Prolonging the Upturn

May 1, 2006
Right now almost everything looks right for the 100 largest rental companies and others as well. There is enough construction going on that there seems

Right now almost everything looks right for the 100 largest rental companies and others as well. There is enough construction going on that there seems to be a big enough pie for everyone. Companies are keeping their rates up, and quite a few of the 100 reported double-digit rate increases in 2005 or double-digit rate increases between 2004 and 2005 combined. As Chuck Miller of Sunbelt Rentals said, perhaps partly tongue-in-cheek, if rates get too much higher, people will just go back to buying equipment. Rates can only go so high, but the fact that rates are still holding strong is a wonderful sign and many RER 100 companies were quick to give credit to higher rates for the stronger margins of 2005.

Another reason so many companies did well had to do with internal changes they made, which would have led to improved performance even if customer demand had been merely moderate. Companies were forced, during the early part of this decade, to take protective measures to stop the bleeding when demand was down. Many companies improved their software or began using it more effectively to manage fleet, to reduce unnecessary paperwork, to cut costs by ordering parts, supplies and equipment electronically, and bill customers electronically. The use of more effective shop-management software became widespread, as did telematics systems for tracking fleet, preventing theft and diagnosing machine malfunctions either onsite or remotely. If somebody left the industry five or 10 years ago and returned to see how rental companies are operating today, they would hardly recognize it.

So what could go wrong? When asked that question, RER 100 executives pointed to what you might expect — the possibility of something unforeseen such as a terrorist attack or calamitous natural disaster. Some voiced concerns over rising fuel costs, possible interest rate hikes and softening in the home-building market in some areas. Others pointed out the indisputable fact that this industry is, by its nature, cyclical and so sooner or later, business will slow down.

Those are all natural concerns and many said they weren't really concerns, they are just part of business and will have to be dealt with sooner or later.

But a bigger issue to many is rental rates. Even though they are good now, and significantly up compared to two years ago, how long before some companies decide they need to satisfy shareholders and investors and increase market share at the cost of rates? And what about companies that are for sale, either openly or quietly? Will new owner/investors understand the dynamics of the marketplace and want rates to stay high? Or, even if they do understand the marketplace, will they come in and want market share even if that means going back to the price wars of the past? And once one major competitor starts rate-slashing, can others resist?

Obviously we don't know all the answers, and how they unfold will have a great influence over what we'll be writing a year from now when we do next year's RER 100. Most projections are that non-residential construction is going to continue on an upswing for some time to come and most RER 100 executives are expecting customer demand to stay strong through 2006 and 2007 and maybe beyond. But how companies approach the market and to what degree they will remain committed to the current rate disciplines remain to be seen.

Training is another area that seems to have gotten the attention of RER 100 companies. Everybody talks about the need for good people. As David Griffith, CEO of Modern Group, said, “At the end of the day it's talent that makes the business sing, not iron.” It seems for years that the rental industry's culture was always if you need people, you figure out where you can steal them from other companies. That still goes on. Generally if you are looking for people with rental industry experience, they aren't just floating around the unemployment office looking for job leads, but rather they are working for other rental companies. But the people you lure away from other companies can be lured away from yours as well.

More and more rental companies are training their own people — training to be managers, to manage finances, customer service training, mechanic training and more. You won't find people graduating from their local university with a degree in management of a rental sales force. You'll probably have to train them yourself. Increasingly rental companies are making the investment in their people.

The more professional this industry becomes, the longer the upturns will last and the shorter the downturns. Let's see how long we can prolong this upturn.