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How will the hirers tap into growth?

SMALL PLANT & TOOLS

In tool hire there is unanimity on one thing, and one thing only: the market will continue to expand. How best to take advantage of the opportunity is where the differences start.

Paul Howard and Andrew Gaved speak to some of those looking for the answer

TOOL hire may not have the same allure of high-risk, high-yield markets like those in the developing world or in IT, but then it's unlikely to have the same st icky denouement either.

It's more Steady Eddie than Fast Freddie.

Yet the market for renting tools in the UK has grown steadily and the trend seems set to continue.

Kevin Minton, managing director of the Hire Association Europe, says: 'We're very optimistic about the grow th of the tool hire. It will be at least equal to that of the rest of the economy and the level of service and quality that tool hire firms can provide will draw in new customers.' Asif Lat if, market ing director at A-Plant, is equally upbeat. He says: 'The general tool hire market is very buoyant. The overall market is growing, and there's plenty of room for our own growth.' Executive Hire News analyst Catherine Stratton has suggested that when the concept of tool hire is expanded to include all the equipment that today's tool hirers are involved with, the sector could easily be worth £1.5 billion annually, twice what many analysts estimate.

Market leader Speedy has demonst rated the sector's potential for spectacular growth over recent years ? and achieved yields the rest of the construction industry would give their eye teeth for. The company's most recent figures show a return of 14.8 per cent.

What is more, the tool hire market still remains largely unconsolidated. There are an estimated 2,500 tool hire companies sharing the UK market.

In fact credit rater Experian claims to have 4,000 firms offering hire on its database. Even if, as some observers foretell, Speedy manages to acquire Brandon Hire (speculation triggered by the announcement that Brandon has given permission to chief executive Charles Skinner to look at an MBO) it will still leave a huge number of small independents out there. There is huge opportunity, then, for big outfits to grow and carve out a strong position.

But for the time being it remains a market abounding with individual entrepreneurs running successful businesses on a local or regional scale.

The question is: which strategy is most likely to secure returns on investment in the future?

For some, like Mr Skinner, the answer is clear: create a national company and aim for market leadership. His reason, in part, is the fact that the UK tool hire market is well-established.

He explains: 'There is still room for some growth, but basically it's a mature market so to grow we need to increase market share.

'We felt the need to be a national operator. Two or three years ago we had very good people and a good infrastructure but felt we were missing out on some work because we were not perceived as being 'national'. It was very important for us to grow rapidly to be able to supply nat ional customers.' But he is nevertheless conscious of the strengths of local companies and this informs another par t of the company's growth strategy.

He says: 'The next step is to replicate the density we have in the south-west. This is important as it's not all about national hire agreements. Preferred supplier arrangements may be negotiated nationally, but it's the strength of your local relationships that determ ines who actually gets the hire.' This appreciation of the importance and ongoing success of local, independent hirers in the face of expansionism by the major players is shared by the HAE. Mr Minton says: 'If 10 years ago you had drawn a line charting the rate of consolidation then by 2006 you'd have ended up with 10 giant companies and no one else. Yet we've got more members than ever. Of course, there will always be takeovers and acquisitions but the number of new entrants to the sector and, from our point of view, new members, suggests there will always be a place for good, local companies.' Neil Stothard, group managing director at Vp, the parent company of Hire Stat ion, agrees. He says: 'I think there will always be a fragmented, local tool hire market in the UK. Construction itself is still largely unconsolidated so there's the local building trade to be served. Plus, even if major contractors are looking more for national agreements, not all their local and regional subbies are going to be bound by them.' The wish to support local suppliers in a world of increasingly centralised procurement gave rise to the creation of the Hire Network, a virtual, national tool re-hirer that taps into the resources of tool hirers across the country, all 2,500 of them if necessary.

