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January 17, 2013

Avis Budget Group Bets Wisely on Personal Mobility

MichelleGrantAnalyst Insight by Michelle Grant, Travel and Tourism Research Manager at Euromonitor International

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On 2 January 2013, Avis Budget Group announced that it is acquiring Zipcar, Inc for US$500 million.  This acquisition gives Avis Budget a market leading position with a strong brand identity in the rapidly growing car-sharing market. Given that industry sources predict that car-sharing could be a US$10 billion market in 2020, this is a smart move by Avis Budget Group.  Click to Tweet! The company, though, will have to successfully tackle obstacles relating to the costs inherent in the car-sharing market and avoid a culture clash that damages Zipcar’s well-liked brand and innovative spirit. 

If you can’t beat ’em, join 'em

Zipcar was one of the first entrants into the car-sharing market when it was founded in 2000 and according to industry sources, it controls about 75% of the US$400 million market in the US. Click to Tweet! Avis Budget Group, along with Hertz Corp and Enterprise Holdings, followed suit with their own car-sharing businesses but haven’t been able to grow as quickly as Zipcar either organically or through acquisition.  It is unlikely that any of these companies will be able to grow fast enough to catch up with Zipcar because their focus is on their core car rental business and they seem unwilling to make the substantial investment it takes to scale a car-sharing business.   

But the move also eliminates a competitor that posed a threat to some of Avis Budget’s businesses.  Although it’s debatable about the impact car-sharing has had on the off-airport business for traditional car rental companies, it’s likely that some consumers have opted for the convenience of an hourly rental at any time with gas and insurance bundled within the pricing instead of renting a car for the day.   Furthermore, Zipcar has diversified in other ways that may compete against Avis Budget:  Zipvan, Zipcar for Business, and Zipcar for Government.

The personal mobility opportunity

Avis Budget Group believes that there is a revenue opportunity of US$10 to 20 million annually by increasing revenue per member through new products, such as airport locations and one-way usage to and from airports.  It also believes it can expand Zipcar for Business by leveraging its existing corporate relationships.  There are additional opportunities to expand the number of members in existing Zipcar markets and introduce the brand to new locations.  Zipcar has identified that there are more than 10 million people within walking distance of its existing locations (much higher than the current 760,000 members) and that there are another 100 global cities and hundreds of universities that would be ideal for market entry.  It will be much easier for Zipcar to expand through these initiatives with Avis’ capital resources, significant fleet and global footprint.

It is likely, though, that there is more than a US$20 million revenue opportunity here.  The car-sharing market is being driven by long term shifts in consumer behavior:  increasing urbanization, acceptance of self-service and pay-per-use, and sustainability.  Most importantly, consumers are more value conscious after the Great Recession and keen to shed high car ownership costs (fuel, insurance and parking).  According to Frost & Sullivan, the car-sharing market could be more than US$10 billion globally by 2020.  Furthermore, Zipcar has identified other personal mobility business models that it seeks to expand into using its know-how and technology:  station-less, peer-to-peer car sharing, one-way car sharing, ridesharing and smart parking.  The revenue opportunities for Avis Budget are likely much greater in the long term.

Euromonitor Travel Research

Source:  Investor Presentation regarding Avis Budget Group’s Acquisition of Zipcar, January 2013

Operational synergies

Avis Budget Group believes that it can achieve cost savings using its expertise and scale to lower fleet acquisition costs, vehicle operating and financing costs, insurance costs and general administrative costs.  The company predicts it can save US$20 to US$25 million annually. Click to Tweet!

In addition, the company thinks that the Zipcar acquisition will result in better utilization of both companies’ fleets.  Avis will be able to move its cars from locations with high demand on weekdays, such as airports, to Zipcar locations that experience high demand on weekends.  The company claims that better fleet utilization could produce additional annual synergies of US$20-$25 million.  Although there is the risk of logistical snafus and alienating members with aging, unimpressive Avis and Budget cars, the management team is confident that they’ll be able to move the cars efficiently and the additional parking needs will not be a problem.  The company estimates that only 5,000 to 7,000 cars would need to be outfitted with Zipcar’s technology to be multi-purpose—a sliver of its 500,000 cars.

Executional pitfalls to avoid

While this is a smart move for Avis Budget Group, obstacles do exist.  Zipcar has struggled to be profitable with 2012 expected to be its first full year of profit.  Because it bundles insurance and gas costs into its hourly and daily rates (a significant competitive advantage against traditional car rental), margins are pressured when either of those costs rise, which can be often for volatile fuel prices.  It also makes significant upfront investments in vehicles and parking for its expansion, which is risky if the expected revenues don’t materialize.  Obtaining parking at a reasonable cost could be a hurdle in highly dense urban areas.  Additionally, revenue per member has been on the decline. 

But Avis Budget’s plans for lower costs, better fleet utilization and new product introductions are likely to mitigate these issues and it’s likely that Zipcar will be a profitable division going forward.  The most significant risk is that the acquisition by a large corporation stifles Zipcar, preventing it from pursuing its personal mobility growth strategies and damages its very consumer-friendly brand.  The wholehearted support of Zipcar’s management, along with seamless integration, will be key in unlocking the value of the acquisition for the long term.


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