Car sharing zips into a new era

November 5, 2013 5:18 pm

Car sharing zips into a new era

By Henry Foy

If you cannot beat them, buy them. The fast-growing business of car sharing hit the big time in January when Avis Budget announced it would acquire Zipcar, the largest operator in the nascent industry, for $500m. While confirming the rise of Zipcar and its smaller rivals from alternative lifestyle choice to serious business model, the acquisition also highlighted how traditional car-rental agencies and manufacturers are scrambling to keep pace with the rapidly changing ways in which people look at driving.People in the west, particularly the young, are steadily moving away from owning a car as urbanisation increases. Car sharing appeals to city-dwellers by giving them the option of hiring a vehicle parked on the street for a matter of hours or minutes.

At the heart of this new business model is a simple time and money calculation. The average car spends 90 per cent of its time idle and is driven less than 45km a day, all the while costing its owners substantial sums in insurance, depreciation, maintenance, tax and parking.

The shift is disconcerting for traditional rental agencies that target business users and holidaymakers at airports and in city centres. It is also unsettling for car manufacturers that need people to keep buying their own vehicles and taking out financing deals to pay for them.

Mark Norman, president of Zipcar, says: “It’s about a better way to use a car in a city and lets urban owners ditch car ownership . . . Owners are paying all that surplus expense for the assurance of wheels when they want [them]. And we’re giving them that.”

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Global membership of car sharing programmes, which typically require an annual fee on top of the hiring charges, stands at 2.3m according to Navigant Research, and will rise to more than 12m by 2020.

“Once a week a city mayor asks me about bringing this to their city,” says Vincent Bolloré, the billionaire French industrialist behind the Autolib car-sharing scheme in Paris, which is being extended to other locations.

Avis’ rental rivals Hertz and Enterprise have launched their own car-sharing arms, while Daimler, owner of Mercedes-Benz, now has close to 10,000 of its Car2Go shared vehicles in operation across more than 25 cities.

Sarwant Singh, a senior partner at consultancy Frost & Sullivan, says the trend is having an impact on employee perks. “We’re even seeing a move away from company car allowances to mobility allowances.”

Many automotive manufacturers, meanwhile, are equipping their models with technology such as internet connectivity and GPS that can be used by car-sharing companies, which have become increasingly important bulk customers.

For car sharing to really take off, according to Mr Singh, manufacturers and rental companies need to work closely to tailor vehicles to the trend.

The attraction of buying into a growing market was “clearly a driver behind the acquisition and the premium paid” for Zipcar, says Mr Norman. “For Avis to jump to the front of that game . . . that’s very powerful.”

While the engines in the cars might make the same sound, Avis’ traditional business and the industry that it bought into are very different.

Where car rental has become associated with staid, corporate vehicles hired out from drab buildings in airport car parks during office hours and for fixed rental periods, car sharing is all about a more flexible and cutting-edge offering.

Maintaining that feel despite its old-school owner is Zipcar’s big challenge following its evolution from start-up to corporate business division. The first mover now finds itself trying to defend its market leader position and ramp up profitability for its parent’s shareholders.

“[Car sharing] is frankly very, very different. If you approach it as, ‘oh it is just the same thing as short-term car rental’ you miss . . . the whole point,” says Mr Norman, a Harvard MBA who has led the company since 2007.

Avis had dabbled with basic carsharing technology before the deal, Mr Norman adds.

Car sharing does have drawbacks. Vehicles can be left dirty, damaged or low on fuel by the previous user. The search to find an available car or a free place to leave it can also dramatically reduce the time-saving benefits.

Rivals have all added their own twists to the basic car-sharing concept. Zipcar, which offers a variety of car models ranging from Volkswagen Golfs to vans, requires that members reserve their vehicle in advance and return it to its designated parking space.

In Paris, Autolib accepts reservations and accredited walk-up customers, but its fleet of identical electric cars can be dropped off at any available docking station.

Daimler’s Car2Go offers both reservations and a walk-up service. Its two-seater cars are chargeable per minute but can be left anywhere in a legal parking space within designated areas of a city, such as Islington in London.

One hour in a Zipcar in London costs from £5, plus a £59.50 annual fee. Car2Go rentals, which are pitched at shorter journeys, start from 35p a minute plus a £29.90 sign-up charge.

It is in cost management and the pace of its expansion that Zipcar stands to benefit most from its new parent, which made 29m vehicle rentals in 2012.

Much of Zipcar’s future depends on attracting older drivers – 60 per cent of its customers are younger than 40; diversifying away from North America, which accounts for 80 per cent of revenues; and innovating to stay ahead of newer rivals.

Shareholders have been enthusiastic so far, driving up Avis’ share price 60 per cent since the Zipcar acquisition was announced in January.

There are other potential threats emerging. Private car sharing, through websites such as RelayRides, offers a glimpse of an even more informal business model than Zipcar, let alone Avis. The platform allows individual car owners to advertise for a small fee to renters, who agree terms and costs of the rental privately, with the insurance provided by the website.

And car pooling, where owners rent out seats in their cars for journeys, is catching on in some cities, mainly among younger people. Such services could further destabilise the car- rental market in the same way that short-term apartment lease arrangers such as Airbnb have taken holiday accommodation away from hotels.

“The barriers to entry aren’t that high,” admits Mr Norman. “The big opportunity for all of us is where we can be nimble and agile and innovative, but with great scale.”

Mr Norman says Zipcar’s “distinct and discreet” headquarters two miles from Avis’ seat of power symbolises the parent company’s desire for its subsidiary to retain a sense of independence. The long-term success of the arrangement could depend on whether its entrepreneurial mentality survives.