Perhaps the most interesting aspect of Avis’s acquisition of Zipcar last week was the sheer volume of criticism. The essential message was clear: the deal was going to ruin Zipcar.
Steven Pearlstein at the Washington Post lit in to Avis for being a stodgy rental car company, whose culture would undermine and destroy Zipcar’s delicate relationship with its customers. Management guru Tom Peters accused the VCs who backed Zipcar of being “greedy” and “looking for a quick payback.” PandoDaily’s Sarah Lacy balked at the valuation, claiming a true “disrupter” was being snuffed out for half of what Zipcar’s worth.
What got less play in the coverage of this deal was a more sobering reality: Zipcar has been at it for almost 13 years and is struggling to grow and become profitable. It’s got a few big problems:
1) Capital scaling. This is Zipcar’s biggest problem. Centralized sharing models, where the business owns and operates the underlying asset (the car), is very capital intensive. (Compare this to share economy darling Airbnb, which just offers up a platform for sharing and takes a cut.) For Zipcar to grow it needs either a lot of cash or a lot of cars.
2) Customer acquisition is getting very expensive. One unsuccessful marketing campaign in Q2 last year pushed the per customer acquisition costs to $89. It’s a relatively small company and the cost of growing is running very high.
3) Weekend car availability appears to be a problem. Demand for Zipcars is high in the evening and on weekends and there have been reports of not enough weekend cars in busy markets. This isn’t a management problem. It’s an economics problem. You can’t add more cars if you can only monetize them on the weekend.
4) About that membership model. With Hertz offering free memberships, Zipcar has conceded that it’s core $60 per year membership fee is going to have be tweaked.
Now that we’ve addressed Zipcar’s issues (and chime in with any I haven’t identified), let’s actually see if Avis can help with any of these. And before I answer this question, let me concede that I’m working from a core paradigm, which is that this deal will only work if Avis attempts to help Zipcar.
Because the critical question on this deal is the following: Will Avis use Zipcar to support its business or will Avis use its infrastructure to support Zipcar’s growth. Now, clearly all the marketing and financial analysts who worked on this deal will trot out that ugly, mostly meaningless word—“synergy.” But the reality is that if Avis treats Zipcar like a farm team to drum up business, Zipcar’s brand will be damaged.
In terms of capital scaling, Avis has a lot to offer. Sure the all cash deal wiped out most of the cash on Avis’s balance sheet, but the company has been borrowing money at under 3 percent interest. More importantly, while Zipcar has around 10,000 cars in its network, Avis has more than 5,000 locations worldwide. That’s access to both cash and a lot of cars to help Zipcar expand into new markets. New markets are critical for Zipcar and there’s a major lag time between opening in a new market and that market becoming profitable. Zipcar breaks out its “established markets” and those are places where it’s done only about $40 million in revenue per year, but which thankfully showed a healthy $8.7 million in profit.
Avis’s size also helps with car availability shortages, presuming the IT infrastructure makes feeding Avis cars into the Zipcar network seamless. Avis is fairly corporate focused in its customer base and those customers need cars during the week, not the weekend. Customer acquisition costs could be aided by marketing Zipcar to Avis’s existing customers. And finally, while it’s still very early for Hertz On-Demand, if it’s free membership model pushes Zipcar into paring back its annual fees, Zipcar would rather do that with tens of thousands of vehicles in its fleet.
When the dust settles on this deal, what I wondered more than whether Avis would destroy Zipcar was whether this deal really made sense for Avis. For a couple hundred million, one would think Avis could spend some serious cash to develop its own car sharing brand with excellent IT infrastructure and great mobile platforms for its customers to locate and rent by the hour. This appears to be Hertz’s thinking, which had considered buying Zipcar. After all Zipcar developed its brand with just $95.7 million in VC between 2000 and 2010.
Because, in the end, Avis is buying the Zipcar brand, it’s efficient IT for managing its fleet and connecting customers with cars, and the Zipcar culture. As critics worry, it could be stupid enough to start destroying all this by trying to upsell Zipcar customers or drag them into an Avis loyalty program. But if Avis does chip away at the Zipcar brand, what will Avis have really bought in the first place?