Feature: The Appleton Column – Two-speed rental
By Kevin Appleton13 May 2015
It’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 same market achieving 30% plus growth rates while others barely stand still. So is there a deeper message for management and investors behind these growth discrepancies?
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 available as the market consolidates in the next five to 10 years.
Similarly, we have seen big growth in rental companies in emerging markets, such as central 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 the USA 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 and maintenance companies, yet the market is dominated by major nationals, there is likely to be a 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 to maintain market share against local competitors who know, and probably went to school with, their local customers.
Variable three - operating model
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 have moved 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 the point that people have voted against its attitude, not necessarily its prices.
As with so many things in life, the reality is that all of these factors are often all in play 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.
Kevin Appleton is former CEO of Lavendon Group plc and former divisional chairman of Travis Perkins plc. He is currently managing director of Yusen Logistics UK, non-executive chairman of Horizon Platforms, non-executive director at Ramirent Oyj and non-executive director of the Freight Transport Association. To comment on these articles please email: IRNfeedback@khl.com
This is a feature from the April-May 2015 issue of IRN. To read The Appleton Column every issue, or to see other features from the April-May issue, please subscribe to the magazine at www.khl.com/subscriptions