Barry Dean, joint managing director of the Hire Network , explains: 'The idea behind it is that so many companies are now looking for national agreements and this precludes the use of independents and local companies. But the latter are still very good companies, so we help national customers get the benefits of keen and efficient local firms while using us as a single point of contact, with single invoicing, and so on.' If local competition is one reason why much of the market remains unconsolidated, another is the scale of effort and resources required to become a national player. Brandon has succeeded in avoiding many of the pitfalls associated with such grow th but Mr Skinner acknowledges its impact on returns. He says: 'We have made significant strategic progress over the past year and, as expected, this investment has had an adverse effect on short-term profitability.' The latest interim figures show margins shrinking from just under 10 per cent to 6.5 per cent.

The recent travails of Vp's Hire Station have a similar root cause and Mr Stothard accepts as much. 'We underestimated the challenge of integrating significant purchases, ' he admits.

Yet this has not discouraged the company from aiming to operate on a national level.

Mr Stothard continues: 'Our focus is on how we deliver the product, or in this case the service, and this will involve greater use of call centres. Thereby we offer a genuinely national service with a much smaller footprint.' Vp has found success with such a model elsewhere.

Mr Stothard says: 'We've got experience of putting this into practice with our other businesses. UKForks offers a national service from one hire desk and half a dozen depots. Of course, tool hire is a different market but there are elements of this approach that hold true and the learning curve for the necessary skills is not as steep for us as for others.' An alternative national strategy is being put into place at A-Plant. A lthough tool hire is run separately from the general plant business and has its own branded outlets ? A-Plant Tool Hire Shops ? the company is intent on exploiting synergies between the two markets (contrast this with the withdrawal of Vp from general plant five years ago because of the perceived lack of such synergies).

This is most clearly demonst rated by the fact that, by the end of this financial year, A-Plant will have more tool hire outlets sharing premises with general plant (57) than being run as separate depots (56).

Mr Latif explains: 'We want one call to be able to access tools, specialist equipment and plant and it's simply a question of how best to organise our network to support that aim. It's part of our strategy to be able meet the complete range of a customer's requirements.' The reason is that the company's extensive plant hire business affords access to potential tool hire customers and the same approach applies to the development of its specialist divisions ? one will open the door for the others.

Specialisation is certainly one of the trends identified by the HAE's Mr Minton.

He says: 'Out of our 700-plus members, there is a growing number of specialist companies.

The imperative for specialising is to differentiate themselves from the competition. They feel the need for a level of competence and expertise so they can work with the customer at a higher level than just saying 'here's the kit'. It's part of the move from being a box-shifter to a service provider.' The diversification of services and products that this approach br ings about is reflected in the broadening of the customer base away from its traditional reliance on construction.

Mr Minton says: 'Sectors other than construction are still only a small part of the overall picture but a lot of the grow th will be coming from them.' That this is particularly the case among the smaller, independent hire companies is borne out by the exper ience of Mr Dean at the Hire Network, with his unique access to such firms. He says: 'Only around 60 per cent of our turnover comes from construction.' Speedy, too, is growing rapidly in areas other than construction. Chief executive Steve Corcoran reckons opportunities in industry are particularly underexploited. Historically, process and manufacturing firms have relied on their own equipment for maintenance but Mr Corcoran believes the fast pace of legislation covering matters such as hand-arm vibration is such that hirers will become essential suppliers to such businesses.

Mr Corcoran says: 'Health and safety and, increasingly, environmental legislation will drive the momentum to outsource. Contractors will need consistency in their products and will require the newest and therefore the most regulation-compliant fleets.' The hirer has accrued over £5 million poundsworth of annual sole supplier deals with the likes of ICI, Corus and the Royal Navy.

But Mr Corcoran believes these stringencies apply equally to the general construction sector, right down to the smaller builders, which means that the tool hire market as a whole will benefit.

He says: 'The builder has a product and safety issue now. There are big risks associated with the likes of hand-arm vibration.

'Modern tools can't eliminate those risks entirely but they can do a lot to reduce them ? and that's where the hire company comes in.'