serves as an advisor for the ARA Foundation’s Rental Executive Advisory Program (REAP), offers his take on the effects of discounting. These articles won’t end the rate debate, but they do offer more food for thought.