Preaching to the unconverted

Phil Moorhouse, managing director of LCV rental specialist
Northgate plc tells Jo Tacon why he believes there is huge
potential for growth in vehicle rentals – in the UK and abroad
 
 
 

‘Conversion’ is one of Northgate plc managing director Phil
Moorhouse’s favourite words, judging by the frequency with which he
uses it to describe Northgate’s growth strategy. With missionary
zeal, he talks about the potential to convert the 90 per cent of
the UK’s 3m light commercial vehicle owners who currently purchase
their vehicles to rental instead. “The trend is towards rental –
the rental market is growing by 4 per cent every year. In the
United States around a third of commercial vehicles are rented, and
we see no reason why this shouldn’t eventually be the case in the
UK, too,” Moorhouse enthuses.

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 Northgate’s half-year results show that Moorhouse may have a
point. With pre-tax profits at £43.9m in the six months to October
31 2007, up 16 per cent compared with the year-ago period, the
company had plenty to crow about – including another new
acquisition, Hampsons Self Drive Hire, which added another 1,600
vehicles to Northgate’s fleet, bringing its total UK fleet to
68,500 vehicles (see Motor Finance Dec 07). It operates a further
59,500 vehicles in Spain, after beginning operations in the country
in 2002 with the purchase of local family-owned business
Fualsa.

A lesser-known entity

In the UK, the name ‘Northgate’ is rather less well known than that
of its most famous product, NORFLEX, which offers businesses what
Moorhouse calls a “totally flexible transport solution”.
Northgate itself is the umbrella company for 21 separately-branded
regional rental companies, which operate from 90 locations
country-wide. Moorhouse explains: “Rather than having one
‘Northgate’ brand, we decided to retain different brands in
different regions so we can be seen as the local company by the
business community – we find this is the best way to get new
business.” In many cases, the company will start a greenfield
operation, then “invent a brand name,” he says.

But surely this entails significant duplication of resources?
Moorhouse says not, as certain back-office functions – finance, IT,
credit control, technical support, and purchasing, among others –
are done on a group-wide basis. However, the 21 managing directors
of Northgate’s brands are individually responsible for their
particular unit’s performance, which in turn determines their
remuneration. “We find this quite an effective motivator,”
Moorhouse says dryly.

Changing concepts of ownership

Moorhouse sees a shift from “ownership” to “usership” in both the
UK and Spain, and intends to capitalise on the trend. “The big
opportunity is to convert cash purchasers into renters,” he says,
“and we have developed a number of strategies to convert
customers,” including sales literature that identifies the risks of
ownership – and the concomitant benefits of outsourcing those risks
to a rental company.

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The message seems to be getting through. If, for example, a
Northgate salesman finds that a potential customer reacts
positively to the idea of NORFLEX but that the company has just
outright-purchased itself a new fleet of vans, the salesman can
offer to buy and rent back the vehicles. “This has been
particularly successful,” Moorhouse says.

Northgate’s focus on flexible renting – rather than contract hire –
means that the company counts several large car leasing firms among
its clientele. “The major lessors have requirements for lead-in and
swap-over vehicles for their clients, outside of their normal 24-
and 36-month contract hire terms, which we can provide,” Moorhouse
explains. “Northgate can do this because all of our vehicles are
provided via a totally flexible arrangement, with no penalties or
fixed terms.”

The company specialises in unliveried LCVs, which make up 80 per
cent of its fleet, while cars comprise 13 per cent and HGVs 7 per
cent. “We provide cars because certain of our LCV customers asked
us to – for example companies which needed vans for engineers but
company cars for sales staff,” Moorhouse notes, adding that the HGV
component of the fleet was added for the same reason. “Our aim is
to meet all our clients’ transportation needs,” he says.

