Just a year or so ago we saw many well run independent equipment rental firms that compete with the national companies enjoying dollar utilization rates in the 60 to 70 percent range. (We define dollar utilization as annual or annualized rental income divided by original fleet cost). Now we see and hear many companies, including the nationals, struggling with dollar utilization rates from the low 40 percent range to the mid 50 percent range. Many fleet owners say the reason is simple — demand is down, supply is up and rates are low. Certainly, lower rates have had a tremendous effect on driving utilization down, however, we invite you to dig deeper and look at some other fleet management issues.
Lack of high utilization equipment
The stores we see having the most success in today's highly competitive rental environment are stores that target smaller equipment and have a mix of homeowner and small contractor business. This profile lends itself well to shorter term daily and weekly rentals, where price is much less of an issue as it is on longer term monthly rentals. These stores often enjoy dollar utilization rates of 100 percent and sometimes more.
Not all stores will be successful renting smaller items on a large scale. Some stores are off the beaten track and are difficult for homeowners and small contractors to get to. Perhaps your store is more of a delivery-type store or location. Similarly, some stores are not configured properly in order to handle this type of business. We know of several stores that had their roots in the smaller equipment segment but abandoned it as their store grew. They thought their store had outgrown this type of customer and product mix and now are trying to bring them back into the fold. Ask yourself the following questions:
- Is my store attractive, convenient and visible in the community?
- Are there other retail-type businesses around my store?
- Where is my existing customer base renting smaller equipment?
- Is my store consumer friendly with adequate parking and a convenient loading/unloading area?
- Are my employees and counter people getting inquiries on smaller equipment and what type of equipment is the customer requesting. Am I using a lost rental log to quantify these requests?
- Are my counter people and computer software capable of quick, on-demand customer turnaround and giving operating and safety instructions?
This type of business is not for every store. Investigate carefully before leaping head first into this segment. Talk with your customers and counter people. Take a look at the competition, the type of equipment they offer and the rates. If you do make the leap, be sure and get the word out in advance through advertising and considering launching your program with an open house.
Even if your business cannot be re-configured for walk-in business, run a utilization report and take a look at some of the higher return items you have in your inventory. Often we find such items as light towers, air compressors and air tools, small generators, walk behind trenchers, mortar mixers and hand tools all have excellent rates of return. Consider adding more of what's doing well and offering a broader variety of similar items. Take a look around at the next ARA show with an eye towards the smaller inventory.
Low utilization categories
Run a utilization report and take a close look at the items that fall below 40 percent. Most likely you'll quickly spot a trend in the type of equipment. Maybe it's larger dirt equipment, maybe it's aerial equipment, maybe it's a type of equipment that is seasonal in your area. Develop a “hit list” to get utilization on these products up or consider paring down low dollar utilization inventory.
Evaluate both your time and dollar utilization. If your time utilization is high, but the dollar utilization is low, consider raising your rates. If your time and dollar utilization is low consider reducing your fleet or eliminating certain categories altogether. Try to establish a re-rent arrangement, preferably with a local dealer, on these lower utilization items that you feel the need to offer to maintain your customer relationships. In this economy, capital is limited and you need to allocate it wisely.
Some items such as backhoes, rough terrain forklifts and reach forklifts have historically low dollar utilization rates, but you have to offer these items if you're going to be in the rental business. Try to set realistic minimum rental prices on these machines, no less than 3 percent to 3.5 percent of original cost on a monthly basis. In these categories, consider buying late model used equipment as opposed to new (be patient, it may take some time to find the right machines). Shop vendors and compare prices. Also, watch options such as cab or extended dig that may add to acquisition cost but won't increase your rental rate.
Acquisition cost too high
The price you pay for a machine affects your utilization rate. For example, if you buy a 185 cfm air compressor for $10,000 and that machine brings in $6,500 in rental over the course of a year, your utilization rate is 65 percent ($6,500 divided by $10,000). If you are able to negotiate a better price on that air compressor, say $9,000, your utilization rate is now 72.2 percent ($6,500 divided by $9,000).
Over the last several years, we have observed the price gap narrowing between what smart independents pay for machines vs. the large national chains. Manufacturers are anxious to move product and keep their customer base diversified beyond just the national companies. In many cases, a new machine can be purchased today cheaper than what you paid for the same machine three or four years ago. We see too many independents still picking up the phone, calling an established vendor and ordering equipment with no negotiation. Again, shop vendors and different brands. Ask for offers on trade-ins. Compare prices, warranties and finance terms. Negotiate and ask for the best prices.
Your rental fleet is your single largest capital investment. Allocate your investment wisely to achieve maximum returns. These suggestions are just the tip of the iceberg in raising fleet utilization and ultimately, profitability. Remember, the larger companies have entire departments devoted to fleet management. A little extra effort in this area can pay huge dividends.
Gary Stansberry is a partner in the consulting firm of Hageman, Stansberry & Associates (HS&A). HS&A specializes strictly in the rental industry offering operational consulting, mergers & acquisition and valuation services. He can be reached at (817) 563-6882 or by e-mail at [email protected].