IRN SEPTEMBER-OCTOBER 2013
53
RENTAL MANAGEMENT JEFF EISENBERG
have unexpected or unwanted charges, hurting
rental company cash flow.
Quality rental companies can simply raise prices
and tell their customers about their new investments
in equipment, but this can be challenging where
demand and supply are not in balance.
In new markets, how are rental
rates set?
The customer or user of the asset, vehicle, or even
property, will do several calculations, perhaps
subconsciously, in a rent versus buy, or a rent versus
other alternatives analysis.
If you fly to a country where there is no car rental,
then you make arrangements with the people you
are visiting to pick you up with their car. In that
analysis, no rent, no buy, was considered.
Or, you take a taxi; a rented asset with labour
included. Indeed in India, there is very little short
term self-drive market for car rental for foreigners;
but there the driver can cost less per day than the
fuel.
Why rent an excavator, where in many countries
you can just have a contractor dig the hole for you?
Then you have rented a service rather than an asset.
The further you go into developing countries,
the more construction companies have their own
equipment. This means that someone, perhaps
subconsciously, carried out a rent versus buy
analysis. If there is no rental industry in a developing
market, then whoever has the investment capacity,
often the construction company, will simply buy
everything they need, or rent it in another country
and move it. This means that rental pricing is more
international than ever.
A large rental asset such as a crane may rent for
similar rental rates in other countries, plus transport
and other costs to get the job done, plus a relatively
transparent premium.
In a developing market, medium sized equipment
may attract a rental payback of one year, where in
an oversupplied Western European market would
see two or three year payback, so the young market
prices may be twice as high as the old market. The
old market was getting those rental prices too, not
that many years ago.
Expensive or scarce money for investment keeps
supply restrained and rental prices stay high.
How can rental associations help
raise rental rates?
In most countries, rental associations work within
legal rules which prohibit price-fixing by their
members. Minimum pricing is usually not allowed,
although ‘recommended pricing’ is sometimes
permissible, if rarely useful.
Rental associations in some countries, however,
have introduced mandatory insurance and
environmental recovery charges. But even in
countries where the rental associations do make
attempts to raise prices, I have never seen it work
long term. There is usually too much disconnect
between the board members of rental companies
who attend rental association meetings, and the
salespeople and rental managers who negotiate
daily rental pricing, and usually have monthly
revenue targets to hit.
In summary, rental rates for mature markets
depend on competition, and the discipline of the
people negotiating the rental rates. If supply and
demand is out of balance then rental companies
have to be willing to live with lower utilisation, or
find new markets for the equipment; something that
is especially difficult for the 'zombies'.
Part of this discipline in raising the rates can be in
charges and fees, but there is a balance between the
benefits and the annoyance they cause to customers
and the difficulties in negotiating them.
In new markets, rental rates can be set for a higher
return, but if these are too high, the customer will
find another way to get equipment.
IRN
An aging ABG paver in the fleet of a Chinese rental company.
Charging for delivery of equipment is important.
Pictured is a Wacker Neuson excavator.
The incremental sale argument
can be tempting. If a rental
company has enough business to
cover its fixed overheads, then
renting the ‘one more machine’
contributes immensely to profit,
even at a discount...The problem
with this argument is lack of
discipline.
