Are we in a sharing mood?
In this still-troubled economy, Americans seem content with either holding onto their existing cars longer, or choosing not to buy a new car. High gas prices aren’t going away, and neither is the green revolution.
Car sharing, or short-term auto use, is poised to take advantage of these shifting transportation priorities. Membership in car sharing programs has tripled in three years. Zipcar, the world’s largest car share player, says it will finally make a profit in this quarter. Enterprise and Hertz have jumped into the carsharing pool.
Herein is a snapshot of the market, an explanation of the components of a carsharing business and a case study of a startup independent carsharing company in New York City.
For traditional car rental, the question will be explored: Can a car sharing operation be a reliably profitable business?
There are 27 car share operations in the United States, according to data from Susan Shaheen of the Transportation Sustainability Research Center, UC Berkeley.
Zipcar: Started in 1999 in Cambridge, Mass., Zipcar has grown to be the world’s largest car sharing company, serving 67 cities and 100 college campuses in North America and the U.K. with a fleet of 6,500 autos and more than 200 employees. Zipcar bought its biggest rival, Flexcar, in 2007. Zipcar controls 80 percent total market share in the U.S.
The company is gearing up for an IPO in 2010. CEO Scott Griffith maintains the company will post its first profit in the third quarter of 2009. Sales will reach $120 million this year and are expected to grow to $1 billion within a decade, Griffith has said publicly.
Connect by Hertz: Hertz staked a claim in car sharing in December 2008 with Connect by Hertz, opening in New York, London and Paris. The company is making good on its declaration of rapid growth, adding more than 420 cars at 170 parking locations in Manhattan this year. Connect by Hertz has expanded onto college campuses and signed corporate accounts such as Marriott Hotels’ Maryland headquarters, IBM in Germany and Xerox in England.
Hertz bought Eileo S.A., its car sharing technology provider, in April.
WeCar: WeCar, Enterprise’s car share foray, is aimed at “dedicated fleets” and is designed to complement Enterprise’s business rental program.
WeCar is operating on four university campuses and on corporate campuses such as Recreational Equipment Inc. (REI) and Google, as well as in some municipal fleets.
U Car Share: U Car Share is operated by U-Haul Truck Rental with a fleet solely of Chrysler PT Cruisers. The company once had 10 locations. It now has four, though it’s growing again with programs planned for Salt Lake City and four more college campuses.
CAR2GO: Daimler AG is bringing its carsharing program stateside with a pilot program in Austin, Tex. A fleet of 200 hybrid smart cars will be rentable by the minute and can be done instantaneously by swiping a seal affixed to a driver’s license on the car. Members will reportedly have the ability to return the car to any of its locations.
Local Players: Larger local players include PhillyCarShare, I-Go (Chicago), City CarShare (San Francisco Bay) and the Co-operative Auto Network (Vancouver). All four are nonprofit.
Exploiting New Markets
In North America, five types of car sharing operations have emerged: for-profit, nonprofit, cooperative (owned by its members), public transit (operated by a public transit agency) and university research programs.
Car sharing operations exist predominantly in three areas: urban environments, universities and corporate campuses.
Tony Simopoulos, president and cofounder of Metavera Solutions, a carsharing technology provider, sees further growth potential in the business fleet environment. “I expect legislation with benefits to encourage this,” he says, as corporations look to reduce their fleet costs, miles traveled and carbon footprint.
A new market is emerging in suburban housing complexes. Real estate developers like car sharing because it frees up parking spaces, says Julian Espiritu, managing director of Abrams Carsharing Advisors, a division of Abrams Consulting. Each car share vehicle takes away the need for seven to 10 parking spaces in a complex, Espiritu says. “It’s an amenity, a sales tool,” says Espiritu.
Simopoulos believes that car sharing could grow in suburbia when it’s tied to a form of business-oriented carpooling. The key is to rent those same cars used for commuting during the business day as well, he says. This hasn’t been done yet.
The primary market is still large metropolitan areas where car ownership is less viable because of garage fees and insurance. “My rule of thumb is that if there is a great mass transit system, then the environment dictates carsharing,” Espiritu says.
