Zipcar Strategy

Adam C. Forni UC Irvine FEMBA ‘13A 8 May 2012

ZIPCAR, Inc. Zipcar, Inc. was a membership-based car sharing company providing hourly or daily rentals to its members. Founded in 2000, the company competed in the $30B automobile rental industry. Though the industry was at a mature stage in its life cycle, Zipcar had a fresh business model: it differentiated itself by offering shorter-term rentals to urbanites and college students, often replacing vehicle ownership in the process1. This was a brand new model, and was termed carsharing. The model had been losing money for over a decade; was it finally time to give up, or were the profits just about to start pouring in? I. Company Financial Standing. Zipcar's financials painted a mixed picture. On the positive, annual revenue and membership growth each averaged more than 50% in the five years to 2011. Earnings - though mostly negative - were rising, with the company celebrating its first-ever quarters in the black in 2011. Approximately 50% of the company's growth was inorganic: Zipcar made acquisitions to grow market share (Flexcar in 2007 and Streetcar in 2010), and peer-to-peer sharing (Wheelz in 2012 – see part IV for more information)1. Zipcar's share price soared by 66% the day of its April 2011 IPO, leading analysts to speculate that the low pricing of $18 per share lost the company $50M in potential income2. Despite what good news there was, shareholders quickly became dissatisfied. In the nine months following its IPO, common stock shares had dropped -51% from their highs, compared to -6% across the industry and -5% among the Russell 3000 index. Since 2007, Zipcar's returns on assets (ROA) and sales (ROS) averaged -9% and -11% respectively, compared to the industry's -3% and -0.5%3. See Exhibits 1, 2 and 3 for select financial comparisons. As the company finally reached profitability in late 2011, new concerns were raised: Zipcar’s core cities showed little growth; rising gas prices threatened to limit or reverse growth; and there was the recent entry of new direct carsharing competitors including Daimler's Car2Go and Hertz's On Demand4. II. Industry Profitability. Companies in this industry rented passenger cars to customers, traditionally for periods of 30 days or less. 55% of revenues came from leisure (non-business) customers and the remainder came from business customers3. Zipcar was the dominant player in the carsharing segment which was characterized by shorter rental periods (by the hour or day), operator-less parking facilities, and the inclusion of fuel and insurance in the rental price. However, Zipcar controlled about 90% of the car sharing segment, and directly competed in the rental industry at-large5. Zipcar had minor forays into international markets, but complexities with overseas markets had traditionally kept the car rental industry close to home. Thus, hereafter the discussion will focus on the US car rental industry at-large, and it will be noted where the carsharing segment deviates from the industry at large.

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The car rental industry was dominated by big players. Enterprise Rent-A-Car, one of the world’s biggest private companies, held the top spot with a 38% market share. The next three, all public companies, were Hertz (19% market share), Avis (18%), and Dollar Thrifty (5%). In 2011 Zipcar took the 5th position with approximately 1% market share3. The remaining 20% was spread over about 6,000 smaller companies.6 The past 5 years had been tumultuous. The 2008 financial crisis hit car rental companies particularly hard, since both business and leisure rentals depended heavily on then-elusive corporate profits and discretionary income. As a result, the industry posted bigger combined losses in 2008 and ’09, than total gains in the rest of the 2006 to 2011 period combined.6 Industry profitability will be analyzed using Porter's Five Forces Model. Threats of New Entry. Low. Economies of scale played a huge role here: New entrants needed lots of capital to buy and maintain their fleets. Further, small new entrants missed out on the bargaining power that the big players have when purchasing vehicles. Finally, brand recognition was crucially important in this industry, since customer loyalty ran high. For example, Enterprise kept the National and Alamo brands even after acquiring a third budget renter in Vanguard Rental; this was because each brand had its own positive reputation. New entrants would lack each of these attributes. Threat of Substitutes. Medium. Taxis and public transportation were the two major alternatives to rentals. However, renters would often make multiple stops and/or carry baggage with them, making those alternatives less attractive. If nothing else, taxis imposed a price ceiling on what rental companies could charge, since a taxi could be directed anywhere a rental car could. Finally, another growing threat was that of electronic communication: text messages, email, and teleconferencing were squeezing the demand from traditional business customers. Bargaining Power of Suppliers. Medium. The smallest companies had little power to negotiate with the big car companies, receiving little discount below consumer retail prices. But, with a US fleet valued at $26B in 2012, the biggest players of the rental industry held great sway in their negotiations with manufacturers. Further, with cost pressures mounting, rental car purchases of imports exceed those of domestics for the first time in 20097, signifying that the renters were willing to purchase from any manufacturer that could provide the required vehicle specs. Another supplier was insurance companies, who Zipcar paid to insure each “Zipster” (as the users were called). Similar dynamics were at play here, too: economies of scale were helping to lower prices, but the expense remained a major budget line item. Bargaining Power of Customers. High. Consumers typically had several rental company choices in their airport or neighborhood of choice, and Enterprise's “We'll Pick You Up” motto raised the bar for all competitors. Business conglomerates negotiated fees mercilessly, driving down prices. Finally, car sharing consumers tended to be quite price conscious, as evidenced in their not owning cars. Rivalry Among Competitiors. High. Competitors had highly-regarded and fiercely-protected brand names, many with successful customer loyalty programs. They sought limited parking spaces in partnerships with hotels, airlines and universities. And the aforementioned 2008-'09 period had driven Page 2 of 9


