Zipcar and Avis: A Match Made in Heaven

Luke is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

On January 2, Parsippany, NJ-based Avis (NASDAQ: CAR) announced the purchase of Zipcar (UNKNOWN: ZIP.DL2), a pioneering car sharing service based in Cambridge Massachusetts. As a supporter of green technology and as an Atlanta-based member of the Zipcar movement, I am excited about this purchase. As an investor, I am elated.

The procurement of this company ensures that Avis has a solid place in the future of the car rental industry. Zipcar brings to the table instant innovation and technology including hourly and daily rental options, remote keyless access to vehicles, an 11,000 strong fleet of high efficiency vehicles, a wider range of pick up locations, a system where customers fuel vehicles (although Zipcar pays for the fuel), a periodic versus daily cleaning schedule for cars, an instant online reservation and payment system, and a 700,000 member (prescreened through driving record checks) base of dedicated customers. In return, Avis offers the purchasing power and economies of scale that come with its 5,200 rental outlets and a seasoned management group that is focused on cost-cutting and efficiency.  Just as its managerial team has driven down its own debt to total asset ratio, Avis should now set its sights on debt-laden Zipcar.  The conjoining of these two operations should produce both a leaner and greener result.

Instinct to Survive=Opportunity to Thrive

Ironically, the procurement of Zipcar was essentially forced upon Avis by its competition. Due to recent industry consolidation and the creation of competing car sharing services, Avis was compelled to make this purchase out of the instinct to survive.

Hertz's recent merger with Dollar Thrifty car rental companies was a game-changing event in an industry-wide consolidation which produced three major players (all with burgeoning car sharing services).

1) Avis/Budget: Avis On Location will likely be absorbed into the Zipcar system or eliminated altogether.

2) National/Alamo/Enterprise: WeCar by Enterprise Rent-A-Car and is only a few years old and will be playing catch-up with Zipcar regarding customer awareness and brand recognition (few consumers even know it exists). It also rents autos through Philly Car Share, but on a local scale in the Philadelphia metropolitan area.  With nearly a million cars, 6,200 locations, and around $11 billion in revenue, this privately-owned giant is king of the hill.  But bigger is not always better and a slow rate of innovation often becomes the hallmark of companies that grow too large in a single industry.

3) Hertz Global Holdings (NYSE: HTZ): Hertz on Demand (formerly Connect by Hertz) operates in the U.S. and major European cities, but also suffers from late entry to the market.  Hertz's fleet of 488,000 vehicles and 3,200 locations, places it in second for size and estimated 2012 revenue ($6.1 billion). Its recent merger is seen as a positive sign, but the costs of this deal will be reflected in the short term in its bottom line.

U-Haul, (with its 13,000 strong independent network of truck rental outlets), and several car manufacturers have started automobile sharing ventures of their own, but they serve a different overall market and would make for a cider to citrus comparison. 

In addition, there are other stand-alone car sharing services offered as well. This is mostly a disjointed pack of small or non-profit companies that account for less 20% of US and 50% of international market share. It is unlikely that any of these groups will provide any real short -term challenge to Zipcar's well-organized and now properly-funded machine.

Survival of the Fittest

Prior to this most recent purchase, Avis managed to increase sales volume in both Asia/Pacific region and Latina America by over 10%.  With its European (mostly Budget) operations, volume surged by 20%.  If the August 2012 earnings report is any indication, management has the track record to turn its new Zipcar venture into a money maker.  If Avis exploits this new purchase and feeds its growth, I think it will gain market share over the next two to three years when the rest of the industry will finally catch up to this growing niche market.  Most importantly, Zipcar offers Avis a client base of tens of thousands of upwardly mobile college students (AKA: future middle-class consumers) to introduce to their brand. There is a reason why we don't see mastadons and brontosauruses lumbering about, but sharks and cockroaches still exist.  Small, nimble, and adaptive species tend to survive. 

 


lukey911 has no positions in the stocks mentioned above. The Motley Fool owns shares of Hertz Global Holdings and Zipcar. Motley Fool newsletter services recommend 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!

blog comments powered by Disqus