How It Works
To join a car share organization, drivers apply online and go through an application process, which includes a driving record check and often a credit check. Yearly membership fees range from $25 to $125 plus deposit.
Members then receive a security access card or key fob in the mail. Reservations can be made online, via Smart phone or 800 number.
Cars are situated in lots or dedicated street parking and can be picked up at any time. To gain entry to the cars, members swipe the access card or fob across an RFID reader in the windshield. The keys are inside.
Time and mileage are tracked electronically and the customer is billed via e-mail. Rates range from as little as $2 per hour to $15, depending on time of day. Mileage is usually capped. Zipcars have a 180-mile daily limit; additional miles cost 35 cents.
The car-share operator (CSO) pays for maintenance, parking, gas and insurance on the vehicle.
A Different Cost Structure
The main cost components of a car-share business are fleet, insurance, personnel and technology.
Fleet costs include loan/lease payments, fuel, vehicle maintenance and cleaning. Car sharing fleets are small, so CSOs don’t have the buying power of traditional car rental.
Parking costs are high ($250-$400 per car, per month), especially in urban environments such as New York. In those markets, vehicle damage needs to be contained to a greater extent.
However, members take better care of a car share vehicle than a traditional rental, Espiritu contends. “Car share members are part of a community,” he says. “You’ve got skin in the game with the membership fee. If a car is trashed, members hold each other accountable.”
High fuel prices could keep a CSO awake at night. However, Espiritu says that the goal is to cover a good percentage of fuel costs with per-mile charges on car shares that exceed the mileage limit.
Technology alleviates traditional frontline staffing. However, personnel and administrative costs include a member services coordinator who handles in-house call center functions, enrollment processing and billing questions. Another cost is an outsourced call center for 24-hour customer service issues such as rental extensions or breakdowns.
Befitting the grassroots image of car sharing, traditional media advertising is not part of the marketing game plan. Zipcar, for instance, rarely uses billboards, TV or radio, says Espiritu.
During his seven years at Zipcar, Espiritu instead worked to partner with transportation organizations and developers and coordinate co-branded and marketed events. “The goal is to educate individuals,” he says.
Technology—integral to the car share business model—can be divided into hardware and software, and customer-facing and back-office components. Upfront expenses run $1,000-$1,700 per vehicle, though that cost can be amortized as hardware can be transferred to new vehicles. Hardware will last three to six years, according to Simopoulos.
Software has a monthly hosting and support fee of $40-$60 per vehicle, with an additional $15-$20 for the cellular data plan.
The hardware component starts with the keyless entry system, which consists of a “proximity reader” mounted in the window on the driver’s side. Swiping a key fob or smart card opens the door via an RFID connection.
The reservation is sent to the car wirelessly, identifying the reserved driver and allowing the car to be started. Most systems today are equipped to lock/unlock the doors and immobilize the engine.
Time and mileage is read either by connecting a speed sensor to the car, via a GPS system, or tapping into the CAN-bus. Data is communicated via a cellular connection.
The software component starts with the customer-facing Web site, the portal for almost all car sharing transactions.
The Web site contains a membership sign-up form and an online reservations platform, both with behind-the-scenes processing engines. Some systems feature an application for smart phones. An accounts section lets customers update member information and review charges.
The billing engine processes transactions, collects payments, generates statements, maintains member profiles, handles accounts receivable, various payment terms and billing-related calls such as a self-service function to reinstate an expired credit card.
Another software component, a decision support engine for call centers, uses an automated touchtone system that diverts calls from a human operator for tasks such as adding time to the rental.
A fleet component is used to plan fleet cycles and routine maintenance.
Your RPU Is What?
Car share operations have an average of 40-45 members for each car. The national average is 45 to one, according research conducted by Transportation Sustainability Research Center, UC Berkeley. Ratios of 50-60 members per car produce overbooking issues, Espiritu says.
Car sharing utilization is 30-40 percent—50 percent less than optimal utilization in traditional car rental—though it’s based on a 24-hour clock. Espiritu says that 35-percent utilization will net about $1,700 revenue per unit (RPU), a healthy margin compared to traditional car rental’s $1,000 RPU.