more price-based competition, trimming margins even in subsequent years. In 2012, Hertz and Daimler launched car sharing networks in Washington, DC, taking direct aim at Zipcar's superiority.8 Based on the above, this industry was not very attractive at the time. See also Exhibit 3 depicting industry return on assets, which had recently been at least 10% lower than the S&P500 at large. Most importantly, the barriers to entry were nearly impenetrable to typical cash-poor upstarts. That said, the carsharing segment showed promise, so the well-financed groups of Hertz and Daimler had launched new subsidiaries to enter the market. III. Competitive Position Zipcar's strategy was to leverage and expand its superior information technology, solid brand reputation and first-to-scale advantage in order to create a remarkable customer experience, all while striking a proper balance between growth and profits. See Exhibit 4, Value Chain Map, to see this strategy in action (albeit at a micro level). Advantages The Zipcar Brand is seen as cool, green, urban; almost Bohemian. Much of this came from a highly engaged, dedicated membership base that called themselves “Zipsters” and spread news by word of mouth. (The high density of the local populations certainly helped word of mouth). But Zipcar also had a very active grass-roots marketing team: For example, on a busy neighborhood sidewalk, their street team set up a campsite complete with grass, tent, sleeping bag, marshmallows and a sign reading “You need a Zipcar for this.”1 The company's IT investment was massive – and a major part of its strategy. It had industry-leading tech in its reservation apps, car-entry swipe cards, and fleet administration software. Each car was equipped with a telematics control unit, including mobile data service, toll system transponders and RFID card readers1. Zipcar was very keen on innovating its IT systems, and leveraging the information it collected to improve the customer experience. Finally, the first-to-scale advantage was discussed in Part II above; this advantage would be crucial to Zipcar's future success. The company held the greatest experience advantage in the industry by far. In 2012 Zipcar had more than 10,000 vehicles servicing 17 of the largest US metropolitan areas, and was expanding its reach even further through roughly-equal-parts of acquisitions and organic growth. Further growth would bring economies of scale to its operations and its IT infrastructure. Disadvantages That very status as “first mover” was also a liability. Staffing was an interesting problem, since almost no one had previous experience with car sharing companies. The company was inventing the industry on a daily basis; earnings were frail and the board acknowledged the possibility that the bottom could fall out at any time. Also, its status as the leader in car sharing put a target on its back for other competitors. Page 3 of 9


