When one of Mark Frissora’s sons was a student at Harvard University almost a decade ago, he became a devoted customer of niche car rental firm Zipcar (ZIP). The fact that his father was named chief executive officer at Hertz Global Holdings (HTZ) in 2006 didn’t keep the youngster from singing the praises of the quirky company, which appealed to young, urban dwellers who didn’t own wheels but occasionally used their laptops to rent autos by the hour. The elder Frissora was listening. He later considered buying fast-growing Zipcar, he says, before deciding Hertz should build its own hourly rental brand.
If all goes according to plan, by the middle of next year he’ll have Hertz’s entire 375,000-vehicle U.S. fleet equipped with devices that let customers use a computer or smartphone to reserve and unlock a rental car from the Hertz On Demand service. (It started in 2008 as Connect by Hertz before being rebranded last year.) That’s more than 30 times the size of Zipcar’s current fleet. “The difference between us and Zipcar is, frankly, the scale,” Frissora says. “A good example is New York. I’ve heard them say they have 2,000 cars there. Well, we have 35,000. When I have them all enabled with Hertz On Demand, they have a real problem.”
Hertz hopes to use its sheer heft to test the loyalty of Zipcar’s paying members, who number more than 500,000 in the U.S. The number of Zipcar shares held by short sellers—investors betting on a decline in the stock—has risen by 15 percent since the end of January. However, Avondale Partners analyst Fred Lowrance Jr. thinks it’s premature to bet against the newcomer. Zipcar membership grew 25 percent last year after expanding 55 percent a year earlier. Analysts estimate sales will grow 21 percent this year. Zipcar logged its second straight quarterly profit in December and is forecasting its first annual profit this year.
“Hertz is certainly a competitive threat, and it’s part of a very popular short story, but so far they haven’t even been a bug on Zipcar’s windshield,” Lowrance says. “I’m skeptical Hertz’s bite will measure up to the bark.” Researcher IBISWorld estimates the current market for hourly car rentals to be about $1.6 billion, or 6 percent of the U.S. rental car market. It may reach $3.3 billion in North America by 2016 and $10 billion globally, market researcher Frost & Sullivan forecasts.
Zipcar has spent the last 12 years securing parking spaces in neighborhoods loaded with urban professionals, such as New York City’s Upper West Side and Park Slope and Washington’s Capitol Hill. Users pay $8.75 to $15.50 per hour to rent its vehicles (each gets a quirky name, such as the Nissan Sentra named Shoultz in Washington’s Capitol Hill) for quick trips to Ikea or weekend jaunts to the Hamptons. (Zipcar also does daily rentals.) About 10 million people live within a 10-minute walk of one of its cars, says Zipcar, which chooses locations based on street-level data about population density, rate of college education, and percentage of car ownership. The company has more than 2,500 locations (some with just a single car) in 15 major U.S. cities and at more than 250 universities. It’s also expanding in Europe.
CEO Scott Griffith says Zipcar sees itself as a private form of public transportation, enabling a generational shift from car ownership. “Most cars sit around 90-plus percent of the time,” he says. “Then there’s insurance, upkeep, and parking. It’s not an efficient use of limited income. Some of this is behavioral, and some of it is just people doing the math.” Zipcar members, who pay $60 a year, can use their smartphone or computer to reserve and pay for a rental. They unlock it with the push of a smartphone button or by placing their membership card against the card reader mounted on the windshield. The keys are inside. Half of the members are between the ages of 18 and 44, and its rentals tend to last just two to three hours. An average user spent $392 last year.
Hertz On Demand, which charges $6.50 to $25.50 per hour, brings in a small part of its parent’s $8.3 billion in annual sales. Hertz won’t disclose revenues, but says it has 84,000 people enrolled in five major cities sharing 639 vehicles. Unlike Zipcar, they pay no membership or annual fees and can earn points in the Hertz Gold frequent renter program. In the New York metropolitan area, Hertz says it has 49,000 users for its 345 cars in 100 spots, and offers one-way rentals, including to the airport.
To boost the visibility of On Demand, Hertz plans an ad campaign this year in New York featuring spots in newspapers and on billboards as well as on subway platforms and online. Frissora’s goal is to allow customers to rent a car hourly, daily, or weekly; talk to customer service; upgrade cars; and return rentals—all without going to a Hertz office and standing in line. “We don’t want to cannibalize the [core] car rental business,” he says. “Our whole mission is to get incremental market size out of a new market: hourly rental.”
To do that, he’ll have to win more urban residents like Katy Pearce, who has been a Zipcar customer since studying at University of California at Santa Barbara. She started renting more regularly when she and her partner moved to Washington in 2010. Pearce likes the ease, saying it takes only about five minutes to reserve a car. “You smack the card on window, and it’s done,” she said. “I don’t have to wait in line and sign paperwork. The cars have names. It’s not annoying but funny and cheeky. I can’t imagine Hertz being funny like that.”
Zipcar’s Griffith says that while he’s watching Hertz On Demand closely, “everything they’re doing is stuff we were doing four or five years ago. We’re really competing with car ownership.” He says Hertz’s upcoming ad blitz should aid Zipcar’s business by showcasing hourly rental as a transportation option. “At most, they might expand the category by helping to raise awareness.”