Disposed of carefully

One key factor in maintaining profitability in a competitive rental
market is how vehicles are disposed of when their rental life comes
to an end. Northgate’s answer to this is to have its own disposal
company, which soaks up “97 per cent” of ex-rental vehicles through
its nine UK sites, Moorhouse says. “We have built up a customer
base of used vehicle traders, and we are also widening our disposal
channels to sell to retail and semi-retail customers, with 20 per
cent of ex-rental vehicles sold this way.” Northgate was able to
open up this new channel following the acquisition of Arriva
Rentals in 2006. “That gave us access to a stock of clean,
low-mileage vehicles, which in turn allowed us to get into the
retail disposal business,” Moorhouse explains.

He points out that residual values for commercial vehicles were
“very strong” in 2007, partly driven by a “lack of supply from
manufacturers”. “Over the last 15 years,” he adds, “we have made an
RV profit in all but two of those years.” The commercial vehicles
sold by Northgate are typically 30 months old, with cars averaging
18 months in age. The only limitation to the numbers the company
can sell is the supply of quality vehicles Northgate can get from
its customers, Moorhouse says; “we’re not talking one careful owner
here,” he says, as many of Northgate’s customers come from the
construction sector, and vehicles often come back after having been
heavily used. Every Northgate hire company has its own rental
expert who can assess the damage chargeable to customers at the end
of a hire contract, and vehicles are reconditioned in-house where
necessary.

Keeping customers happy

“We aren’t the cheapest rental company around,” Moorhouse says,
“but we have a reputation for quality in customer service. There is
a premium for a high quality of service – although there is of
course a limit to that.” The 21 managing directors of Northgate’s
brands are encouraged to “take ownership” of their own customers,
although there is a call centre to deal with queries from corporate
customers who rent vehicles on a nation-wide basis.

 As part of its customer service strategy, Northgate carries
out the vast majority of its maintenance in-house, at its 60
workshops across the UK, which allows for a fast turnaround and
minimises vehicle down-time. To add another string to its bow, the
company bought a small fleet management business called Fleet
Technique in 2005, which managed a fleet of 15,000 vehicles. “This
allows us to deal with customers who don’t rent – we can manage
vehicles for clients if they prefer to purchase their own
vehicles,” Moorhouse says. Fleet Technique had its own bespoke
software, which was another attraction for Northgate.

Looking abroad

Northgate’s move to Spain in 2002 was prompted by a strategic
review in 2001 which found UK growth levels – historically at 15
per cent – to be flattening, and which found that the rental model
could potentially work in any market. The Spanish operation now
provides a third of group revenues, and Northgate is to enter
another European market before the end of 2008 – “hopefully by the
end of July,” Moorhouse says. Both western and eastern Europe are
on the agenda, although Moorhouse hinted strongly that a former
Eastern Bloc country such as Poland might be a good bet for a new
venture, especially as new members of the European Union are likely
to receive substantial grants in coming years to develop
infrastructure, which will benefit the construction companies which
are likely to make up a significant proportion of any rental
company’s client base.

 If the new international operation – wherever the company
ends up choosing – follows the model of the Spanish subsidiary’s
development, Northgate will choose a suitable takeover target, then
engage suitable local managers – directly answerable to Northgate’s
seven-strong UK board – to run the company. “Local management is
key,” Moorhouse says. But that does not mean that the UK will be
neglected: “40-50 per cent of the UK rental market is ‘mom and pop’
businesses with 50, 75, 200 vehicles. There are lots of
opportunities for market consolidation out there, and we are at the
forefront of the consolidation wave.”  Northgate is regularly
approached by businesses wanting to sell up, but is “selective” on
the ones it pursues, he adds. “We look at businesses with a minimum
of a few hundred vehicles, although it is quite easy for us to
‘decant’ vehicles to the nearest depot if we feel it is worth our
while.”

 When it comes down to it, rental is “very simple”, Moorhouse
believes – “buy a vehicle, rent it to a customer, collect the cash,
then dispose of the vehicle.” Northgate’s success at delivering
profit growth would suggest there is slightly more to the business
of vehicle rental than that; whether other companies can replicate
Northgate’s growth strategies remains open to question.