Seeing the Light

Jan. 1, 2000
For decades, the backbone of the rental industry has been small contractors: the guys in pickup trucks who come for their tools of the trade, wearing

For decades, the backbone of the rental industry has been small contractors: the guys in pickup trucks who come for their tools of the trade, wearing jeans, baseball caps, T-shirts and work boots. Independent small contractors and subcontractors who might own one or two machines and a few tools, but obtain most of what they need from local rental centers. They talk across the counter to inside sales coordinators and managers with whom they drink coffee, sodas and beer with and call by their first names.

There are millions of such rental customers across the country. But few were ever Caterpillar customers. They knew the Cat name; they respected the Cat reputation; they might have worn baseball caps with the Cat logo. But they rarely used such large machines, and even if they did, they couldn't afford to buy Caterpillar equipment. And they rented from rental centers that couldn't afford to buy it either.

Until now.

Shepherd Machinery, like many Caterpillar dealers across North America and around the world, recognized that the future was in this growing segment of customers. And the leaders of the Peoria, Ill.-based Caterpillar Corp. realized the same thing and decided to go after this customer.

Caterpillar began by increasing its line of smaller equipment such as skid-steer loaders, compact wheel loaders and mini-excavators, as well as by expanding its arsenal of attachments - "work tools" in the Cat lexicon. Then it plunged into the rental business directly, putting together a program to help Cat dealers become effective rental players.

It meant a change of culture. It meant that short-term rentals, even for a day or two, were important services to the customer and important means of revenue, rather than at worse a nuisance or at best a necessary evil.

Bill Shepherd III, owner of Shepherd Machinery, Whittier, Calif., had been in the rental business for many years. He approached rentals the way many Caterpillar dealers approached it. It was a service that kept a customer happy while his own equipment was being serviced or if he needed an extra machine short term. Before 1998, Shepherd's rental business was a mix of rent-to-sell and rent-to-rent. Far too many of its rental contracts were re-rentals to rental centers rather than deals with the end-user, Shepherd felt. And the rental machines were large earthmoving equipment that for decades was the Caterpillar trademark.

But Shepherd saw the writing on the wall. He understood that short-term rental was the fastest-growing segment in the world of equipment distribution. He knew that meant change - that he had to have a separate business for rentals, with a dedicated staff that would specialize in a short-term, immediate-response mode. He knew he needed a service staff that would be ready to prepare a piece of equipment for the morning or even that very afternoon. He knew he needed counter people who would spring into action the minute the customer got off the phone because the customer needed something within minutes, rather than within weeks.

He also knew he needed leadership. He needed management who understood the immediacy of the rental culture, who understood the dramatic difference between operating a rental center and a distributorship.

He found Dale Hill. Hill, like so many managers and leaders in the rental industry, had worked for Hertz Equipment Rental Corp. for eight years and had been trained by HERC's systems-oriented program.

But Hill, because of his sound rental training, felt that certain conditions were necessary to make a rental program successful. He wanted his own service department consisting of qualified technicians who would put rentals first. He needed a fleet of service trucks that could be dispatched at a moment's notice to the jobsite to do almost any repair short of a complete overhaul. He also needed his own fleet of delivery vehicles so that he could guarantee around-the-clock delivery to any customer.

Shepherd agreed. Because Shepherd, whose family had owned Shepherd Machinery for 75 years and who took over the company himself in 1980, knew that a successful rental program needed autonomy.

Hill also recommended a separate facility for the rental division and Shepherd Rentals recently moved into a remodeled building one freeway exit away from the dealership.

Service first As Hill began putting together the rental program and developing his team, he believed that building the business from the ground up was important. He started with the service department first.

"One of the things I wanted to make sure of when I was interviewed by Bill was that we would build the service side of the business first and then let the sales side catch up," says Hill. "I've seen too many people try to do it the other way. And their first exposure to the market is negative because you get out there and you make all these promises you can't possibly keep without the infrastructure."

Hill hired Mike Bates as rental services fleet superintendent. Bates had been with the dealership and had rental experience, also with Hertz. Most of the staff Hill and Bates hired were from outside the dealership and had previous rental industry experience.