“A 40 percent utilization will make you an enormous amount of money,” asserts Espiritu, who says that during his years at Zipcar some cars pulled in $4,000 a month RPU. “From my car rental days I would have said you must be smoking something” to obtain those numbers, he says.
Zipcar’s total anticipated revenue of $120 million this year will beat revenue figures from franchise systems such as U-Save and Payless in 2009, and Zipcar does it with 40-45 percent less fleet and a fraction of the staff.
Why is Zipcar turning a profit only now? “When I left Zipcar, their core markets were very profitable,” Espiritu says. “But opening up new markets takes a huge amount of capital.”
But Does It Make Sense for Traditional RACs?
There are some clear advantages for traditional car rental companies looking to get into car sharing, Espiritu says.
“Understanding fleet is hugely important; you can lose your shirt on the cost of a car,” says Simopoulos. “That’s where traditional rental car operators have a massive edge.”
“We have fleet support, so I don’t need to hire a whole fleet team,” says Griff Long, senior director of global car sharing for Connect by Hertz. “We have marketing and sales, and most importantly, we’ve been able to leverage the existing structure of our reservations center to provide 24-hour in-house member support, which nobody else has ever been able to do.”
Many CSO back-office duties, such as accounting and call center functions, can be handled by personnel already experienced in general fleet and rental processes.
The ability to bring car sharing units under an existing insurance umbrella is another advantage over a startup that needs to find insurance.
If You Build It, Will They Come?
In a study completed by the Economist Intelligence Unit and commissioned this year by Zipcar, the potential market for car sharing worldwide may reach 37 million customers and yield $10 billion a year in revenue. The report didn’t specify a timeframe.
The numbers indicate a growth market—but where?
Cities with the highest potential for car sharing include Hong Kong, London, New York, Paris and San Francisco. Those cities have high population density, extensive public transit systems and a relatively high burden of car ownership.
Cities with less expensive parking, lower education levels and higher vehicle ownership rates offer a less conducive business environment for car sharing, the report says.
“We’re not even close to market saturation,” says Long of Connect by Hertz. “Only 10 percent of the U.S. population knows what car sharing is. If you take that figure, you could imagine that this could be a $1 billion industry in the U.S. alone.”
“I don’t think growth is an issue of consumer demand, but an issue of supply—parking supply,” says Shaheen. “Access to dedicated, on-street parking and safe, public off-street parking are critical. A dense network of cars is crucial. Where the car is parked has a lot to do with how much people know about car sharing.”
As in traditional car rental, scale is important. The larger the fleet, the greater the ability to spread costs over technology and personnel. “Some people think a 100-car fleet is the profit threshold. I think you can do it with less, even less than 50,” says Simopoulos.
Assuming a ratio of 50 members to a vehicle, and assuming a 50-vehicle fleet is a good target for profits, a new operator must be prepared to recruit, process and maintain 2,500 members.
“Finding the balance while you’re growing rapidly is tough,” Simopoulos says, noting that it’s better to have overcapacity, which will be capital intensive.
In new markets, consumers need to be educated in the carsharing concept. “If you’re starting in a city that knows nothing about car sharing, going pure retail is a big challenge,” says Simopoulos.
In major markets, a new company will have to contend with Zipcar. Is there enough revenue opportunity for more players? And can a for-profit business survive against a well-funded, established nonprofit car sharing organization?
Zipcar members maximize their membership fee by being able to rent in many locations across the U.S. For startups, will consumers be attracted to a car sharing company with such a small initial footprint?
RACs need to look beyond their traditional customers and suppliers.
“The key is to find that niche,” Simopoulos says. “Go after the business that will sign up and commit its employees, or that condo developer that will give you a revenue guarantee for the first few months.”
Shaheen emphasizes the need for strong public/private partnerships with cities for access to parking spaces and joint marketing on buses and trains.
Implementation issues aside, a small but growing group of advocates is working to push car sharing into the mainstream. “I think this process and business model is the new wave for car rental,” says Espiritu. “It’s a better way of doing business.”