Tuesday, May 29, 2007

Coates Hire - Powering Ahead

1.1 Company Overview

Coates Hire supplies a large number of industries: building construction, engineering and maintenance, mining and resources, manufacturing, government and events. The majority of its revenues (80%+) come from operations in Australia.

Coates also operates overseas in the United Kingdom, with Coates Offshore providing specialised equipment to offshore oil and gas operations, and in Indonesia, operating on the mining and resource sector. Today, Coates Hire corners about 20% of the equipment hire market. It is clear and away the market leader in what is a highly fragmented industry that consists mainly of small companies.

1.2 Industry Overview

Equipment hire industry involves the business of purchasing and leasing out of equipment to industries such as building and construction, engineering, civil construction, building construction and maintenance, mining and resources, manufacturing, government, industrial maintenance shutdowns, and events.

Because the construction industry is highly cyclical (DITR, 2006), and accounts for a large percentage (6 per cent) of GDP, the equipment hire industry tends to follow the peaks and troughs of the construction industry and be cyclical as well. The equipment hire industry also tends to expand according to the growth in construction activity, which tends to follow economic activity.

For industry revenue forecasts, see Appendix A1.

1.3 Key Competitive Forces

Barriers to Entry: Barriers to entry for the equipment hire industry are relatively low. This is because anyone can purchase equipment and start leasing it out to customers with a relatively modest amount of capital, as long as the equipment meets basic standards of quality and safety. As a result, there are a large number of players in a highly fragmented industry. A key emphasis is thus placed on a company’s ability to differentiate itself from other competitors via economies of scale, customer relationships, range of services, and asset management.

Buyers’ Bargaining Power: The construction and resources industries are highly fragmented. This puts a cap on buyers’ negotiating power, which is generally weak. Equipment hire companies which are able to differentiate themselves and provide quality services can increase customers’ willingness to pay. The key threat is for construction companies to purchase their own equipment, rather than rent it. However, except for the largest construction companies, it is generally cheaper to lease equipment from equipment hire specialists.

Suppliers’ Bargaining Power: the industry presents an important number of suppliers, which means that the power is diluted between them. The competition in this industry for suppliers is important, so they have to be efficient.

Internal Rivalry: The industry is highly fragmented, with multiple small companies. Coates is the largest with about 20% market share. Other main competitors include Tutt Bryant Group, Boral, and Boom Logistics (check revenues). The most competitive firms tend to be large. This enables them to achieve economies of scale and provide a larger range of services. It also enables them to supply larger, more expensive pieces of equipment that earn higher margins.

Coates vis-à-vis the Broader Industry: Coates hire is the market leader, and with its size, scale, strong customer relationships and established business practices, it has been able to create sustainable competitive advantages in what is a highly competitive industry.

1.4 Coates’ Strategy

Coates purpose is to provide the best hire solutions on the market. The management defined its vision as “to become a $1 billion company by 2010 of first choice for customers, employees, shareholders and suppliers” (2005-2006 Full Year Results, p.3).

Coates’ strategy focuses on four dimensions:

Superior Customer Value Coates is committed to deliver the best value to its customers. The management believes that apart from delivering reliable equipment Coates should also provide customers with efficient support services and solutions options. The strategy is supported by consolidation of qualified HR and effective IT infrastructure - Coates Hire Enterprise Resource Planning (CHERP) and sales system “Coates@Work.”

The company also provides diverse range of services for its customers, via its multiple subsidiaries (Coates Hire, Coates Prestige, Coates Shorco, Coates Conrent, Coates Offshore). This allows the firm to provide value that other firms are unable to replicate.

This superior customer support service allows Coates to differentiate itself by providing value-added services in an otherwise undifferentiated market. By continuously innovating and upgrading its solutions options, Coates is able to sustain this competitive advantage.

Personnel and Human Resource Development Coates aims to attract and retain the best employees. It offers attractive salary and annual leave packages, provides a range of educational opportunities. In order to strengthen the skills of its management Coates launched two training programs for the management staff, Leadership Development and Frontline Management. Another area of primary focus is safety of employees. By hiring the best talent and giving them superior training, Coates is able to develop a sustainable competitive advantage in its human capital vis-a-vis its competitors.

Fleet management Coates claims (2006) that as a market leader it achieved significant ‘economies of scale’ in fleet management. The quality control is supported by a program “Silver Service”. As a part of financing activities, Coates heavily conducts reinvestments into its fleet. Coates has also developed superior fleet management technology in maintenance and storage. This allows it to depreciate equipment less quickly than its competitors and allows it to achieve lower costs and higher quality.

Business Growth via Acquisitions Coates plans further business expansion. It aims to achieve a sustainable growth by diversification and acquisition. Coates has executed this strategy successfully over the past decade by making multiple acquisitions and integrating them well. For example, (add example) This strategy of acquisition allows the company to consolidate a fragmented industry and build further its economies of scale, as well as derive other synergies from the diversification strategy.

In view of the above, diversity of business and revenue streams, both geographical, market and product, is the main strength of Coates Hire. The main weakness Coates identifies in limited capacity (2005-2006 Full Year Results, 2006).

Strategic Summary

Overall, Coates is a well established firm with a sound strategy and strong track record of executing its strategy successfully. It should continue to expand its market share in Australia as the industry continues to consolidate, and is in a good position to capitalise on opportunities overseas.

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