In addition to putting together a strong service staff, Hill wanted the right service equipment. Shepherd spent $80,000 each on service trucks totally devoted to rental that included a 6,000-pound crane, full fluid-changing capacity, welders, air compressors, waste oil storage systems and all the tools, hoses, parts and filters required for complete in-field service and repair.

With the foundation of strong service, Hill built the sales side of the business, hiring Scott Hukill as sales manager, a rental veteran who worked for Prime Equipment and U.S. Rentals before joining Shepherd. Hukill shares Hill's passion for strong service.

"These service trucks and our service capability are a tool," Hukill says. "When we go out and aggressively pursue a customer and can deliver the equipment with the type of vehicles we have, that makes it easier on the customers' infrastructure as well as our own. And when we can go to a jobsite and do the job from start to finish without impeding the customer's progress, it's a tremendous sales tool."

Shepherd Rentals also has a business development coordinator who analyzes customer segments. "What industry segments are driving our business currently?" says Hukill. "We need to be cognizant of changes in the industry and the economy. Today it might be housing projects or underground utilities going into a housing project. Six months from now it might be something entirely different. So we want to keep a pulse on the market and analyze the effectiveness of our advertising."

400 acres of support In service as well as marketing, the support of the 400-acre dealership is a big factor in Shepherd Rentals' prospects for success and is a good illustration of some of the advantages the Cat Rental Store program has over independent rental operations.

The strength of the Caterpillar dealer network is well-known in the world of construction, and Shepherd is a fine example.

Shepherd Machinery repairs and can re-manufacture many types of equipment. Its financing department structures deals from rental-purchase options to sales of new and used equipment to sophisticated packaging of services, sales and rentals. Its credit department provides instant credit analysis and works with the rental department to find creative ways to extend credit to customers who may not qualify under traditional credit structures.

As an organization accustomed to larger, more financially sophisticated clientele, Shepherd's credit department has had to change its approach to work with the rental department. "You hear horror stories from many dealerships around the country about how the rental customer is a second-class citizen and how suspicious the credit departments are about how much credit they should get," Hill says. "We're approving 94 percent of the credit applications we receive. We find a way to say yes."

Dave Lindy, financial services manager, sees the benefit to the traditional dealership as well as the rental program. "A customer may only rent from us once in a while, but he may have a friend with a bigger need," says Lindy. "Even if he just rents once in a while, that adds up over the years. Word of mouth is the best thing we've got going. Sometimes you run into a customer who doesn't have as high a credit standing as you'd like. Maybe he has paid late because he did a job for a large corporation or a government agency [that didn't pay quickly]. We know smaller customers sometimes can't pay until they get paid. We try to work with them."

Hill was impressed at how much support he got from Shepherd's marketing department, headed by marketing manager Pam Pounds. Its marketing team does direct mail and brochures and publishes an in-house magazine called Earth, which promotes Shepherd's services. This past fall, the marketing department put together a program with Shepherd Rentals' becoming an official sponsor of Irwindale Speedway, a local NASCAR track. Shepherd's booth at the track displayed Caterpillar and allied equipment and sponsored giveaways and other promotion efforts. The marketing department is working at putting together a Shepherd Rentals Web site separate from the dealership's site.

Hill says the dealership is cooperative in every aspect - human resources, parts support, the power systems division, and the sales and service departments. If the rental department needs a machine from the dealership for a rental customer, Hill says, the response time is outstanding, unlike some dealerships that regard rentals, especially short-term contracts, to be of minor importance.

Much of the atmosphere stems from Bill Shepherd's management philosophy (see Outlook 2000, page 72). "We were able to build something from nothing, and it's because the whole atmosphere of the dealership is unique," Hill says. "In many companies there is a rivalry between departments, with people trying to steal the glory and make themselves look good. Not here."

The cooperation extends to the sales departments of the rental center and the dealership.

"We portray ourselves as a one-stop shop," Hukill says. "If I or one of the Rental Store reps comes across a customer with a need for a purchase or rental/purchase option, we take care of the customer and get him in contact with the right people. We don't want to tell the customer that he needs to make another phone call. We're going to do all the legwork and take the steps necessary to get the customer in contact with the appropriate people to make that transition as seamless as possible."

