August 2013

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Rental Not Your Grandfather's Rental Companies An RER-hosted webinar this spring, featuring three rental industry experts, focused on the sophistication of rental companies today, and a continued rental-ripe climate in the U.S. By Loretta Sorensen Twenty years ago, rental companies accounted for about 5 percent of construction equipment sales. But in 2012, that figure rose to at least 45 percent and rental industry experts predict it could reach 50 percent by 2015. So what's behind this dramatic change? Rental industry expert Dan Kaplan of Daniel Kaplan Associates said the upward trend was sparked by the economic uncertainty originating with the 2008 downturn. The lingering uncertainty of that economic decline, coupled with the highly professional equipment rental services that rental companies are using to make construction companies more profitable, is causing contractors to rent rather than own their equipment. "Especially over the last few years, when the Architectural Buildings Index (ABI) came out with poor numbers, I think stock prices of rental companies should have increased," Kaplan said. "Economic uncertainty has driven people to rent equipment. At the same time, you cannot minimize the effects of the truly professional rental industry and their effective distribution system. In the past, when you rented equipment, you hoped it would work. Now the quality of rental equipment is great." Kaplan, who began his rental industry career with Hertz in 1982, noted that between 1982 and 1993, construction companies were perceived to be successful if they owned their equipment. "Today, if a contractor shows someone his balance sheet, it's expected that investments are being made in things other than equipment," Kaplan said. "To justify ownership, a contractor would have to show prime utilization in excess of 65 percent. In most companies, that doesn't often occur. The contrast between where we were then and where we are today proves that virtually any late model type of construction equipment is available through major rental companies throughout the United States. Equipment rental distribution systems and fleet sizes are significant. Major rental companies are targeting national accounts and bringing them from ownership to rental. Today there's really no need to own." Measuring Rental While construction industry statistics are constantly gathered and analyzed, accurately measuring the level of rental penetration in the construction equipment industry required a new analytic tool. A group of rental companies asked the American Rental Association to identify methods that would allow them to measure current levels of equipment rental penetration. "They asked if we could develop a standardized formulation that could be used to obtain repeatable measurement results and give them some predictive power," said John McClelland, ARA vice president for government affairs. In September 2012, McClelland, in conjunction with ARA partners at IHS Global Insight, formed a workgroup to develop an appropriate measure of equipment rental penetration. The result was the ARA Equipment Rental Penetration Index now used to assist rental companies in measuring how much potential market exists versus the current market. The measurement tool also allows manufacturers to project equipment demand and investors and analysts to consistently measure construction equipment rental trends. "That work group included representatives from virtually every large rental company," McClelland said. "The basic concept of the index is to measure the amount of equipment that is rented as a percentage of total construction equipment. The entire fleet of construction machines is constantly changing with new and old machines moving in and out of the fleet every day. An accurate measure of equipment rental penetration must account for flows of machines into and out of the fleet, as well as the stock of machines that constitute the fleet." The formula developed by McClelland's work group includes both rental and contractor fleet statistics to determine what percentage of rental fleets is found in total equipment stock. The mathematical calculation also takes into account the value derived from rental fleets and all equipment rental revenue, as well as the value derived from all equipment. As part of their development process, the work group 46 | www.cedmag.com | Construction Equipment Distribution | August 2013 46_Rental_Feature_Index_KP.indd 46 7/25/13 12:52 PM

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