Zipcar also had liabilities that were peculiar in the rental industry: it included insurance and fuel in the purchase price of each transaction. While customers found this convenient, it presented legal difficulties, for example if a pre-qualified customer later caused a collision in a non-Zipcar vehicle. And the past few years had featured some of the highest fuel prices in history, which harmed Zipcar even more than its competitors since it included fuel in its price. IV. Future of the Industry The industry's key external growth drivers – corporate profits and per capita income growth – were both forecast to grow steadily for the coming five years. However, rising gas prices and an aging vehicle fleet were expected to weigh on industry's profitability. Sales growth was expected to average 2-3% with return on equity averaging 3%. The carsharing segment, though, is growing much faster: annual sales growth of 20-25% is expected in the coming years3. This can be most strongly attributed to a growing trend: drivers were increasingly shunning the extra costs associated with car ownership, including the purchase price, maintenance and parking, and even carbon emissions associated with manufacture. This particularly applied to the educated urbanites with limited car needs that were Zipcar's target customer. Carsharing was seen as both green and convenient, which projected an optimistic future for the segment. Another growth area in this realm was peer-to-peer sharing (P2P). The P2P concept allowed car owners to rent their vehicle to peers, with the intermediary company functioning as matchmaker and technology provider, and taking a commission of up to 40%.9 In 2012 RelayRides launched nationwide service, in effect allowing any two interested parties to share a vehicle.9 The power of this concept was in its leverage: no vehicle purchases were necessary, though insurance continued to pose problems. Zipcar bought into California based P2P player Wheelz in 2012, a major move into the P2P realm. See Exhibit 5, Industry Positioning, to see the leverage effect: the newer companies were owning ever fewer cars, and extracting more and more out of each car they involved in the business. V. Sustainability of Competitive Advantage Zipcar's competitive advantages, from least sustainable to most, were as follows: IT advantage; first-toscale advantage; personnel / experience effects; and brand name. While Zipcar's IT expertise was a major success driver, its programs were being quickly copied by wellfunded competitors like Hertz10. Despite this, major investment was still called for in order to stay ahead of the technology curve. Zipcar had kept its first-to-scale advantage for years by continuing to scale: i.e. by acquiring smaller competitors and expanding into new cities. Through 2011 the company held a monopoly or nearmonopoly on car sharing in most of its markets. However, well-funded companies like Hertz and Daimler entered the realm in the 2012, raising major concerns about price competition. These parent companies' revenues were orders-of-magnitude greater than Zipcar's, and they brought with them lots of experience Page 4 of 9


in the rental realm. Also, Hertz was considering oufitting ALL of its vehicles with Zipcar-like technology – a fleet 40 times that of Zipcar6. Could these big firms unseat Zipcar as the carsharing king? Even if not, they could continue to pour money into these losing ventures to keep Zipcar from making a major breakthrough. Zipcar (along with its acquired companies) had invented the very idea of carsharing. Further, it had a high level of employee satisfaction, retention and enthusiasm for the business model. These two facts kept the segment’s most important expertise within the company, away from competitors. While Hertz had general rental car experience, it didn't have the decade-long depth of knowledge that had accumulated at Zipcar. Senior management knew this, and they consistently expanded this knowledge and put it to use in daily operations. Finally, the company's brand name was crucial to its future success. Zipcar had come to be known as a forward-thinking, hip, and environmentally conscious brand. The big rental companies had none of this cache – indeed, they were often thought of as hulking behemoths that rented wasteful vehicles, in contrast to Zipcar’s fuel-efficient Minis, quietly at the ready in minimalist parking spaces. It should be noted that this advantage applies to car sharing in general; however, none of the other players had anything near the brand image that Zipcar held. While big renters like Enterprise had good reputations in the rental realm, the growing car-sharing customer segment paid less those traditional roles. VI. Recommendations For over a decade, Zipcar’s position had been that of uneasy leader. Fast-paced growth was enough to entice investors, but not for long, and not enough for big profits. In the very year it first posted positive quarterly earnings, it found itself assailed by new competitors and concerns. The company had several options for addressing these concerns: 1. Leverage brand. Zipcar has a sterling image that it must continue to polish. It should continue grass-roots marketing campaigns by exhibiting at urban street fairs and similar venues. It should boost the “green effect” by adding hybrids to its fleet, and with the “green meter” described as described in the following item #2. 2. Expand IT investment. Zipcar must innovate in order to stay ahead of the competition, as it has for years. IT has given the company the reputation of great customer service and that must be expanded upon. Hire talent from other up-and-coming high tech industries to bring new ideas. Personnel should build into the user interface a “green meter”, constantly updating each Zipster on exactly how much savings (in dollars and in emissions) they have accumulated in their time with Zipcar. 3. Engage complementors. Public transit, while a competitor to car sharing, can also be considered a complementor since most Zipsters must use buses and subways from time to time. Consider advertising in subway stations, and bundling transit tickets with Zipcar credits. 4. Make inroads toward cooptition. The big rental companies are all too aware that the previous decade’s profit decline was largely due to price based competition. The new forays by Hertz and

