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Rate War is Taking No Prisoners

For the first time in almost 20 years, Sharon Cooper, GM of Barmot Truck Hire, can’t see a glimmer of light at the end of the tunnel. John Pearce, MD of Paramount Distribution has closed the doors of his truck hire business saying he can no longer compete in a market decimated by an on-going rate war. Cape-based Weel Rent has halved the size of its fleet and is fighting to stay in business. Crystella du Plessis, MD of Atlas Truck Hire, says the company is sitting on a tight rope and the current business is probably at its lowest ebb in her 15 years in the game. These are the stories emanating out of the transient truck hire business, a once viable sector of the local transport industry. FleetWatch correspondent Andrew Parker investigates.

While the state of the economy has been an influencing factor in the decline of the rental market and volumes have been significantly affected, one of the main overriding factors affecting this industry sector is a pernicious rate war that is having a devastating affect on the viability of the industry.

According to Sue Rabie, a director of Kempston Vehicle Leasing, an over abundance of vehicles available from too many players in the truck hire industry has been one of the major causes that has lead to a preponderance of cut-throat rates.

"Because the used truck market is currently so depressed, many players have had no choice but to hang in as defleeting has not been a financially viable option for them. Because of this, rates have come under fire," she says.

Weel Rent is one of those companies that have down-sized and the fleet is half the size it was two years ago. Manager Basie van Zyl describes the situation as the worst he has experienced in 15 years. "We haven’t increased our rates for the last three years and have extended vehicle life from three to five years on the medium trucks - and from two to three years on the bakkies.

"However," he says. "even this doesn’t help much because the bigger truck hire companies like Super Rent are putting old, paid up vehicles into the market at extremely low rates."

The situation is so bad that no-one even uses rate cards anymore. "You simply negotiate the best deal you can at the time," says Justine Vorster of Spartan Truck Hire. Vorster reports that discounts range from 20% to 60% while Barmot Truck Hire's Sharon Cooper says they are offering truck hire at rates you would find a decade ago.

Pearce reiterates this latter point. He says he knew his number was up when his daughter brought him a 1987 rate card from his old company, Fleetrent. It showed that now - in 1999 - he was charging far less to hire a vehicle from his current truck hire business, Paramount Truck Hire, than he was back in 1987. "When I realised this, I drew a line a line through the business and closed the doors." Paramount Truck Hire is no more.

Victim of the rate war

The demise of Paramount was not in any way due to poor management practice, the downturn in the economy or even inexperience. Pearce is a doyen in the truck hire and full maintenance leasing industry and was one of the founders of Rent-A-Bakkie before establishing Fleetrent in the early 1980s. Quite simply, Paramount is a victim of the rate war.

Pearce is quite outspoken about the state of the industry and says that in his opinion, big companies are to blame for cutting rates beyond reason.

"In my opinion," says Pearce, "Super Rent is trying to kill the competition by buying as much market share as possible." Tom Celliers, sales and marketing director of Fleetrent, agrees with Pearce saying the rate war is a deliberate ploy by the big companies to get rid of the opposition.

His sentiments are given credence via Sharon Cooper's protest that "some of the larger players are hiring out vehicles for less than what my lease payments are. One of them told me to my face that they are over fleeted and are prepared to take almost anything to get the vehicles moving."

Cooper adds that this same company is offering a five-ton refrigerated truck - reputably the most expensive vehicle in truck hire today - for less than what most people are willing to hire out a five ton panel van! How they do this is a question a lot of people would love an answer to.

Cooper says the medium and smaller size companies are suffering more acutely than the larger players in the rate war as the bigger companies are cross-subsidising the truck hire fleets.

"We are forced into offering extremely high discounts but our rates still get cut by more than 30%. Our clients have little choice. They ask us to match these rates or we lose the business. We obviously can’t budget for a price increase and are, in fact, increasing discounts to over 40% in order to keep the business alive."