"That communication covers parts, sales, service or rentals," adds Bates. "It makes it easy for parts people to say, 'We have a customer who's going to be down for a month, and he will probably need a rental machine, and here's the lead.'"

Hill says this cooperative spirit makes being part of the team exciting. "With other companies I worked for, we would often work on small- or medium-sized accounts and partner with them to meet their equipment needs," says Hill. "As they grew and built their businesses, they were rental intensive for the first couple of years because they lacked capital. We helped them build their businesses, and they finally got to a point where their accountants look down and say they're doing too much rental, they need to own some equipment. And it was usually at that time that I would lose them, or at least a portion of their business. And I would wave goodbye to them as they drove down the street to the John Deere or Cat dealer.

"But here it's a very easy transition. When they're ready to do a rental-purchase option, we just lead them down the hall to the part of the dealership that handles it. And we know that just because they want to purchase a piece of equipment this month, they'll still return to renting next month."

The rental mentality has permeated the dealership as well. A department exists for immediate repair of used machinesthat will be either rented or sold. When a machine is brought in for repair in the late afternoon, the service workers work double shifts so that it can be ready for early morning delivery.

One-stop shop With so many levels of support, Shepherd is a one-stop shop. And Shepherd Rentals is aiming to be a one-stop rental shop, which is the goal of the Cat Rental Store program and its extensive lines of allied equipment.

Shepherd's strategy - like that of the Cat Rental Store program overall - is to provide the complete gamut of equipment from the large earthmoving machines that are the foundation of most construction projects to the small everyday items such as light towers, aerial work platforms, hydraulic and air tools, compressors, concrete equipment, and saws.

The company was built with strong service capability and has built its marketing efforts around that, to spread the word that Shepherd, and Caterpillar, is a player in the rent-to-rent business.

It may take time for the program to develop into the well-oiled machine its architects intended. But it's off to a strong start. And the pickup trucks are pulling in to the parking lot.

ARIZONA - Mesa-based Empire Metro, Empire Machinery's rental division, is in direct competition with RER 100 powers such as Rental Service Corp. and Sunstate Equipment, but revenue has been strong since it opened its first Cat Rental Store in 1997. "There's a lot of pricing pressure now, but we're able to keep our rates fairly consistent," says Ted Johnson, rental supervisor. With two Phoenix-area locations and one each in Flagstaff and Tucson, Empire has emphasized the Cat name and treated the rental push with top priority. "Everyone who was brought on board was specifically for the rental division," Johnson says.

Two years ago, the Caterpillar Rental Store acted a lot like a political campaign on heavy spin: Everyone knew something was going on, everyone knew it was big, and everyone was kept at bay with a steady dose of doublespeak and canned quotations.

Funny how success, like a spike in the polls, makes it easier to talk.

"A lot of dealers wanted to see how it went before opening their mouths and saying too much," says John Faress, Cat Rental general manager for Atlanta-based Yancey Bros. "A culture is developing that is very different [from the traditional dealer operation]."

The oldest Cat dealer in North America, Yancey opened its first Rental Store about 18 months ago in Austell, Ga. Since then it has set up rental shop in Cummings, Buford, Kennesaw and, just this month, Columbus, Ga. The rental fleet now stands at about 300 Cat machines and another 600 pieces of lighter rental-friendly equipment.

This whirlwind rental expansion for Yancey has come at a time when the overall Atlanta rental market is relatively flat. "We're taking market share," Faress says. "It has exceeded every expectation we had."

All but one of Yancey's Cat Rental Stores are dedicated, stand-alone facilities. Yancey uses the separate approach to be less intimidating to the typical small contractor than Cat's huge dealer locations, according to Faress.

Thinking smaller is new to Yancey, which had been in the rent-to-own business for years, but drew the line at the color yellow. "If it wasn't yellow [heavy machinery], we didn't rent it," Faress says. "We rented to customers who had the intention to purchase. If they wanted to rent a chop saw or a lift or something smaller, we referred them to somebody else."

Now Yancey, the dealer, is referring those requests to Yancey, the Rental Store. "We go get whatever the customer wants if it makes sense," Faress says. "The more we listen, the more business we get. We're certainly not the cheapest by any means, but customers are willing to pay more for a higher level of service."

