Murray Pollok interviews David Downie, COO of HSS Hire.
11 November 2011
HSS has grown its revenues and key accounts business at a time when others in the UK are still struggling with falls in construction activity. The company's chief operating officer, David Downie, tells Murray Pollok how they have done it.
It is ironic that one of the key elements in the reinvention of HSS Hire - the shift away from its ‘high street' or ‘consumer' profile towards a tightly focused business support role - has been pushed through by senior managers who all come from high street retail and consumer business backgrounds.
Chairman is Archie Norman, the ASDA supermarket guru; chief executive officer is Chris Davies, who has worked for Staples and Disney Stores Europe; and chief operating officer David Downie was an ASDA board member at 36 and a former managing director of Phones 4 U, the mobile phone chain.
What these and other new managers have brought to HSS is top level business experience applied to a strategy that was first signalled as early as 2004, when Davis Service Group sold HSS to private equity firm 3i and its then managers.
That process, of transforming a broad-based tool hirer with 500 depots into a business support company with less than half that footprint, was simply accelerated in 2007 with the sale to Mr Norman and private equity firm Och-Ziff Capital Management.
Since then the focus has been on targeting customers in sectors such as facilities management, retail, utilities and airports. "Maintain and operate rather than ground-up construction", is how Chris Davies put it earlier this year.
David Downie, the company's COO, talking to IRN at the company's regional distribution depot in Leeds, explains that the new structure of the business - with a much smaller network of depots linked by a backbone of large Superstores - is designed to supply the needs of this new customer base and in particular its key accounts, who now make up around 30% of revenues.
"It is customer led", says Mr Downie, a chartered management accountant who comes from a farming background in Scotland, "It's consistent with what customers want. Equipment that is safe and of a certain quality - that's a given. Then you get to ‘why us and not someone else?' It is availability and service: you've got to be in the ball park on price, especially in a recession, but the underlying driver is availability, service and making life easier for customers."
Maximising availability of the fleet through an efficient national logistics system has therefore been a key task for Mr Downie and his team. Equipment is viewed as a national fleet rather than allocated to individual depots, and the distribution of that fleet via a national warehouse, the Supercentres (currently standing at 15 but with plans for that to reach 30), and a hub and spoke depot network has been crucial.
The transport fleet of 500 vehicles (down from the peak of 600) includes 30 large 18 t trucks that plough up and down the UK's motorways through the night delivering equipment to where it is needed.
"The question is; how do I drive the time the truck is utilised, and drive the utilisation of the driver?", says Mr Downie, drawing on his supermarket experience, "We're close to having double the productivity per truck that we used to have."
This is something of a culture change for branch staff, who were used to taking trucks home in the evening, a practice than has been phased out. "We made them a key part of the process from the beginning", says Mr Downie, "and we went quite slowly at first."
Delivery drivers also have hand-held devices that allows the trucks to be tracked and which can be used to take photos of damaged equipment, and more. Mr Downie says this means that HSS knows where equipment is, in real time.
Centralisation of the workshops to around 20 centres is another part of this logistics operation. Staff at standard depots can solve simple issues, but bigger maintenance and repair jobs are dealt with by the workshop centres (with the same transport infrastructure being used to make sure that ‘in repair' times are kept to a minimum).
This is all about driving the availability of the fleet and increasing utilisation. Mr Downie says that 40% utilisation has long been the norm in tool hire, and that HSS is trying to get it to the high 40s or the low 50s.
"You get a far higher proportion of availability...then that starts to change the capital model. I don't see why we can't get that to a new level", he says, "The network is now at a place where we can really exploit it".
HSS still rents to consumers and homeowners for the DIY market ("that's one reason we won't go below 230 depots"), but professional customers, from ‘white van man' tradesmen to key accounts, generate 70% of revenues.
And within this professional customer base, it is major accounts in sectors such as airports, retail, facilities management and utilities that are of growing importance, now representing around 30% of its 2010 revenues of £171.0 million. Sales to key accounts grew by 25% last year, which is a significant achievement in the current market.
"Our focus on key accounts has not finished and we are gaining momentum", says Mr Downie. The company has signed major rental contracts with companies like airports operator BAA (for Heathrow Airport), lifts installer Otis, and more recently with a major UK supermarket chain, the identity of which has not been published.
In the case of the supermarket customer, the contract means that HSS will be used by all contractors working on new retail stories or on refurbishing existing locations. It is a model that is getting more attention in the UK rental market; "It's the proposition of going straight to the end user rather than the contractors", he says.
