A zippy story on car sharing

Over the last few years, an industry that I have found really intriguing is car sharing. I am not in the target market for this business.  I am a middle-aged guy with kids living in the ‘burbs. I can’t get by with sharing a car.  For better or worse, life in the suburbs requires a car. But car sharing is an alternative for urban dwellers where just leasing a parking space is several hundred a month. What I find fascinating is that this (at some level) is just a car rental business but the Big Boys of the industry have not been the pioneers of car sharing. Rather, they have pretty much ceded the market to Zipcar (although Hertz may disagree with that characterization — see below).

The Wall Street Journal ran a recent article on the industry that lays out some of the issues (Car Sharing Attracts Large Rental Agencies, Mar 24 — page B7 but it’s not on-line for some reason). The subtitle of the article is “Business Has Significant Differences That Make Challenging Market Leader Zipcar Difficult Task for Hertz, Others,” which hints at why I find this interesting. Specifically, there are some operational issues that make car sharing very different from the traditional car-rental business. For those that have never looked into this, here is a brief primer on the topic. Zipcar locates cars around a metro area.  There are usually one or two at a given location and a specific car is supposed to go in a specific spot. Members pay an annual fee, registering their license etc with the firm.  Everything from there is basically self service. They then make reservations on-line possibly in brief increments — think from an hour to five or six hours.  (Members can also reserve for a day or two if they want.)  Hourly rates start at $7 per hour (at least here in Chicago) and includes insurance. They have a card that will automatically unlock the car that already has the keys in it. Members are responsible for keeping the cars clean and gassing them up (there is a gas credit card in the car).

What this all means is that the cars are dispersed around the city as opposed to all grouped at the airport. That changes almost everything in how the operations work. Hertz has cars come to the resources that can clean or gas the car. Zipcar has to rely on its members to take care of things. What that means in part is that everything that Hertz et al know about renting cars at airports pretty much goes out the window. Indeed, the difference in the eyes of Zipcar is so extreme that they argue that they are not in the rental car business:

Zipcar Chairman and Chief Executive Scott Griffith, for one, argues that his 10-year-old, privately held company isn’t really a “rental” firm. “What people want is a replacement for car ownership, a service they can buy one hour at a time,” he said. Zipcar’s aim is less to rent people cars than to free them of the burden of having a car without losing access to one, he said, making it a different business altogether.

The differences also mean that Zipcar can build a business with a lot fewer cars.

Notably, the company needs a little more than 6,000 cars to meet the demand of its 360,000 members, far and away the biggest membership of any car-sharing operation. Enterprise Holdings, parent to the Alamo Rent A Car, Enterprise Rent-A-Car and National Car Rental brands, has more than one million vehicles world-wide. It has more locations than Zipcar even has cars. But its nascent WeCar has only a fraction of Zipcar’s membership. In car sharing, the advantages of scale may not be felt for years, even assuming meteoric growth.

The key point is that car sharing is a local business.  A Zipcar customer who lives in Boston but finds themselves in Chicago can use Zipcar in the Windy City, but that is not the firm’s bread and butter.  They are focused on people who live in the Back Bay and always reserve a car in that neighborhood. Hence scale and national prominence doesn’t really matter.  It’s a lot more like dry cleaning; you’re going to go whatever is the most convenient location unless they ruin your suit.

So how are traditional car rental firms trying to play this? A lot are acknowledging that trying to catch up with Zipcar may be a hard row to hoe and are instead focusing on college campuses — another setting where many want to use a car but may not be able to afford it. Hertz, however, seems willing to play tough:

[Hertz] makes no secret it wants to do it all, including launching a direct challenge to Zipcar. Its Connect By Hertz has about 14,000 members at present using 700 cars. “If we wanted to, we will scale up to 5,000 cars, and we could do that in two weeks,” Hertz Chairman and Chief Executive Mark Frissora said. Frissora touts Hertz’s big nationwide rental network and what he says is a significant auto-maintenance and acquisition-cost advantage. But he noted how hard it is building membership. “Your biggest issue in this business is awareness.”

So is the market big enough for two players?

Growth prospects are strong enough that a competitive war hardly seems necessary. Frost & Sullivan recently projected the car-sharing industry’s 2009 revenue–thought to be $150 million to $250 million — could surge to $3.3 billion by 2016. “We see it as the next generation in ground transportation,” industry consultant Neil Abrams said. Then there is the fact that margins may be higher than in traditional auto rental. Car-rental firms are “doing quite well” if they earn $1,000 a month on a vehicle, but a well-functioning car-share business means $1,500 to $2,000, said Julian Espiritu, Abrams CarSharing Advisors managing director

How this all plays out will depend on whether that extra revenue holds up.  It seems like it could. $1,500 a month would require about 190 rental hours at $8 per hour (note that rates start at $7). There are about 720 hours in a month so the required utilization is only 26% or so. Even if you think it wrong to count the wee hours of the morning, there are still around 480 “relevant” hours per month.  So they can hit $1,500 at less than 50% utilization.