VIRGINIA - Salem-based Carter Machinery has been around for more than 50 years as a dealer, but jumping into rental required some attitude adjustment, according to Craig Sanford, manager of the 3-year-old Fredericksburg Cat Rental Store. "We had to change to meet rental customers' expectations which are different from dealer customers' expectations," he says. "Rental customers want very quick response and are more loyal to customer service. Dealer customers are more loyal to the product." - C.C.

As any start-up in any rental market knows, it can take years to pull customers away from established rental operations. And so it is for Cat Rental Stores, even though a national brand identity and big-time buying power provide a starter kit most other newcomers can only envy.

A few Caterpillar dealers have bypassed the difficult stage of new kid on the rental block. They've bought the "old kid."

Tennessee Cat dealer Stowers Rental & Supply launched its first Rental Store almost two years ago in Knoxville, where it is based. Last summer, instead of opening a second location in Chattanooga, it acquired Ballard Equipment, a 9-year-old rental operation in town.

Presto! Caterpillar had instant market share, not to mention an experienced rental manager - the former owner, Jim Ballard - and his knowledgeable staff.

"Now we have the benefit of the big name and the local, family-owned history," says Greg Moore, a former Ballard employee who remained as operations manager for Stowers.

In a way, Caterpillar can thank its main competitors for the win-win union.

"[Ballard] decided to sell because he was no longer No. 1 in the market - RSC, Prime, Hertz had all moved in," says Moore. "Before, you could pretty much set the rates you wanted. When the other companies came in, we got low-balled a lot."

Not only was Ballard, as an independent, forced to compete more on rates, it often had to re-rent equipment from its competitors - at considerably less profit margin - in order to satisfy the needs of longtime customers who would otherwise go elsewhere.

Since the Cat alliance, the Chattanooga location's inventory has grown tenfold, including the Cat offerings, of course, but also other lines: Bosch, Genie, JLG, Multiquip, Skyjack, Upright and Wacker.

"The advantage is the discounts we get with the non-Cat manufacturers," Moore says. "Because of the Cat dealer network, they give us a great price whether we buy one or a hundred. Now we can go against RSC, Prime and Hertz. We're back to No. 1."

That's a number that Caterpillar, the world's largest construction equipment manufacturer, is accustomed to claiming. Depending on how long it takes other Cat Rental Stores to approach top billing in their markets, the acquisition formula may be called on more and more.- A.S.

CALIFORNIA - Johnson Machinery, family owned since the 1940s, had had free reign to run its Cat Rental Store in Murrieta, which opened about a year ago. "Cat is a support system," says Eric Hooper, sales manager. "Decisions are still made by individual dealerships."- C.C.

Shepherd Rentals Whittier, Calif. History: Shepherd Machinery was founded in 1924 by Bill Shepherd, whose son, Bill Jr., became the next CEO. Current CEO Bill Shepherd III took over the reins in 1980.

Before 1998, Shepherd Machinery's rental business was a mix of rent-to-sell and some rent-to-rent business. Its product line consisted primarily of Caterpillar products. Shepherd hired Dale Hill, a former HERC branch manager as general manager, to develop the Cat Rental Store concept.

Shepherd Rentals opened its main branch in Whittier in September 1999, one freeway exit away from the dealership. Shepherd Rentals also has branches in Foothill Ranch and Lancaster.

Shepherd Rentals operates as a separate business unit within the dealership.

Key personnel: Dale Hill, general manager; Scott Hukill, region sales manager; Mike Bates, rental services fleet superintendent.

Allied equipment: Ditch Witch trenchers; Sullair air compressors; full line of Multiquip products; Allmand Bros. light towers; JLG aerial lifts; Cat-powered GMC water trucks and dump trucks; Partner saws.

Projected rental revenue for 1999: $8.4 million.

Employees: 50.

Customer base: Residential and non-residential construction contractors; industrial accounts; small independent contractors.

Philosophy: "Many rental companies start in the middle and go down. When a new job mobilizes, they might have great salespeople who do their homework and know the job is starting. But they get there, and the customer needs scrapers, big excavators and big dozers, so all they can do is give them the phone number of the Cat or Deere dealer and hope for scraps with the smaller items. We find that customers appreciate having one vendor who carries everything from a 345 excavator to a 2-inch trash pump."