Does This Stock Have a First Mover Advantage?
Shawn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Every Zipcar (NASDAQ: ZIP) shareholder knew the day was coming when larger car rivals like Hertz (NYSE: HTZ), would attempt to offer rentals on an hourly basis to directly compete against ZIP. That day has come as Hertz recently unveiled an hourly rental service in attempt to partake in this growing consumer trend. Given that Zipcar enjoys roughly a $20 per car per day value greater than Hertz (see table below), it's not surprising that Hertz would want to enter this new market.
Should investors be concerned? Probably a little. But what could ease investor anxiety is that the company could leverage the benefits of being the first mover to effectively fight off Hertz. Researchers* have identified four characteristics that first movers exhibit that could lead to a competitive advantage: brand loyalty, scale from experience, asset inertia, and patent protection. Does ZIP enjoy the benefits of the first mover advantage? Let’s take a closer look.
First Mover Advantage
Let’s face it, humans are creatures of habit. Once we experience something and have a favorable outcome, we tend to keep coming back until either we no longer have good experiences or get a better one elsewhere. Both factors are reasons that first movers often have the brand advantage. The consumer is essentially there’s to lose. Zipcar has done well in this category, demonstrating a monthly average retention over 97% since the fourth quarter of 2009. Consider how impressive this is given the transient nature of their target market.
Another element that shows brand loyalty is the ability to add subscribers without significant costs. Companies faced with the prospect of marketing heavily to consumers are also burdened with high acquisition costs. This element can be a despairing endeavor as each consumer becomes less and less profitable. Take a look at the acquisition costs of Ancestry.com (NASDAQ: ACOM). While the company’s service was new and gaining steam, the acquisition cost per customer was relatively average at $70 compared to other services. But as the company required to sign up consumers who needed more convincing, subscriber costs increased significantly to a recent $107 per customer. Zipcar on the other hand has relied more heavily on word of mouth, the most cost effective form of advertising. The brand loyalty that allows consumers to make a recommendation to a new user is partly why Zipcar has managed to keep subscriber costs low.
Scale From Experience
The idea behind this advantage is that the company has a chance to learn about the market before their competitors can step in to compete. While the competitor is learning what the incumbent already has discovered, the incumbent continues to learn ahead of the competition creating an endless advantage loop. From a Zipcar point of view, the company has demonstrated that they have learned a great deal of insight from being in the market for the past decade. This learning can be seen in the profit improvement in their established markets like Boston, New York and Washington, D.C (see graph below.)
First movers have an advantage in access to assets because they often enter into deals or acquire resources that a competitor needs to compete. Take for example, the importance of parking spaces for hourly rental car companies. Zipcar theoretically, if they mobilized the model correctly, has the most important parking spots to place their assets. These parking spots are key to the hourly rental model as the cars must be accessible to consumers at convenient locations. Keen investors will note that a competitor could come in and incentivize the third party parking operator to grant the parking spot to them by paying a higher price, creating additional costs to Zipcar. This practice will most likely happen but can’t be sustained for a long time given that it hurts the profitability of the model.
Take also, Zipcar’s joint venture with Ford (NYSE: F) announced a few months back. Ford was interested in partnering with a company who could access the university market in the hope that young consumers would gain positive exposure to the brand. Zipcar was a great partner as the company is located in over 250 college campuses. A competitor entering the market doesn’t have this immediate scale. Keen investors will also note that this advantage has a short duration and hopefully will be renewed when the venture expires in less than two years.
The final advantage to discuss is the concept of patent protection. Companies enjoy the benefits of having protection for their technology or processes that set themselves apart from competitors. If a company has a patent on a certain product that a competitor needs to be competitive, the law allows the incumbent the sole right to that product. This often allows first movers to continue to be the only mover.
Zipcar has only limited protection of their products or services. Zipcar does hold a patent relating to mobile reservations, but doesn’t have patents for protection beyond that.
Do you believe ZIP has first mover advantage? What other companies do you believe do? Share your comments below!
*Footnote: Research gathered from Gerald Tellis in his book Will and Vision: How Latecomers Grow to Dominate Markets. Ironically, this book provides evidence that companies who were first ultimately don't often succeed. Luckily for ZIP shareholders, the company to first introduce car sharing was Flexcar that was acquired by ZIP in 2007. So Zipcar would fall in the positive side of Tellis' research.
Shawn Robinson is also on Twitter.
Motley Fool newsletter services recommend Ancestry.com and Zipcar. The Motley Fool owns shares of Ancestry.com, Hertz Global Holdings and Zipcar. ShawnRobinson owns shares of 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.