It's little wonder Cooper says many truck hire companies would make more money if they sold up and put the money in the bank. "It’s not just me being negative," she insists. "A director of a major truck hire company said to me recently that after 20 years in the business, he wishes he was in another industry."

That such a sentiment is perhaps understandable is underscored by Celliers who says Fleetrent introduced an 8% rate hike in September last year but found it to had back-track rather quickly when existing clients threatened to take their business elsewhere.

No comment from Super Rent

And what does Super Rent have to say about all this? First of all, it is perhaps pertinent to note that when the Super Group published its figures some months ago, all divisions were reportedly making money except the transient hire division.

Secondly, while Super Rent stands accused of being one of the main manipulators of the chaos in the truck hire business, one must remember that most players are cutting rates and fighting for market share. Why Super Rent is being picked out as being worse than anyone else is anyone’s guess.

Be that as it may, recently appointed MD of Super Rent, Stephen Thomas, was not prepared to speak to FleetWatch and gagged all the company’s branches from doing so. He says since his appointment, he has not yet had a chance to acquaint himself with all the vagaries in the marketplace and it would be premature for him to comment on any aspect of it.

Although this is understandable with him being new in the position, we feel this is a pity given that the opposition has torn into Super Rent. FleetWatch will, however, offer Thomas the opportunity to respond to these accusations whenever he is ready to do so.

The problem with Super Rent’s alleged tactics, should they be authenticated, is that they are unsustainable over the long term. Unless the group is going to supply the truck rental division with used vehicles from its other operations, it is not going to be able to afford to replace its existing truck hire fleet. When the time comes to introduce new vehicles into the transient hire fleet, it is not going to make ends meet on the existing rate structure. Not unless they know something everybody else doesn’t!

Like flies over a road kill

While the big players are being castigated for their role at the top end of the market, there is another extreme which is being blamed for adding to the chaos. These are the small independent operators who are buzzing around the industry like flies over a road kill.

Executive director of Rent-A-Truck, George Johnson, says these would-be truckers are under-cutting all players in the market. "Look, we deal with a large food supplier down in the Cape which utilises four different truck hire firms of which three are small players. These smaller companies charge up to 40% less than Rent-A-Truck is able to and are subsequently taking 75% of the business."

Johnson says the other three companies - operated by ex-civil servants (whatever relevance this may have) - have no overheads, are unregistered and are not obliged to heed to any of the tenant’s of the National Bargaining Council. Quite possibly their insurance and public liability cover is also non-existent. In a nutshell, they can easily afford to cut rates by 40%.

They can’t offer much in the way of customer service, professional drivers or replacement vehicles in an emergency and have scant knowledge of transport logistics but the clients are apparently willing to over look these little idiosyncrasies. One wonders if they also overlook shrinkage and damage to loads. Some of the established companies such as Rent-A-Truck - among others - have installed vehicle tracking systems and pride themselves on the fact they haven’t lost a vehicle for years. They are also justifiably proud of their service levels. Obviously there is a cost factor to all of this but this is obviously lost to the end-user.

Upsetting the market

Johnson’s sentiments are echoed by Crystella du Plessis, MD of Atlas Truck Hire. She says smaller companies are indeed upsetting the market. "Apart from saving money on registration, tax and VAT payments, they also work outside the unions and undercut wages as well. Legitimate companies can’t compete on these terms," she says.

Fortunately, it is not all doom and gloom and we found some light out there. Speaking on behalf of Elite Truck Hire, Les Tomsett says there are clients willing to pay a premium for quality service. "It is up to the rental industry to uphold its credibility." he says. "Our clients understand that reliable vehicles and good service come at a price. We are not allowing ourselves to get dragged into a price war."

Rates! Rates Rates! Everybody keeps talking about rates! Should the industry try and set some standards or would that be collusion? Cooper says truck hire companies have in the past tried to talk to each other - not to set rates but to introduce reasonable rate increases. "It didn’t work. Everybody waited for everybody else and as soon as one company increased its rates, the rest of players took advantage of the situation." So much for gentlemanly conduct!

