The trend that has created a boon for the rental equipment industry
The notion that a penny saved is a penny earned is playing out in the marketplace, as execs from the C-suite hold tightly to hard-earned capital in an environment where lending remains tight.
Doubts about the strength of the economy have pessimists outnumbering optimists in the U.S., and even though business growth is expected in 2012, it will be at a sluggish pace. So finds Duke University and CFO Magazine experts who recently asked nearly 1,000 chief executives about their expectations for the economy.
Among the notable findings: most businesses plan on holding capital due to continued economic uncertainty. “Rather than spend, many companies say they will hold on to their cash,” says John Graham, a professor of finance at Duke.
Nowhere is this more apparent than in the construction market, where projects are at a premium and job backlogs are a thing of the past. With this reality in mind, contractors and others in commercial real estate are turning to another tried-and-true management strategy to help reduce operating costs and preserve capital: renting.
Companies have long found value in renting their transportation fleets, office equipment and even outsourcing manpower during crunch times. It is now spilling over to users of heavy equipment and is increasingly becoming more common for project managers to rent equipment instead of buying.
It’s a trend that has created a boon for the rental equipment industry. Scottsdale-based RSC Equipment Rental has recorded more than $1B in revenue during each of the past three years. RSC’s growth also attracted the attention of United Rentals, Inc. which agreed to purchase RSC last December for $1.9B.
“Access to capital has been a major challenge and it’s become much harder for mid-sized companies to secure financing for projects and equipment,” says Asit Goel, director of strategic marketing for RSC. “Companies are finding greater business benefits in renting.”
Goel says many companies are finding bottom-line value in renting equipment since it helps control expenses and reserves capital for other needs such as employee growth, new business initiatives and potential acquisitions.
Renting also improves inventory usage and ensures that project managers have the right equipment at the right location when they need it, from boom lifts to bulldozers. Another upside to renting is that once a project is complete, the equipment doesn’t have to be stored, maintained or transported to other job sites. That’s all taken care of by rental companies.
Vanderra Resources, an oil field services company, previously managed its equipment fleet in-house, often resulting in unknown fleet numbers located throughout its job sites. Kyle Falkenberg, northeast procurement manager for Vanderra, reports that this issue was costing the company valuable resources. Falkenberg estimated Vanderra is now saving an estimated 15 percent on equipment costs working with RSC as its rental provider to implement its fleet management system.
United Rentals is also seeing positive momentum with its rental business. Based in Greenwich, Conn., United also does business in Arizona and throughout the Southwest and as it incorporates RSC, its footprint will only become more significant.
Even though the commercial real estate industry remains largely stagnant, RSC’s Goel is seeing some bright spots. Growth in the energy, healthcare and manufacturing sectors continues to provide significant opportunities to the equipment rental industry. “Companies have realized that the out-sourcing model provides great flexibility to their businesses,” he says.
Gordon McDonald, RSC’s vice president of managed services agrees, noting that companies have modified their behavior because of the recession and have changed from equipment purchases to rentals for projects.
“They are seeing the project cost savings and efficiencies of renting and that has long-term appeal,” Gordon says.