As the concept of car-sharing catches the imagination of American car drivers, Zipcar (NYSE:ZIP) now faces more formidable competition from car rental giants like Enterprise and Hertz, which have recently joined the hourly car rental business in a big way. While Zipcar’s previous growth has benefited from minimal to no competition, the landscape is quickly turning hostile for the young company that has yet to post a profit.
After Hertz and Daimler extended their car-sharing services ‘Hertz On Demand’ and ‘Car2Go’ in Washington D.C. this March, Enterprise has now launched its car-sharing arm after buying several small car-sharing companies on the East Coast. These new players are aggressively trying to sway car share users in their favor through flexible membership terms, one-way rentals and other benefits, and have played a major role in the decline of Zipcar stock since the beginning of the year. Zipcar currently serves 700K members with a fleet of over 9K vehicles in North America and Europe.
Enterprise has acquired several small car-sharing and hourly rental players along the East Coast markets like ‘PhillyCarShare’ and ‘Mint Cars On-Demand’ in New York and Boston to add to its own car-sharing arm WeCar. It is likely to increase its New York fleet by 50% this month and integrate all of its hourly rental operations this year. WeCar currently operates in NY, Philadelphia, Boston and about 50 college campuses with significant plans of expansion and currently boasts of 58K members, making it the second largest car-sharing service after Zipcar.
Hertz On Demand
Hertz’s car-sharing service, Hertz On Demand, not only offers one-way rentals, but also does away with membership fee altogether. With its usual car-rental business, Hertz has access to the best parking spots across the U.S. and has a fleet size of 375K, 30 times that of Zipcar. It also plans to fit its entire fleet with the car-sharing and hourly-rental compatible Eileo technology by 2013, which could be a serious threat to Zipcar’s growth over the coming years.
Challenges Ahead But Market Has Potential
Frost and Sullivan research estimates that the North American car-sharing market can reach $3.3 billion by 2016, and the entry of several new players reaffirms the future potential of hourly car rental market. Zipcar currently estimates more than 10 million people reside within a 10-minute walking distance of Zipcar in its major markets, and targets a much deeper penetration in its existing big markets, apart from gaining a first mover advantage in new tier 2 markets. However, upcoming competition has made Zipcar’s road ahead more challenging, leading the stock to a 30% decline this year, but we believe the stock commands a higher valuation than its current market price.
We currently expect Zipcar Membership in North America to reach 1.4 million by 2018 with double digit sales growth. However, given the increased level of competition in the capital-intensive business with high fixed costs, growth investments and customer acquisition costs are expected to inflate and put pressure on the margins. Nonetheless, we believe the business has sound long-term profitability prospects, as demonstrated by its mature markets. Read more - Why We Believe In The Zipcar Story.
We have a $18 Trefis price estimate for Zipcar, at a 80% premium to the current market price.