Zipcar: So Far, Profits Are Zip

High gas prices are driving up membership in the car-sharing club. So why is it still in the red?

It was simple economics that changed the driving habits of Xavier and Kyra Cuadrado. With gas prices on the rise, the Brooklyn (N.Y.) couple decided not to replace their 10-year-old Volvo station wagon when it died last spring. Instead, they joined the car-sharing club called Zipcar. Now, for a fee of $50 per year, they can book a variety of upmarket vehicles on a Web site, at rates starting at $11 per hour or $77 per day. With gas, insurance, and parking all folded into that fee, Kyra estimates the couple's driving costs this year will fall by half, to around $3,600.

The Cuadrados are true converts—and so, it seems, are thousands of others. Since Zipcar was founded in Cambridge, Mass., in 1999, it has expanded into more than 50 cities. Fueled partly by high prices at the pump and the green halo of a car-sharing model, membership this year is on pace to grow 80% over 2007, to 300,000 members.

There's just one blemish on Zipcar's rosy complexion: red ink. Although the privately held company expects to pull in about $100 million in revenues this year, up from $60 million last year, it won't be in the black until 2009, at the earliest. Simply put, Zipcar's all-in-one price scheme leaves it vulnerable to volatile fuel prices and other costs. "I lose sleep at night knowing I'm paying for gas for 225,000 people," says CEO Scott Griffith.

The solution, he says, is scale. The bigger Zipcar's customer base, the more broadly it can distribute its operating costs. That's one reason Griffith merged his company last October in a stock swap with Flexcar, a West Coast competitor backed by AOL (TWX) co-founder Steve Case. The deal won him much-needed geographic reach and lowered his per-car overhead. But expanding into new markets is costly, and saps income from already profitable older cities such as New York. "There's a minimum size you need to be to make money, to lower financing, insurance, and vehicle costs," says Neil Abrams, an auto rental market analyst. "The merger takes them closer," he says, but the business is still "a niche."

Zipcar is bolstered by $45 million in angel and venture capital. Most of it comes from Benchmark Capital, Global Capital Partners, and Greylock Partners, plus a personal investment by Staples (SPLS) founder Thomas G. Stemberg. The investors are patient. Even so, Griffith decided to raise prices by 5% last month. He also talks about taking the company public, if and when market conditions are right.

Long term, his biggest worry may be competition from giant car rental companies, which have begun to clone Zipcar's approach. Hertz (HTZ) is offering hourly rates, gas included, in New York and Boston. And privately held Enterprise, the world's largest rental provider, launched a similar program, WeCar, in St. Louis, which could go national. "The big players do monthly, weekly, and daily rentals," says Abrams. "Hourly rentals are the obvious next step."

A host of nonprofit and public-sector startups are also experimenting with car sharing, some of them with ties to municipal transport agencies. In Chicago, a nonprofit civic group started a venture called I-GO Car Sharing, with backing from the city and the U.S. Transportation Dept. "With our connection to government, we'll survive," says Sharon Feigon, CEO of I-GO. "I don't know if you can make profits in car sharing."

The nonprofit model represents a return to Zipcar's early inspiration. Car-sharing was born in Europe as an extension of public transit systems, and its environmental aura eased its adoption in the U.S. By Zipcar's analysis, each car it adds to its fleet (currently at 5,500) keeps up to 20 private cars off the roads. Still, "the core appeal of Zipcar is convenience," says Griffith. "Its green virtues are fundamental, but they're not how you build a billion-dollar business."

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