Mr Downie thinks there will be other new customers and markets to discover where rental is not currently being used. "In facilities management outsourcing is a key trend. Finance directors are looking at their balance sheets."
Another part of the service equation is providing these customers with more information. The company's LiveHire online rental system , which allows for real time ordering and off-hiring of equipment as well as providing details on what's on hire and invoicing, was launched in 2009 and augmented last year with a service that provides estimated delivery times for customers.
Mr Downie says around 10000 of its customers are using LiveHire. "It tends to be used to reduce the administrative burden, but some companies do place orders. It hits the mark with all the big customers - how to make hire easy to do. Transparency just makes a lot of sense." HSS is now pushing LiveHire to its smaller trade customers as well.
His own experience on the highly competitive mobile phone market at Phones 4 U has also informed HSS's approach to monitoring sales activity at depots. "There is a big difference now on what they do if it goes quiet", explains Mr Downie, "How many contractors have they called that day? If you are not having a good day, we ask, what can you do?"
There is evidence that HSS's strategy is paying off. Revenues were up 15% last year in a market that was flat. EBITDA profits rose by 33% to £39.1 million.
This is partly because of increased efficiencies, and because its target markets are performing better than the general economy; "There is a certain element in the customer base where activity levels were good and continue to be good", says Mr Downie. He says HSS's 15% growth last year can only have represented increased market share; "It's mathematically impossible for us not to be [growing market share]."
Pricing has held up in the last 18 months; "We haven't achieved growth through dropping our prices", he says.
There are still concerns about the UK economy - especially since 25-35% government budget cuts are just now starting to be felt. "We are absolutely focused on what we can do - we are not second guessing what is going to happen", he tells IRN, "It's going to have an impact, but I'd rather be in facilities management and the retail sector than be saying I'm 30% down on construction."
HSS believes that conditions will still be challenging in 2011, although investment levels are starting to creep up. The capital expenditure of around £18 million last year - including some brought forward from 2011 budgets - will be exceeded this year, with spending in the region of £27 million.
This money will be targeted at areas such as access towers and powered access (access equipment represents around a fifth of turnover), tools for shop fit-outs, and lighting towers. Mr Downie says he wouldn't describe the fleet as old - "we entered the recession with a young fleet".
Going ahead, HSS is looking at undertaking more refurbishment of equipment with key suppliers, particularly in areas such as powered access and generators, and probably focused on equipment valued at more than £3000.
He also says there are opportunities to partner with suppliers in redeveloping products. This is not a harking back to the HSS past, when it had a name for developing innovative new products (and which proved to be rather hit and miss).
Now it is about lowering costs on established products. "We want to partner with suppliers and see if we can re-engineer the price of products", he says. For example, HSS is working with a supplier to develop a lower-cost lighting tower, perhaps with a smaller engine or different power source altogether. He says there is the potential for that kind of initiative in a number of product sectors.
Another key strategy of the past, franchising the HSS brand internationally, has also been largely dropped. "It's more of a legacy", says Mr Downie, "Our focus is on the UK and Ireland. Some [franchises] will continue, some will not - we're not pursuing that route."
A more relevant question, perhaps, is whether HSS will venture into larger equipment? It currently does so only in Ireland through its Laois Hire business, which also brought over some large machines to London in support of HSS's involvement in the Olympics 2012 project (it has a depot in east London).
This applies also to powered access, where HSS's fleet currently goes up to Genie GS-1932 scissors; "We cross-hire a lot of equipment that sits above that", says Mr Downie, "these are ongoing investment decisions." He mentions concerns about oversupply in the larger sized powered access market, which implies that investment in that area may not be a priority.
Investment in lager equipment would be a big step in a market that is still uncertain, and at a time when HSS is not bent on a spending spree. Acquisitions are another issue, and Mr Downie will only say that, if merger and acquisitions activity does increase; "You want to be in a position to play a part in that."
More to the point, many in the industry will be wondering when Archie Norman and Och-Ziff will want to cash in on their 2007 investment. Mr Downie isn't really in a position to comment on that, and prefers to focus on the positive; "We are building a strong and talented team that can help HSS perform".
Whatever the future holds, the strategy of applying the logistical expertise of supermarket chains to a well defined, professional customer base appears to be working.
Anyone who believes that HSS has been hijacked by retailers with no feel for rental should revise their opinion: its financial numbers tell a different story, as does a visit to the Leeds depot, which is the very model of an efficient rental operation.
As David Downie says, looking over the Leeds site; "Running a distribution centre like this is a darn site harder than managing a supermarket."