Intent on Success

The consolidation bug has struck the party rentals industry, and perhaps the most public personification of that trend is Los Angeles-based Classic Party Rentals, which in three years has grown from its Southern California roots to 26 locations in nine states. Ten locations have been added in 2007 alone.

While activity such as this might seem to sound the death knell for small, single-store operations, most in the industry don’t think that will be the case.

“The mom and pop operations around the country will continue to play a very big game,” says Ken Hughes, vice president of communications for the American Rental Association.

At least part of the reason small operators in the sector will continue to thrive is that the industry itself isn’t as large as, say, the heavy-equipment rental sector, where the need for continued growth and cost savings found in economies of scale drove a consolidation surge in the late ’90s.

“Mergers in the party rental industry are an elective dollar rather than a necessity,” says Fred Hageman of the mergers and acquisitions consulting firm Hageman, Stansberry & Associates. The equipment rental industry is just under $30 billion as an industry, while party rentals are just over one-tenth that size, he says.

What’s more, the investors who drove the M&A activity in the equipment rental industry look for businesses with more revenue than is normally generated by party rental companies.

“Private equity is looking for a company that is doing at least $10 million to $20 million,” he says, and only a handful of party rental outlets, mostly in top U.S. markets, can claim that kind of volume.

Still, the party rental industry is growing significantly faster than the American economy in general, and Hageman and Hughes agree that Classic will ultimately raise the standard for the industry as a whole in terms of the level of service and the products offered.

Hughes also points out that Classic’s moves are likely to raise the general level of awareness of the party rental industry, which benefits everyone, and smart operators of smaller operations will leverage their local connections and personalized service, raising the level of their games to take advantage of this growth.

For its part, Classic expects to continue its acquisitive ways. In the long term, CEO John Campanelli hopes to serve 50 or 60 U.S. markets within the next 10 years. But for the near term, he’s taking a cautious approach, keeping in mind the challenges inherent in his strategy of nationalizing a predominantly local business.

“Eventually a company like Classic has to operate their business,” Hageman says. “There is going to come a time when the owners are going to be interested in operating results, and not acquisitions.”

Looking ahead to that time, Campanelli likes to think of all of the company’s stores as “centers of excellence.” He compares Classic’s outlets to certain high-end retailers that consistently attain high levels of product quality and customer service at a large number of locations while maintaining a local feel and strong customer loyalty.

Local Management

Staffing, pricing and inventory are local questions best left up to local management, Campanelli says. He claims no interest in purchasing the inventory and customer list of a company, preferring whenever possible to bring the existing management and staff on board.

“We are really only interested in acquiring well-run businesses,” Campanelli says. “We look at their hiring practices. Do they pull the appropriate permits? What’s their safety record? We look at their OSHA log. We check reputations. We are looking for ethically run businesses headed up by team players.”

Once the initial criteria are satisfied, the fit to Classic’s internal culture becomes paramount.

“We are not interested in companies that do not fit our culture reasonably well,” he says. “It’s too hard to change them and we’re not trying to stick a square peg in a round hole.”

Campanelli says he sees considerable value in the knowledge and relationships that successful local operators have developed.

“We try to maintain people’s local pride and market savvy and then give them more tools to work with. Tennessee is not San Francisco,” he said. “From Miami to Albuquerque, people have different taste. The white china is everywhere, but there are many products that are local.”

How much the china costs is also a question of market dynamics. Classic doesn’t change the pricing policies of new acquisitions unless another nearby Classic outlet has a conflict. When that happens, uniform pricing for that market is created, “based on how that market’s been established over time,” says Campanelli.

National Ownership

For some business owners, there are benefits to becoming part of a larger organization. For starters, Classic helps lift some of the back-office burden from managers, such as payroll and accounts payable.

“Former owners don’t have to focus on back office,” Campanelli says. “They can focus on the clients and new ideas. We can do the back office chores very efficiently internally.” Traditional small-business burdens such as vacations and health benefits are likewise removed from local offices and transferred to the parent company.

To add coherency and uniform training, Campanelli brings Classic’s managers together at special events to discuss best practices and to learn from each other.

“We use events and trade shows to bring our leadership together, in part because it generates excitement and builds morale.”

The Next 10 Years

Beginning with the 2004 purchases of Regal Rents, with three locations in Southern California; and Tri Rents, with one location in Phoenix and one in Albuquerque, N.M., sunny climates have drawn Classic’s attention.

For now, Campanelli’s strategy is to continue to seek acquisitions in the Sun Belt states such as Texas, Florida, Georgia and the Carolinas, which have expanding populations of older, more affluent Americans who celebrate more life-cycle events and have the resources to splurge. Moreover, serving clients in the adverse winter weather conditions of northern climes is a challenge he wants to postpone for now.

Eventually, though, those challenges will be addressed and he’ll look more closely at the cooler climates. Then, in the not too distant future, are the national borders: “We will look to other geographic areas, the major cities in Canada and perhaps over time in Europe as well.”

Until then, Campanelli is content with Classic’s trajectory.

“It’s a fun market,” he says. “It’s fun to be involved in an industry that’s creating happy events and at the same time develop a business model that works.”