Ever since I became involved with the access rental business in the 1980s I have been aware of the argument that one has to offer some products that are clearly unprofitable “for the service”.
I first encountered it directly while working in the USA, during a capital expenditure approval meeting. Our accountant-owner balked at a request to buy more 60ft telescopic boom lifts given the dreadful rate of return. The rental rate came nowhere near justifying their cost, let alone the high add on costs of moving and maintaining them. The manager responsible pleaded that they were always out and that you needed to offer them “in order to provide the full service.”
I see from the annual Cranes & Access rental rate guide that nothing has changed in the almost 30 years since then – in fact in many countries the 60ft boom rate is now even lower, while costs have continued to rise.
As the 1990s approached and back in the UK I became responsible for a collection or European rental operations. It was immediately clear that while Rough Terrain scissor lifts were in very high demand the rates were almost as bad as 60ft boom lifts. But you had to offer them for the service.
I was therefore surprised when the managing director of the UK rental business I was responsible for, called and asked if it was OK to sell off his big scissor fleet? I questioned him “but surely you need to have them as part of the service don’t you?” “We can rehire them when and if we need them he replied. I want to use the money to buy more TM12s and 45ft booms.”
So that’s what happened and sure enough the business managed perfectly well, the funds received were spent on expanding the small scissor lift fleet along with more 45ft articulated booms. And amazingly barely six months later the move looked like a master stroke when the rate for a 50ft scissor lift dropped below that of a 12ft mast lift and yet you could buy five TM12s for the cost of a big scissor. A short while later and it not only become almost impossible to rent out big scissors lifts, but you could not sell them either!
Our UK business did very well without offering a full product range – or at least in not owning everything needed to provide the ‘full service’.
In recent years the same argument has been heard in the crane rental market, at one time 25 tonne truck cranes were the ‘bread and butter’ of the business but rates declined while new prices increased. At the same time customers began asking for All Terrains, but were less keen to pay a higher rate for them. Companies purchased 25 tonne All Terains, and then justified the lack of return by convincing themselves that their popularity kept them busier – leading to higher utilisation. But they also cost a good deal more to maintain and repair.
Rental companies eventually abandoned the sector, moving their starting points up to 40 and 50 tonners. In recent years though is seems that there is renewed interest in the smaller end of the market, with sales of two axle All Terrains on the rise. At the same time sales of Böcker aluminium boom truck cranes are ‘flying’ in markets like the UK- mainly because their costs are in tune with the rates. This is not true for regular two axle All Terrains though – where the “we have to offer them for the service” argument is still heard.
If the market is working as it should then low rates or prices for a particular product/service should result in a reduction of supply of that product that then drives rates back up. But as long as enough people continue to offer them at a non-viable rate the market does not function as it should.
On the other hand there can be something to the “you must offer it for the service” argument, in that customers looking to hire a range of machines, would clearly prefer not to split their business, just because one supplier cannot provide the full range – although a good quality re rent policy will overcome that. And if this argument stands up, why do companies still use from specialist rental companies for lift equipment, rather than the general rental companies that offer everything from generators to aerial lifts?
There is also a long history of companies being decimated by private equity owners that focus purely on the percentage returns for each product. “Quit all the product lines that do not generate a return that meets our minimums and profits will rise” This can be the beginning of the end, especially if it goes hand in hand “now that you have a simpler product line you can cut headcount and costs.”
On numerous occasions I have seen such investors snap up a company with a dominant market share. Only to argue that “prices must be too low, increase them – you can afford to lose a bit of market share as your returns and margins go up” While this can make sense where margins are uncommercial – there is after all no point in being a ‘busy fool’ – I have also seen it applied to a well run company making very decent margins across the board, purely for greed as they attempt to squeeze a little more out of the business in the short term. Such a mentality frequently ends in tears as a good company is destroyed as new competitors are sucked in, and employees become dispirited.
So do you need to offer some products at unviable rates ‘for the service’?
It is not always clear cut.
Source: vertikal.net, September 23, 2017, http://www.vertikal.net/en/editorial/