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Daimler should be viewed as an opportunity to make amends, toward a more profitably industry. Attend industry events to get a pulse on the market, and attempt tacit collusion in this burgeoning marketplace – but always beware these power competitors. 5. Expand further into P2P Sharing. As seen in Exhibit 5, the leverage available with Peer to Peer sharing is powerful. With 250M vehicles on US roads (or 140 times the total rental fleet), the possibilities are vast. Apply the successful IT model to Wheelz, and monitor the subsidiary’s success closely. Consider additional acquisitions, and keep a close eye on the other rising stars of the industry. 6. Expand into other niches. Zipcar’s competitive advantages in IT and in branding can be leveraged into related realms. Some of the hottest areas have to do with big logistical problems that Zipcar is good at: for example, one-way sharing, ride sharing, and smart parking. Each of these opportunities have similar leverage effects as P2P sharing. The company should put its IT and branding to expansion into these areas: launch subsidiary brands or acquire as necessary. 7. Adapt to Insurance and Fuel constraints. Insurance is a major expense for Zipcar. Vertical integration should be considered, as Zipcar expands its scale. Another option would be to offer ala-carte options for Zipsters – for example, they could use their own insurance if it meets Zipcar’s legal criteria. The other big expense, fuel, is harder to negotiate since it’s a commodity. However, Zipcar should consider joint marketing opportunities with strategy gas companies, perhaps at a discount to Zipsters.

ZipCar Revenue $300 $250

Millions

$200 $150

Revenue

$100 $50 $0 2007

2008

2009

2010

2011

Exhibit 1, Zipcar Revenues

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ZipCar Net Income $0 -$2

2007

2008

2009

2010

2011

-$4

Millions

-$6 -$8 Net Income -$10 -$12 -$14 -$16 -$18

Exhibit 2, Zipcar Net Income (Loss)

ZipCar & Industry ROA 5.0%

0.0% 2007

2008

2009

2010

-5.0%

2011 Zipcar ROA Industry ROA

-10.0%

-15.0%

-20.0%

Exhibit 3, Zipcar and Industry Return on Assets

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Step

Differentiator

Member → Acquisition Branding1

Customer Reserves → Vehicle IT2

Customer Uses Vehicle

→

Customer Drops Off Vehicle

IT3 Insurance/ Fuel4

Notes: 1. Brand Image is an advantage during member acquisition: grassroots marketing, word -of-mouth, and wanting to be part of the cool “Zipster community” play a major role in retention. 2. IT plays a big role in any reservation system. But Zipcar was truly high tech: its Iphone and Android apps were downloaded a half million times, and over half of reservations were performed on mobile phones. 3. Again during vehicle use, IT differentiated the company. Zipcar offered GPS standard, as well as in-trip assistance on its Iphone app. Internally, the millions of annual microtransactions offered a rich cache of data to mine, in order to optimize fleet deployment, pricing and product options. 4. During vehicle use, fuel and insurance are included. This is both a differentiator and a liability. See part VI for recommendations.

Exhibit 4, Value Chain Map

Exhibit 5, Industry Positioning Page 8 of 9


References 1. Zipcar’s 2011 Annual Report, March 2012. http://ir.zipcar.com/financials.cfm 2. Zipcar’s Underwriters Lost Money in IPO. http://articles.businessinsider.com/2011-0414/news/29964429_1_zipcar-ipo-price-goldman-clients 3. IBISWorld US Car Rental Industry Report #53211. www.IBISWorld.com 4. Zipcar Fails to Accelerate. http://www.fool.com/investing/general/2012/04/30/zipcar-fails-toaccelerate.aspx 5. JPMorgan Weighs in on Zipcar. http://articles.businessinsider.com/2011-0524/markets/29967248_1_zipcars-market-cagr 6. Auto Rental Industry Statistics. http://www.autorentalnews.com/fileviewer/1410.aspx 7. Detroit Loses its Edge in the Rental Market. http://articles.latimes.com/2009/jul/22/business/fi-rental-cars22 8. Zipcar Gains Competitors. http://www.washingtonpost.com/business/capitalbusiness/zipcargains-two-competitors-for-washington-drivers/2011/07/29/gIQAsmhSaS_story.html 9. RelayRides Launches Nation Wide. http://techcrunch.com/2012/03/05/relayrides-nationallaunch 10. Hertz Copies Zipcar. http://www.forbes.com/sites/ycharts/2012/04/25/hey-zipcar-suppose-carrental-by-hour-by-day-is-just-a-crummy-business/

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Zipcar Strategy

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