Avis' Zipcar Buy Illustrates These Three Companies' Strengths
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Three strengths helped upstart car rental company Zipcar (UNKNOWN: ZIP.DL2) grow big enough to get bought out by Avis for $500 million. Downtown car lots offered convenience and time savings. Hourly rentals offered a way to gain a pricing edge while maintaining daily sales. A new business model offered an entry point into an established industry. These three Zipcar strengths also show how three other companies established competitive advantages.
Zipcar showed auto rental companies an alternative to catching a taxi or bus to the airport to pick up a car. The car rental company went where the customers were, and bread maker Panera (NASDAQ: PNRA) does the same thing with its sandwiches. The fast casual restaurant chain also runs a popular catering service. Sandwich deliveries have also helped the chain deliver good financial results recently. Panera co-CEO Ron Shaich explained that the company's catering sales have risen 50% in the last two years, reported by Justin Menza at CNBC. Convenience helped both Zipcar and Panera differentiate their brands in competitive markets.
Car ownership and the traditional car rental model can leave a renter paying for a car while it sits in the garage. The Zipcar business model offered an opportunity to undercut big competitors like Avis and Hertz, while potentially bringing in more revenue. A customer who only needed a car for an hour could pay much less than the typical daily rental fee, while the rental car company could potentially collect more cash at the end of the day if enough renters showed up.
The Zipcar rental model has parallels with the software as a service model, promoted by Microsoft (NASDAQ: MSFT) and other business software vendors. Software as a service helped Microsoft compete on price when a small business needed enterprise software for a short period, since Microsoft effectively rented its software to the small business. Now, Microsoft's rental model has gained popularity with scientific researchers. Microsoft's Director of Cloud Research Strategy Dennis Gannon wrote a blog post that explains how the Windows Azure cloud service helps scientists analyze large data collections. Like Zipcar, Microsoft found a pricing model that could save its customers cash and secure its own revenue stream.
Zipcar took a big risk by challenging giants like Avis and Hertz, since the established car sellers could simply copy Zipcar's business model and set up their own hourly car rental services. Hertz actually did take this step with its Hertz on Demand service. Mark Clothier, at Bloomberg, reported that Hertz planned to make Hertz on Demand available in all 375,000 of its vehicles by mid-2013. Even with this challenge, Zipcar still had one major competitive strength, a brand with strong appeal to younger car renters.
Monster Beverage (NASDAQ: MNST) used youth appeal to take on the giants in its own industry, Coca-Cola and Pepsi. By sponsoring motorcyclists, speedboat racers, and car racers, Monster established a link between its energy drinks and extreme sports. Private competitor Red Bull takes a similar approach, and the energy drink company even sponsored an athlete's jump from the edge of space last year. The company's biggest challenge right now might be addressing concerns about energy drink safety and regulation. Ben Bouckley, at Food Navigator, reported that Monster CEO Rodney Sacks gave his side of the story at a recent investors' presentation, explaining that his energy drinks could satisfy food safety standards and pointing out an attack on Coca-Cola a century ago over health concerns.
Zipcar can still keep growing, but an investment in the company going forward will require an investment in Avis. Avis could have better growth prospects now, although the rental company already carried $10.86 billion in debt and the Zipcar buy will add even more debt. Zipcar's story remains relevant even after the acquisition, because it demonstrates that companies that share the traits that helped convince Avis to buy Zipcar could have appealing growth opportunities themselves.
enovinson has no position in any stocks mentioned. The Motley Fool recommends Monster Beverage, Panera Bread, and Zipcar. The Motley Fool owns shares of Microsoft, Monster Beverage, Panera Bread, and Zipcar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!