Car Companies Overwhelm Zipcar’s Success

Zipcar (NASDAQ: ZIP) brought new convenience to the car rental market, but whatever moat it created has been damaged by the actions of America’s largest car companies and their car rental partners.

The Zipcar formula is simple. The company makes cars available in most large cities. These cars can be rented for short periods of time at low prices. Zipcar has hundreds of locations in large cities like New York.

Zipcar assumed that the large car rental companies like Hertz (NYSE: HTZ) and Avis-Budget (NASDAQ: CAR) would ignore it and stay with their models of renting cars for fairly long periods and renting vehicles to business travelers. Zipcar management must have been surprised when Hertz launched its “on demand” service. Hertz charges no membership fee. Zipcar does. Hertz guarantees it will have cars available during the week. Its fleet is large enough that it can offer cars at many locations on weekends as well. Hertz may not have as many locations as Zipcar, but it can use its substantial network to challenge Zipcar in its most important markets — large cities.

General Motors (NYSE: GM) has decided to enter the short-term car rental field. Its RelayRides program allows GM customers to rent their cars to others. GM uses its OnStar technology to make these rentals easier for owners and renters. GM has a large enough universe of owners that hundreds of thousand of them could use the program.

Zipcar’s success was based to a large extent on the size of its fleet. It is expensive for another company to match it without spending tens of millions of dollars to acquire cars. What Zipcar did not count on was that firms that already had huge numbers of vehicles would find a way to use that inventory to flank it.

Douglas A. McIntyre