I
t’s interesting looking at the latest sets of
business results coming out from rental
companies around the world. Increasingly
it does seem that we are in a world of two-speed
companies. Ashtead posted growth rates of almost
25% despite already being all but a $3 billion
(€2.8 billion) turnover business, yet we see other
businesses struggling to post positive numbers. Of
course some of this is explicable by the market in
which people operate, but even in the UK we see
some companies in the samemarket achieving 30%
plus growth rates while others barely stand still.
So is there a deeper message for management and
investors behind these growthdiscrepancies?
Variable one -market maturity
It is clear that the degree of rental penetration and
the overall economic maturity of a market help to
drive growth. Although the US economy is clearly
one of the world’s most developed and mature,
there has been a historic under-penetration of
equipment rental relative to overall equipment
ownership. The development of large, professional
and nationally available rental operators really
only gathered pace in the early 2000s and the
market share of the top five players is still, I would
estimate, below 30%of the total potential US rental
market. So there is still plenty of organic growth
availableas themarket consolidates in thenext five
to 10 years.
Similarly, we have seen big growth in rental
companies inemergingmarkets, suchascentral and
eastern Europe, Latin America and the Middle East.
The difference here is that the relative immaturity
and fragility of the underlying economy can mean
that the rental market suffers huge, periodic
shocks, which a more mature but underpenetrated
market like theUSA is less likely to see. Growth can
be spectacular, but losses can also be significant if
an economic shock hits.
Variable two - structure
The degree of customer concentration
within a chosen market also helps
determine growth opportunity. If your
customer base is largely regional and
local construction andmaintenance companies, yet
the market is dominated by major nationals, there
is likely tobea ceiling to your growth. However, the
boot is more often on the other foot. Where rental
companies that have grown nationally in markets
that are essentially regional or local in nature -
Germany is a good example - they really struggle
tomaintainmarket share against local competitors
who know, and probably went to school with, their
local customers.
Variable three - operatingmodel
Another twist on the second variable is that when
companies get to a certain scale their mindset
changes from “growing” to “harvesting”, and the
focus is much more on trying to wring cost from
the rental company’s operating structure or to
squeeze an extra few percentage points from
pricing. While there is nothing wrong with that
as part of the business strategy mix, customers -
especially medium sized ones - quickly spot when
you havemoved too far from being human to being
mechanical, and they don’t like it. This is why, in
markets where larger companies lose their growth
focus, market share quickly shifts back towards
smaller, regional competitors.
At this point there is a danger of the “cost down,
squeeze price” mentality becoming a vicious
downward cycle; where striving to maintain
performance without any rising tide of new
customers to support it results in more and more
cost cuts and price rises until all momentum has
gone. By this stage the business has often lost its
sales “mojo” too and so resorts to aggressive price
cutting to try and regain its lost market position –
missing thepoint that peoplehave votedagainst its
attitude, not necessarily its prices.
Aswith somany things in life, the reality is that all
of these factors areoften all inplay simultaneously.
But recognising where your market is, how your
customer base is structured, and being aligned
to service that customer base as efficiently and
effectively as possible, is crucial to success. In a
business where 80% of costs are relatively fixed in
the short term, understanding how to grow isn’t an
optional extra – it’s about staying alive.
IRN
KEVINAPPLETON is former CEOof LavendonGroupplc and former divisional
chairmanof Travis Perkins plc. He is currentlymanagingdirector of Yusen Logistics
UK, non-executive chairmanof HorizonPlatforms, non-executivedirector at Ramirent
Oyj andnon-executivedirector of the Freight Transport Association. To comment on
these articles please email:
Two-speedrental
With financial results being
announced almost daily in
recent weeks, KevinAppleton
asks if the rental industry
is now divided between the
super-rich and everyone else
11
THEAPPLETONCOLUMN
IRNAPRIL-MAY 2015
“Large, professional and nationally available rental
operators in the US really only gathered pace in the
early 2000s, and themarket share of the top five is
still below30% of the potential rental market”
