Ashtead Survey: Competition w/ Indie Equipment Rental Firms, Ferguson vs Watsco, Appfolio, Vistry

Content Published Last Week

1. IP SURVEY: Sunbelt Rentals: Competition with Independent Equipment Rental Firms

2. Sunbelt vs United: the Nature of Equipment Rental Competition

3. Ferguson vs Watsco: HVAC Distribution

4. AppFolio: Value-Added Services

5. Vistry Group: Regeneration Projects & Planning Process

Sunbelt Rentals: Competition with Independent Equipment Rental Firms

Sunbelt Rentals (AHT) and United Rentals (URI) are the two largest equipment rental firms in the United States with a combined market share of over 30%. The market continues to consolidate; last year, 4-5% of rental firm members of the ARA were acquired with the majority joining national rental firms.

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There is very little middle market with 95% of rental firms generating less than $5m revenue:

we have almost no middle market. When we analyze members by branch count, only six members have over 75 branches. Approximately 95% of our members have fewer than five branches and generate, on average, less than $5 million a year. The middle market, companies with between five and 75 branches, comprises 160 companies, many of which are dealerships. - Former CEO of SME Rental Firm

Over the last 6 years, Sunbelt has made ~150 acquisitions and over 300 since 1990. AHT plugs its network with smaller indie companies unlike United which prefers large acquisitions like Ahern. Some of AHT’s acquisitions are companies with 1 branch generating ~$1m in revenue. Inorganic growth is a key driver of earning power and durability for national players.

This survey aims to understand the operating realities of SME rental firms across the US and the nature of competition in the market.

How do SME firms compete with AHT / URI?

What are the benefits and challenges to scale in this business?

How much M&A runway is there for national players?

We surveyed 12 SME rental firms to explore such questions and help us understand how the competitive landscape has evolved since the 2008 crisis.

We've also made updates to our survey UI to help you navigate between responses by question. This will help compare and contrast answers for any given question in the survey as shown below:

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We have many more surveys planned this year including Trupanion vets, Watsco contractor customers, and indie auto dealers to understand why they may or may not use ACV's digital auctions.

Sunbelt vs United: the Nature of Equipment Rental Competition

This interview follows on nicely from our survey above because it walks through the competition between rental firms for large and small projects. This executive sold his rental company to Sunbelt and shares how the company changed his business post-acquisition.

Within weeks after the acquisition, Sunbelt significantly changed the branch equipment mix; it placed more and higher-value equipment on site to serve its large national customers nearby. Large CDL equipment has higher physical utilization and lower dollar utilization than smaller gen tool equipment but is crucial to serving larger customers:

If you were to compare a skid steer loader or mini excavator with a reach forklift on a job site, the return on investment is much higher for the skid steer loader and mini excavator. However, the reach forklift is likely to be on the job site for the entire duration, while the mini excavator might only be required for specific tasks like plumbing or electrical work. So, this type of equipment is more competitive, more expensive to buy and transport, and offers lower profitability in our terms. - Former CEO of Indie Rental Firm acquired by Sunbelt

Indie rental firms can’t afford the breadth and depth of equipment to serve large contractors and are left to focus on the more cyclical, shorter-term DIY / small contractor business. Although the higher fleet utilisation from larger contractors provides AHT with greater revenue visibility, what what happens if we play this forward a decade?

United, Herc, and AHT all carry the same equipment at similar prices serving the same national contractors. What happens to price discipline and ROCE when the market matures?

Maybe such a strategy is attractive when there are more branch clusters to build and upside to the rental penetration rate. But in a mature market, what do underlying returns on capital look like in gen tools for scaled rental companies all competing aggressively to serve large contractors?

This question is a subject of investigation for us this quarter.

As a side note, this comment on EquipmentShare has also piqued our interest. We will be exploring how sustainable such a pricing strategy is during Q1/Q2:

EquipmentShare, from my understanding, caused some annoyance among larger and regional rental companies when they joined Rouse. This is because they brought down the rental rates in every market as soon as they went live on Rouse. EquipmentShare is the low price leader. They're not the best rental company for a variety of reasons, which we can delve into later. Essentially, EquipmentShare is trying to drive down prices to get their fleet rented out, as they have a large new fleet that isn't performing well. However, national rental companies aren't taking the bait and trying to compete with EquipmentShare's rates. - Former CEO of Indie Rental Firm acquired by Sunbelt

Ferguson vs Watsco: HVAC Distribution

We’re particularly fascinated with how and why certain B2B distribution models work and why they may fail. We’ve also previously explored why B2B distribution seems to be a fruitful area to allocate capital; companies like Fastenal, Watsco, POOL, and Addtech are some of the top long-term performing companies in their respective indices.

1. Watsco, Fastenal, & B2B Distributors: Gross Margin & ROIC Predictability

2. POOLCORP, Heritage, Leslie's, & Swimming Pool Products Distribution

3. RS Group, Bechtle AG, & B2B Distribution

4. Bergman & Beving, Lagercrantz, Nordic B2B Distribution & M&A

Ferguson, the plumbing, HVAC, and waterworks distributor, is next on our list to study. This interview is the first in a series and explores FERG’s HVAC business with a distribution veteran with over 25 years experience at Ferguson.

