Too much of a good thing: Can rental companies ever sign too big a contract?

With a hefty contract in the bag to supply a multinational construction firm with construction machinery for projects including work on the UK’s M6 motorway, the board room of the Hawk Group of plant hire companies in the UK must have been an upbeat place to be in 2017.

The Shropshire-based construction equipment rental firm, which had a fleet of 2,000 machines, had been supplying equipment to construction sites across the UK for more than 40 years and in 2017 made a profit of more than £0.5 million on sales of £93.5 million.

(Image: Adobe Stock via AI)

Yet, just over a year later, Hawk Plant was in administration, a victim of the liquidation of construction giant Carillion, one of its biggest customers.

Hawk Group is not the only equipment rental firm which has been hit by the problems of a major customer. In June, when tools and equipment hire group HSS Hire announced that customer Amey had decided to switch to a different supplier, HSS’s share price fell by a tenth, although it has since posted a more positive trading update. (It was Speedy Hire that won the Amey contract.)

The Manchester-based company said the Amey deal, which has been in place since December 2015, had accounted for about 7% of annual revenue and a tenth of its adjusted EBITDA profits in 2023.

So, how much of a risk do rental companies take when signing a contract with a customer many times their own size that they may be left with an earnings gap - or worse - if things go wrong? And what can rental companies do to mitigate these risks?

Rental Briefing asked some experienced industry figures for their view on how to manage the risks associated with getting too much business from major customers - and what sort of balance companies should aim for.

Pat Fallon, group deputy CEO, Byrne Equipment Rental
“I don’t agree that you can have too much business from any one customer. I do think that too much focus on one large customer at the expense of others and a lack of recognition of that by management and their team is the issue.

Pat Fallon, Byrne Equipment Rental. (Photo: Byrne)

“For any rental company to sit back and have 5-10% of their revenues with one particular customer, not to recognize that risk and have a robust plan and strategy to address this is most unwise.

“Like many other companies in our industry, the Pareto principle is alive and well. Around 70-80% of our revenues come from 20-30% of customers. I would say in overall terms, our biggest customer would only account for perhaps 2% or 3% at the revenue level.

“The way we try and manage the risk around that is we try and draw a balance - there has to be a ratio between the lower number of large customers and a higher number of smaller transactional customers so that we don’t start getting hung up on four or five really big customers to the point where we then we suffer enormous pain if one falls away.

“It’s difficult to have an ideal customer makeup model because it differs so much from industry to industry and country to country but I suppose we would like to have 10-15% large customers, and then 40-45% in the second tier, and then the balance made up of multiple more transactional reactive trade that for the most part will come in direct to a hire desk without involving too many people or too much operational cost.

“Very often with your larger customers who by definition are high volume, we see constant strong competition and very often price negotiations happens at least a couple of times a year. Added to this, there’s regular negotiation when we come up against competition because client companies are constantly looking at ways in which they’re going to be able to cut costs and there is no shortage of providers offering low prices to gain a foothold.

“At the other end of the scale, you can charge quite good rates on your small shorter term transactional hires but even then there are limits - It doesn’t fit that every smaller customer is going to be a more profitable customer.”

Kevin Appleton, chairman at MRO Plus
“I would always say that customer over-dependency risk emerges, not from the share of overall revenue the customer produces or the type of activities or products used, but rather on the nature of the client-customer relationship.

“If it’s a deeply embedded, unbreakable link between two organisations, I would consider that a very different quality of earnings from the situation where you have one salesperson who brings a significant contract with him from a competitor based upon a personal relationship with one buyer.

Kevin Appleton

“What you want is a genuinely symbiotic relationship with a high degree of integration then it is very hard for companies to decide to end the relationship on a whim.

“The more layers of integration you can have with a customer, the more you can take the relationship beyond the bit of steel that they are renting. What you want is to create a situation where you make life easier for the customers and where it becomes operationally unattractive for them to offer the work to someone else.

“For firms which do have a large customer accounting for a significant portion of their annual turnover, these things are added to a risk register as a feature of the business. There is no threshold where things tip over and a blue light goes off because a customer accounts for a particular amount of revenue.

“If 10% of annual revenues comes from two or three large customers, for example, then managers should look to manage that risk by ensuring that those relationships are well managed and not purely transactional or managed from a single point. These could be things like setting up educational programs for site managers on how to use the equipment or finding other ways to build a senior management relationship.

“Rental firms are always looking for new opportunities to grow their businesses and many of these things would just be things they are naturally doing anyway.

“Large customers are going to be frequent users of the equipment they hire so you can afford to offer them a lower rate because at the end of the day, their usage volume covers the cost of the equipment more quickly than that of occasional users who will only hire the kit for one day in a week with it then standing idle for the remaining four days.

“For occasional usage customers there is often more admin because they still need a human interface to fulfil each hire . The equipment still needs to be inspected, repaired and cleaned every time which adds cost to very short-term and occasional hires.”

Jeff Eisenberg, Claremont Consulting
“There’s a long strategic pendulum that swings back and forth in pretty much all major rental companies between having a few large customers or many smaller customers. Much of this will depend on the type of business you are setting up and the contacts you have in the first place.

“Working for big customers has a lot of advantages: A big contractor may have hundreds of sites, so there is a lot of work. Moreover, these are often blue-chip companies. You’re taking credit risk on somebody that’s much less risky than yourself and there are economies of scale.

Jeff Eisenberg, Claremont Consulting

“Rental companies will offer big customers the opportunity to centralize their purchasing and concentrate it in as few suppliers as possible to get the best deal. They will offer midnight cover and a dedicated team which can come and provide backup or repairs whenever necessary.

“The problem is that getting these large customers can be very competitive. All the big rental companies may end up chasing one or two big customers. The purchasing people for these big firms try to save a few percent on that whole contract.

“So, for a rental firm you’re taking less. You’re probably going to have to discount to win the business so margins for this kind of work is often as low as 10% because otherwise the contractor gets jealous and says we can do that ourselves. And once the discounts get to a certain level, it’s just it’s just too painful to do.

“On the other hand, to go after small customers can also have advantages because you can charge them a better rate. I’d say that that the gross margin can be very high. It could be 80% even 90% gross margin. If somebody is in a hurry, they will pay more because it’s available.

“Also, if you have a lot of small customers you have a more diversified customer base so it’s less of an inherent risk from an investors’ perspective. But then maybe the rental contract is only US$40. You’ve got one person on the counter managing that for 10 minutes. That’s a lot of time in comparison to the size of the order and a lot of overheads to pay.

“A lot of small customers with a very high margin can be very profitable. But you need volume. It’s pretty hard to do a billion of that. And knocking on hundreds of doors and getting hundreds of new customers every year also has a certain cost. There’s a certain churn.

“So most rental companies will come up with their own strategy which determines the mix of customers they want to attract. Each of them is going to answer it a little differently.

“I think if you’re a big rental company, you’ve just come off a few years where the utilization is low, but your average rental prices are OK then you’re really tempted to go for the big customers just to get that last bit of equipment working. But if you’re in the opposite situation, with very high utilization but low rental rates, and are really struggling for your profitability, then the temptation is going to be, let’s get some smaller, lower-risk customers that cost more to manage but for whom the rental rates can be 30% or 50% more. It’s how they adjust their own mix.

“I think eyebrows in the rental industry only start to get raised if you’ve got your biggest customers more than 10% or certainly more than 20% of your total revenue. But this is just a rule of thumb. You’ll see rental companies that will deal with a big utility like a water utility or a power utility, and some of them will be 20 or 30%.”