The right rate
21 April 2021
A blog post last Wednesday discussed the rising demand for equipment and, in some instances, the lack of supply that is placing upward pressure on prices. It asked why, if costs are likely to rise, any hirer would need to cut rates excessively to win business.
You can read that story here.
Moreover, prices of materials like steel and timber are increasing. Indeed, this week the British Chambers of Commerce published research showing that 87% of production and manufacturing firms surveyed cited pressure to raise prices from raw material costs. Businesses also expressed concerns about rising inflation.
And with emissions regulations and other legislation focusing attention on technologically advanced products that inevitably carry a higher price tag, end users will need to realise the cost implications for those supplying and hiring equipment.
Yet following last week’s story I’ve spoken to hirers who are perplexed by competitors cutting rates severely. (Indeed, the topic of hire rates represents the most frequent cause of frustration cited by Q&A interviewees on the blog when asked what annoys them.)
“We as an industry are our own worst enemy,” said the managing director of one long-established hire business. “Machine availability from some manufacturers is getting difficult with very long lead times. The last time I can remember them being as long was in 2008 before the credit crunch.
“If there is an acute shortage, then logic tells you there’s no need to cut rates, but it’s still happening.
“Anyway, we’re being cautious,” the hirer continued. “We have had a very good year despite Covid-19 but we are budgeting for lower turnover in our next financial year and lower profitability. I think we’re going to struggle getting new equipment, we could see an increase in bad debts and we don’t know what the economic impact will be when the furlough scheme ends in September.
“We have to be realistic. Prices of assets are going up but hire rates are not matching the increase. We’re also giving our staff a wage increase because they deserve one. And our landlords recently told us they’ll be putting our rent up, too.”
This hirer also believes that some CBILS (coronavirus business interruption loan scheme) and BBLS (bounce back loan scheme) funding, grants and other government-backed financial help might be having unexpected consequences.
“There’s a company with several depots near us that received Small Business Grant Fund aid - which doesn’t need to be paid back - for each of its locations. And they have taken out more CBILS loans than you could shake a stick at.
“They’ve probably got more cash in the bank than they have had for a long time. They’ll have to pay the loans back eventually, of course, but meanwhile they’re competing against us with very aggressive rates. It’s distorted normal economic forces.”
Admittedly that scenario might not be commonplace. But cutting rates when your costs are rising sets a strange precedent. Indeed, another hirer I spoke to following last week’s blog post told me he is going to have to tell an established customer that the hire rate for a 100kVA generator should increase considerably because a Stage V model costs substantially more to buy for the fleet.
Interestingly, the topic of rates was raised yesterday during a virtual ‘capital markets day’ event held by Ashtead Group plc (Sunbelt Rentals’ parent) for analysts and investors covering its future growth and expansion plans.
During questions on the Group’s plans for it US, Canadian and UK operations, CEO Brendan Horgan said: “The rental industry today has 5% less fleet than it had a year ago and, as we’ve all seen, we are entering a period of construction start increases and, we think, another step change in terms of rental penetration.
“Lead times today from manufacturers for non-planned assets are as long, if not longer, than they were immediately following the great financial crisis.”
He emphasised that lead times are obviously longer for unplanned purchases. However, Sunbelt Rentals, he said, is already making plans with major OEMs for its fleet additions as far ahead as 2023 and 2024 and securing build slots.
“So we are in a position where there is a lack of availability of fleet. The proof you also see has been in the second-hand values [of equipment],” he continued, adding that the industry is “in as good a position as one could be in” to improve rates.
As the earlier post described, this is a situation requiring careful management and good judgement.