How to survive a recession
The Commerce Department recently reported a second consecutive decline in US gross domestic product (GDP). Although not a definitive marker of a recession, it is a key indicator. The Federal Reserve has also said it is more concerned with fighting inflation than preventing a recession.
All that news aside, maybe it’s not that bad. I know that an apocalyptic article usually gets more readers, but in this case the equipment rental industry has some nice tailwinds to propel it through a recession. Let’s first see why it might not be so bad. Next, we’ll cover some best practices in the event of a more severe downturn.
Interest rates are rising and that could be a good thing. This probably sounds odd, because an industry typically contracts when interest rates rise. This is especially true for industries that use debt to finance growth and assets, such as the equipment rental industry.
However, the rise in interest rates is more positive than negative for equipment rental companies, as it also affects contractors. For most of the past decade, the federal funds rate has been historically low, translating into interest rates on equipment purchases at or near 0%. When a contractor makes the decision to rent or buy, the cost of new equipment is a huge factor. Not only has the price of new equipment increased considerably, but the possibility of financing it “for free” has disappeared. This should increase the perceived value of renting and encourage entrepreneurs to rent rather than buy.
In addition, impending recessionary periods create uncertainty for entrepreneurs. If you are unsure of the quality of your business in six months or a year, would you make a long-term investment in an expensive asset or would you choose to wait and rent in the meantime? You are much more likely to choose the low risk option of renting the necessary equipment.
Both of these tailwinds are expected to increase rental penetration and encourage more contractors to see the value in rental, which will be positive for the equipment rental industry. It is always possible for a recession to get worse. In this case, there are still opportunities to get out of it.
The biggest opportunity is in staffing. According to a recent survey by the American Rental Association (ARA), historically low unemployment rates coupled with the long-term trend of low availability of tradespeople has left equipment rental companies understaffed by 30 %. If the recession spreads and increases unemployment, it could increase your access to talent and allow you to grow your team even if demand drops. The key would be to increase staff to meet projected demand levels instead of current levels.
Not all geographies and segments are treated equally during a recession. So if you find yourself in a niche market or product class that is struggling more than others, you can do more. You would like to slow down or freeze hiring. If you need to downsize, start by taking advantage of natural attrition. If that’s not enough, aim for a deep cut rather than several minor cuts. Layoffs are brutal for morale, but multiple layoffs are worse.
Strive to raise and retain cash, but if you have substantial cash reserves, invest in training and developing the staff you retain. The good times will come again. If you are ready to take the plunge with a highly qualified team, you have the opportunity to gain market share. Finally, if you think business is going to slow down, be okay with missing rentals. One of the worst things to do before a downturn is to be overweight on the fleet. If you don’t run out of rentals, at least occasionally, you’re overstocked.
It’s always dangerous to say this time is different, but what’s happening now is unlikely to be a repeat of 2008-09. I see more opportunities this time around, as evidenced by our ARA Rentalytics™ five-year industry forecast which is updated quarterly. Our latest August update predicts at least two more years of solid growth. We have not made any downward revisions to projections for 2022 or 2023 and still expect at least two solid years of growth for the equipment rental industry.