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It Only Hertz When Enterprise Laughs

News: Analysis & Commentary


Tough luck: First, Shannon J. O'Donnell nearly totaled her 1986 Cadillac on Nov. 9. Then she discovered that her insurance company provides just $20 a day to pay for a replacement rental. Turns out $20 was enough. Enterprise Rent-A-Car Co. delivered a 1995 Ford Taurus to her suburban Chicago driveway the same day, and O'Donnell signed the rental papers in her kitchen.

A car-rental outfit that makes house calls? That's just one secret behind the rapid growth of St. Louis-based Enterprise, the privately held company that shook up the industry in late November when Auto Rental News named it No.1 in the U.S.--bigger than Hertz Corp. The trade publication based its rankings on the size of Enterprise's fleet (232,000 vs. Hertz's 215,000) and the number of office locations (2,000 vs. 1,175).

The news drew outrage from Hertz's Park Ridge (N.J.) headquarters. "The answer is a flat-out no, they're not bigger than us," says a Hertz spokesman, who contends that Enterprise inflates its figures by, among other things, including leased cars. But Enterprise CEO Andrew C. Taylor is crowing: "I guess we snuck up on them."

DOWNTOWN TRADE. In truth, Hertz and Enterprise barely compete, except for bragging rights. While Hertz, Avis, Alamo, and the like specialize in airport rental cars for business and leisure travelers, Enterprise has made its mark in the low-budget insurance-replacement market. More than two-thirds of its $1.85 billion in projected revenues this year (vs. $2.1 billion for Hertz and $1.7 billion for Avis) comes from a market the majors don't play in--rentals to people whose cars have been wrecked or stolen.

The economics of that market are different from conventional rentals. While Hertz operates at expensive airport and downtown city locations--some open 24 hours--Enterprise works mostly daylight hours from storefronts and shopping strips nationwide. It also keeps costs manageable by tying the monthly pay of about one-fourth of its 18,000 employees to profitability.

Another cost-saving technique: Enterprise's cars are older. Hertz and Avis obtain their vehicles through buyback programs negotiated with the big auto makers, returning them for new ones after six months or so. Enterprise buys its fleet from a variety of manufacturers, often favoring models that are about to be discontinued or redesigned. And it keeps its cars for about 18 months before selling them. Helped by such tactics, Enterprise claims its consumer rates are up to 30% lower than what rivals charge.

There are other differences, too. While Hertz and Avis plow a fortune into national advertising, Enterprise limits its TV time and relies mostly on grassroots marketing. Much of its business comes from referrals, and Enterprise looks after the insurance agents and adjusters who point customers its way. It offers a roughly 25% discount on personal rentals to the insurance trade, as well as an occasional golf outing, Taylor says. It also maintains close ties with local car dealers, body shops, and garages, sometimes paying rent to maintain a booth on the premises. Enterprise managers even deliver breakfast to referral sources. "One of our biggest sales methods is doughnuts," Taylor jokes.

Enterprise started its rental business with 17 cars in the early 1960s, and founder Jack C. Taylor, now 72, expanded the business slowly. By 1980, the company had 6,000 rental cars and revenues of $75 million. Since 47-year-old son Andrew took over as CEO in 1990, the pace of expansion has increased, funded mainly through bank debt, private debt, and reinvested profits. There are no franchises or public offerings in sight. According to the company, it has posted a profit every month for 20 years.

LOCAL RIVALS. Can Enterprise keep up the pace? So far, its growth has come mainly at the expense of the fragmented collection of independents that compete for insurance-replacement dollars. And rivals such as Eugene Blum, advertising director at Rent-A-Wreck of America Inc., based in Owings Mills, Md., wonder if Enterprise's rapid expansion won't cause glitches in its performance.

Taylor thinks he has the risks under control, partly because he has no plans to target the highly competitive airport market. But as the company expands, it will compete increasingly with Hertz and Avis for "local" business--customers who need a car for errands or short trips. Outracing the majors in that market--where renters don't keep their cars nearly as long as insurance customers--will be tough. But so far, Enterprise shows no sign of wanting to pull out of the fast lane.Greg Burns in Chicago

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