By Jared Baan, David Mack, Tim Murphy, Stephanie Sharma and Laura Watson
After raising more than $174 million in its initial public offering on April 14, 2011, and nearly $50 million from private investors pre-IPO, the question now is whether Zipcar has enough gas in the tank to turn a profit. Zipcar is the undisputed leader in car sharing, with an established presence in more than 200 markets. However, formidable competitors such as Connect by Hertz and City CarShare (a non-profit based in San Francisco) have entered the race to challenge Zipcar in at least 9 markets. Unfazed, CEO Scott Griffin eyes open roads ahead, “We have 570,000 Zipsters out there and they believe in what we see. The world in cities of transportation is changing.”
The current car sharing market for the US and Europe is an estimated $400 million. By 2020, the company estimates that the car sharing market will grow to $9.1 billion based on a study by Frost & Sullivan . Although the future of the car sharing industry has yet to be written, membership and participation continues to rise and the potential for profit is significant. Zipcar is betting that one of its key pillars for success will be the “young urbanite.”
Blue Waters Run Deep
Founded in 2000, as bloody waters formed in the overcrowded and highly competitive car rental industry, Zipcar established the car sharing business as a socially responsible and sustainable alternative to vehicle ownership. First-mover advantage enabled Zipcar to implement a blue ocean strategy whereby it determined the rules of the game and developed proprietary technologies and operations unique to servicing this niche market. Zipcar has relied on word-of-mouth and a network-driven strategy to promote the brand, but is now focusing its efforts on a lifecycle migration strategy targeting the young urbanites in cities across the United States and Europe.
This strategy is designed to create a following of young professionals by creating trendy marketing ploys and programs which present Zipcar as a solution to the many problems associated with vehicle ownership in urban settings such as: insurance coverage, parking, maintenance, fuel costs, inconvenience, and car-theft prevention. Zipcar will seek to position its services as an attractive, viable, safe and cost-effective option for the young urbanite in hopes that a positive customer experience and value proposition affects lifestyle changes and encourages user adoption among what is expected to be a sticky client segment.
The Winner’s Circle
An “urbanite” is a city dweller, environmentally aware, and comfortable with innovative new ways to view, interact with and contribute to the world. They live, work, play and relax in the city frequenting coffee shops, corner markets, shopping malls, parks and bars. Getting around the city efficiently and in a timely manner is a primary concern for the urbanite. Tapping into this market segment, Zipcar promotes car sharing as an eco-friendly alternative and includes in its fleet a mix of hybrid and bio-fuel powered cars. Proponents of social responsibility will uphold Zipcar as the model of sustainability, reputation and moral appeal.
Zipcar’s demographic beyond the somewhat obscure “urbanite” is laser focused on the younger generations . This younger audience has habits that are still developing as many are living away from home for the first time, whether attending college or working a first job. By reaching these customers early in the lifestyle cycle, Zipcar can development a lifelong partnership which will generate reoccurring revenue for the company. This a key advantage to a younger target audience and one that may help to shift automobile utilization. The service model to this audience also creates high switching costs, as dedicated consumers would be making more of a lifestyle change in moving towards substitute products such as buying their own car.
Beyond the labels branding the Zipcar-car, is the viral marketing that happens on Facebook or Twitter when customers share their experiences “in a Zip.” Through social networking, customers linked to Zipcar expose the concept and rewards of car sharing to their friends and followers. This form of personalized and grass-roots marketing has proven very effective in helping Zipcar tap into the young urbanite market segment. And by focusing on urbanites, Zipcar is able to address the key needs of a large and growing population: access to a car when needed and at a nominal cost.
Driving to Greener Pastures
The young urban market that Zipcar is targeting has many attributes that align very well with the company’s socially conscious goals. Zipcar’s service model has always been socially responsible in looking to change consumers’ driving habits. Similarly, the younger market segment has grown-up with a greater awareness and appreciation for the environment, and sustainability has been of great concern. The young urbanite tends to be more passionate and educated about the effects of pollution and oil consumption on the environment, certainly more than past generations. They immediately recognize benefit of car sharing in reducing the carbon footprint and impact on the environment.
The Zipcar business model centers on car sharing and capitalizes on the ideology that as a convenience product, Zipcar and its members are contributing to a better and more socially responsible environment. To support this claim, Zipcar conducted a survey among members and determined that on average Zipsters drove 5,500 miles or less per year than they had as non-members. This effectively reduced the consumption of oil by an estimated 32 million barrels . Furthermore, independent studies suggest that introducing even one vehicle into a car-sharing program reduces the number of privately owned vehicles on the road by a 7 to 1 ratio . Simply put, members of car sharing programs are more likely to reduce the number of cars they own.