Commenting on this, Rent-A-Truck’s Johnson says the solution is not for truck hire companies to set rates among themselves but to rather introduce checks and balances on the small independents.

"Vehicles should be roadworthy, businesses must be licensed, drivers and staff should be paid in line with acceptable rates. What we have here - in addition to established players fighting each other to the death - is an undisciplined minority moving in and upsetting the market even further."

And what of the customers? They are on a roll and are quite happy it seems to play the truck hire companies off against each other. It’s all part of the free enterprise bandwagon. They are, however, going to be in for a real shock when the discounted rates they are enjoying and encouraging come to an end and they suddenly have to start paying realistic rates for decent, reliable vehicles.

Leaving rates aside, truck hire’s problems are further compounded by low utilisation and low kilometres. These days, hire trucks are utilised as efficiently and for as short a period as possible. Celliers says where a client would in the past hire three trucks, he now hires one and uses it on the short trips.

Cutting costs to the bone

In the meantime, to stay in the game, truck rental companies are cutting costs to the bone. While we have already mentioned the fact that fleets have been reduced, companies like Weel Rent have been cutting costs everywhere they can.

"We started at the switchboard," Van Zyl says. "We found we could cut one or two of the lines out and manage just fine. We have also had to retrench and we carefully monitor the overtime of our remaining staff." He has even cut his own personal medical aid and drives a low budget car. In spite of the pressure, Van Zyl retains a measure of optimism. "At the moment the economy is wounded and like any wound, it will heal."

And while the healing is going on, Weel Rent is looking for business anywhere they can find it. "We have gone back to square one and are moving anything from rubble to furniture," Van Zyl says.

Extending vehicle life is also becoming a way of life. Cooper comments: "There was a time when we kept our heavy commercials for five years before replacing them. We can no longer afford to do this. Our customers are starting to see six and seven year old vehicles in our fleet."

It’s not just replacement policies that are being shot to pieces. Barmot used to respray and panelbeat the fleet once a year to keep it looking spick and span. This practice has also been dropped in the name of economics.

Tomsett warns against going over the top when cutting costs. "It’s all very well to cut costs but this process has to be carefully managed. Quite often cuts are made in the maintenance area which leads to reduced reliability and poor service levels."

Kempston’s Rabie also advocates rationalising and consolidation overhead structures as the only means to retain a competitive edge. "Kempston has only one truck hire branch in Gauteng and from this centre controls clients as far afield as Bloemfontein without difficulty. It is not necessary to have satellite branches in each and every city."

Costs up and profits down

Unlike most of the players we spoke to, Spartan Truck Hire has grown its fleet by around 40% in the last year and it is now sitting at around 250 vehicles. Justine Vorster says it is a matter of getting out there and being pro-active in the market. She admits however, that costs are up and profits are down.

Like some of the other players we spoke to, Spartan is experiencing a trend away from transient truck hire to more formal distribution contracts. Kempston’s Rabie reports a similar trend although she does not believe this means an end to the transient hire business.

"While there is an increasing need for our customers to opt for longer term hire and third party distribution contracts, there remains a sustained demand for casual hire and we are increasing our hire fleet to our commitments in this area. Recent additions to the hire fleet include a number of Sprinter 412s as well as Toyota Hilux pick-ups. A number of the new 8- and 10-ton Mercedes-Benz Ategos are also on order."

Johnson, however, says the daily truck hire market is shrinking. This, he says, is partly a result of companies outsourcing their transport requirements coupled to the general malaise in the economy. Owner-drivers are also absorbing some of the transient hire market.

In many instances companies that were reliant on daily truck hire to complement their own vehicles are now finding their in-house fleets are adequately coping with their reduced volumes of business. Many are in fact over-fleeted resulting in a greatly reduced need for vehicles on a casual or daily basis. A sign of the times!

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