HVAC contributes <20% of FERG’s revenue with Waterworks and Plumbing its largest business lines. Watsco is a pure-play HVAC distributor with double FERG’s HVAC revenue.

HVAC distribution is slightly odd. It’s very different to plumbing distribution:

That's an interesting question. Unlike HVAC, plumbing does not have exclusive territories. Most plumbing distributors have access to all lines. For instance, on a faucet line, if I'm a distributor doing a lot of business with Delta, Kohler may not give me preferred pricing, but I still have access to both. In the HVAC sector, it's different. It requires a significant investment in stocking inventory to be an equipment wholesaler. Distributors need to invest millions of dollars in inventory to support the dealers and contractors purchasing from them. There are different tiers of brands, and dealers expect distributors to support them. This support includes not just inventory, but also product training, expertise, commercial specialists, and other back-office value-adds. Providing this support costs the distributor money and requires time, energy, and effort to build up the necessary back-office support. - Former Product Line Manager at Ferguson, HVAC

HVAC oddities largely stem from the OEM’s power in the value chain. OEM’s assign exclusive territories for distributors to carry certain product lines to serve contractors installing units for homeowners. Such territorial licenses lead to a highly fragmented market of mom-and-pops carrying exclusive product lines. This is also why FERG and WSO both follow a rigorous M&A strategy.

The org structure between FERG and WSO is very different: FERG is centralised and WSO decentralised. What WSO trades in centralised cost savings, it aims to gain in service and efficiency being closest to the customer.

Although FERG is centralized, it seems to have fallen behind WSO in improving the customer experience and order flow for contractors. Credit to WSO management; for a company so decentralised, its centralised technology team is leading the industry.

From what I've observed, Watsco has been far superior to Ferguson and certainly more advanced. Ferguson is trying to catch up to some extent. Watsco's net margins have generally been stronger or at least as strong as Ferguson's on a quarter-to-quarter basis, especially in the HVAC sector. - Former Product Line Manager at Ferguson, HVAC

This interview goes on to explore how and why HVAC is different to plumbing, why FERG is different to WSO, and how FERG can compete with WSO operating companies.

We will continue to explore HVAC distribution and plan to study each of FERG’s major business lines. We’re fascinated with WSO culture and operations but are still trying to understand its underlying power within the value chain. Put simply, with Carrier so crucial to WSO's economics, what are the underlying risks embedded within this relationship? Given SEER and the increasing regulatory scrutiny over HVAC products, how is WSO impacted if Carrier doesn’t innovate fast enough and loses share? Can WSO easily diversify to other lines? How would Carrier react? These are a couple of many questions we plan to explore going forward.

AppFolio: Value-Added Services

Over the last few weeks, we’ve posted multiple interviews covering Appfolio’s history, economics, product offering and the operating workflow of SMB and enterprise property managers:

1. AppFolio: Moat, Retention, & Moving Upmarket

2. AppFolio: SMB Customer Sales Process

3. AppFolio: Selling to 5,000 Unit Property Managers

This interview focuses on Appfolio’s value-added services which grew ~50% YoY last quarter and drives the majority of APPF revenue.

We explore the attachment rate of each value-added service line:

Another significant change occurred in how we onboarded customers. I was managing the screening services team, which was a value-added product, as was our payments service. Around 90% of our customers used screening and 80% to 85% used payments. We decided to integrate these services into the implementation process, setting up customers with payments and screening during onboarding. I helped transition that team to our implementation team, marking a shift in our approach to customer onboarding. - Former Product Growth Manager, Appfolio

In July last year, APPF added a $2.50 ACH fee for tenants paying rent through its platform. This used to be free for tenants. Given payments is the largest value-added services line, and tenant revenue is the largest contributor within payments, this price hike is powering APPF’s current revenue growth. One perspective is that APPF is finally leveraging years of stored pricing power baked into its core product. Another is that its core SMB market is mature and it has a larger challenge onboarding enterprise clients so the core needs to drive more revenue growth.

The interview goes on to explore how the maintenance contact center works, opportunities to improve screening, and future potential value-added services.

We plan to speak to 5,000+ unit customers of Yardi, Entrata, and APPF this quarter to explore the opportunity and challenge for APPF moving upmarket.

Vistry Group: Regeneration Projects & Planning Process

Vistry Group's transformation into a capital-light homebuilder has grabbed the attention of many investors with the NVR story in mind. An executive at one of the UK's largest Private Rented Sector providers explains the planning process in the UK and why building new homes is so difficult today.

Broadly speaking, local authorities need to adopt a more sensible and pragmatic approach. In London, for example, there are 28 or 29 local authorities, each controlled by different political parties. These authorities operate independently and often make inconsistent decisions. I've been to planning application meetings where two virtually identical properties, with identical planning requests, receive different decisions. The reasoning behind these decisions can be hard to understand. The process is archaic and, in my opinion, somewhat unprofessional. - Former Commercial Director at L&Q