Priming the Pump
The company notes that revenue has grown from $30.7 million in 2006 to $186.1 million in 2010. However, this growth includes a merger with Flexcar, Inc. in 2007, as well as the acquisition of Streetcar Limited in 2010. Isolating for Zipcar revenue as a standalone business, the growth rate for 2010 was still a healthy 24.3%. Year ending 2010, Zipcar owned a 45% market share with revenues totaling $186.1 million . While it is only a matter of time before Hertz Connect and other new entrants seriously compete in this market, Zipcar is committed to developing deep and lasting relationship with the young urbanites.
The potential volume of the young urbanite segment offers the greatest potential to positively impact the company’s financials. A Zipcar customer and young urbanite living in Manhattan was recently asked why he became a Zipster. “I was paying $400 a month for parking and another $1,200 for my lease and insurance. Before putting the key into the ignition, I had already paid $1,600 a month. When my lease expired, the decision was easy. I now pay Zip about $500 a month driving as many miles in a month as I had in the leased car,” said Matt Johnson. Zipcar is betting others like Matt will give car sharing a try. The trend setter potential for Zipcar, where social media and word of mouth are critical, gives Zipcar an advantage over its competitors and the growth in this segment will be a critical source of revenue in the years ahead.
Zipcar will continue adding smaller compact cars, such as the MINI or Golf, to its fleet of 8,000 vehicles. These smaller and more fuel efficient cars have certainly been a trend in the United States over the past few years and will reduce the capital outlay needed to expand operations. Lower fuel charges, which is included the cost to rent a Zipcar, increases the profit potential and minimizes the threat of new entrants.
Now in its first year of trading following its April 2011 IPO, Zipcar financial results are being closely followed by analysts and the investing public. As a smaller business, the growth in revenues and number of customers is the largest focus. The IPO saw shares jump 67% on its first day public, but since then the stock has traded lower, closing in on the stock’s 52-week low of 18.92 . The downtrend in the stock price is also a reflection of the economic environment, which bodes well for Zipcar as young urbanites throttle back on purchases and look to live within their means. As Zipcar shifts its strategy towards more profitable segments with increased volume potential, any subsequent increase in “Zipsters” member count and revenues will certainly please analysts and the stock price will be rewarded with a higher valuation.
Speed Bumps and Potholes
Zipcar faces a few challenges in targeting the urban population. The first major challenge is the availability of parking in densely populated areas. As the company expands, it faces scarce and expensive parking options in prime locations. Zipcar is competing with developers that are trying to buy up empty lots or paying a contracted price through an existing vendor. Zipcar has had to think “outside the box” for their parking woes and have had to look at cutting deals with places like schools and churches to help fill these voids . Getting these prime areas also comes at a cost for Zipcar. “Urbanites” are all about convenience, so Zipcar is also looking at renting “exclusive spots” on popular streets at a high cost from the various city municipal transportation agencies. Each space would cost roughly $150 to rent per month . However, doing so will pay dividends as a service unique to Zipcar and further differentiate it from its competitors.
Another challenge for Zipcar is developing a strategy for engaging the lower-income areas within city centers. There is definitely a demand in these areas, but Zipcar does not extend service to these locations. Targeting the city areas where universities, shopping centers, and trendy cafes exist does exclude those lower-income areas that are also interested in taking advantage of the car sharing services as well. The exclusion of the lower-income areas creates conflict with customers living in these neighborhoods .
Finally, insurance costs continue to rise and Zipcar faces an uphill battle with their target audience being young, inexperienced drivers. According to a report published by Auto.com, people between the ages of 15 and 24 and over 75 are the groups most likely affected by car accidents. And people under the age of 24 account for 30% or $26 billion per year in accident costs . These statistics suggest that Zipcar will need to carefully consider its target market and in defining what is a “young urbanite”.
The Race Has Only Just Begun
For the past decade, Zipcar had the advantage of the Blue Ocean Strategy by offering customers a leap in value at an affordable cost. As more “young urbanites” turn to Zipcar as a viable option for their transportation needs, the company will remain in the pole position. It is clear that Zipsters are eager to benefit from the convenience and “hassle free” lifestyle that the service provides. And if Zipcar successfully engages the younger generations in promoting and advancing the car sharing lifestyle, rather than owning and operating a car, Zipcar will have made a positive impact on environment and provided a sustainable and cost-efficient alternative to vehicle ownership.
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