55-A Standard Leader Blocks the Price Leader Competitor

 

You would think that a company looking for growth opportunities might look favorably on adjacent markets. These markets might use the company’s products or sell to some of its customers. The adjacent business may offer the company an opportunity to increase the economies of scale the company enjoys in one of its cost areas. But entering an adjacent business is usually just as difficult as entering an entirely new business because it usually is an entirely new business. Here is the story of an industry where most of the industry leaders are entering one or more adjacent businesses. How likely are they to succeed?

Posted 10/27/08

Enterprise Rent-A-Car is an astute, well managed company. They have grown to the number one position in automobile rental by using their management skills to beat the likes of Hertz, Avis and National. Now they are starting to close the door on a growing low-end, Price Leader, set of competitors. A Price Leader is a competitor or product that offers below industry-standard performance for a very low price. More than 50% of a Price Leader competitor’s total unit volume is usually sold at price points below the Standard Leader product.

This low-end, Price Leader, part of the business is car sharing. This is a club-like service where members join and then rent cars by the hour in locations close to their home or business. The leader in this industry is Zip Car Inc. This company has 250,000 members and 8500 corporate clients. Zip Car, as well as most of the industry, exists only in the larger cities in the United States.

So what has Enterprise done to stunt the growth of Zip Car? It has gone after the largest customers in the industry, in big geographic markets, with a comparable product. (See the Symptom & Implication, “Low end products are gaining share of the market” on StrategyStreet.com.) Enterprise has created WeCar branches at several partner businesses around the country. It plans to deal only with the largest customers, businesses. By contrast, Zip Car gets most of its business from consumers, a costlier market segment to serve. It currently has WeCar locations at Google’s office in San Francisco, Washington University in downtown St. Louis and at sporting goods retailer, REI’s offices in Kent, Washington. The company has been attracted to this car sharing price point because it is a booming business in an otherwise slow-growth industry.

In the long term, it is likely that the industry’s Standard Leaders, including Enterprise and Hertz, will be the leaders in this low-end price point. (See the Perspective, “When Product Mix Matters”, on StrategyStreet.com.)

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Update 2022:

There was a great deal of turmoil in the automobile rental market over the last decade or so. First, came the emergence of many forms of alternative mobility solutions, including bicycle and scooter rentals, ride hailing, ride sharing and car sharing services. The ride hailing segment has been the big winner here with the combination of Uber and Lyft controlling virtually all of the market. Uber’s market share was 69% with Lyft at 31%. There was turmoil as the industry Standard Leaders acquired many of the low-cost Price Leader competitors. The Avis Budget group bought Payless rental car in 2013 and Zipcar the same year. The Hertz Corporation bought Thrifty and Dollar rental car in 2012.

By 2021, Enterprise had become the dominant leader in US auto rentals, in both cars in service and US revenue. The Avis Budget group was a distant 2nd followed by Hertz at number 3. These 3 competitors controlled the large majority of the rental car market. The number 4 competitor in the industry had less than 10% of the revenues of number 3, Hertz.

Acquisitions are significant tools for Standard Leaders to expand into the other industry Price Points. HERE are some considerations for an acquiring company.

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Update 2025

The industry has attempted to evolve into a broader service business called “mobility solutions.” This business concept sells mobility as a service. This concept has three separate arms: car rental, ride hailing, and car sharing. All the leading automobile rental companies have entered this broader business in some form or another.

There is both opportunity and risk here. The opportunity is to get away from competing solely in the car rental business which was becoming a low return, commodity market. The risk is that each of these business arms is an entirely separate business. A successful competitor will have to create a strategy specific to each of those businesses. This strategy must create unique Performance benefits and a cost structure able to withstand competitive price challenges. History is littered with established companies who tried and failed to do that well as they entered adjacent businesses. A brief review of each business illustrates some of this strategic complexity.

The car rental business is stable and has reasonable profit prospects, though with little growth or product innovation. The industry is slow growing at 2 to 3% a year. The top three US competitors, including Enterprise, Avis and Hertz, control 94% of the total industry. The business had become a commodity by the time of the Covid crash.  It was difficult to shift market shares. Difficult until the Hertz bankruptcy.

For a short while, the industry had substantial Volatility (share shifting from one competitor to another). Hertz managed its finances poorly and declared bankruptcy early in the Covid era. Hertz failed many of its customers while it went through and recovered from bankruptcy. This struggle enabled both Enterprise and Avis to gain market share on the failures of Hertz. Hertz suffered Negative Volatility (market share leaving Hertz for another competitor) with its failure while its two competitors gained share with Positive Volatility (market share gained from another competitor or from customers new to the market) in what we call a Weak Win (a competitor gains share only after an incumbent supplier fails its customer relationship).

Now, the industry has stabilized and share change takes place very slowly. Profits should be attractive. The domination of the three top players should enable the industry to maintain pricing discipline, even though it failed to do so pre-Covid, and produce reasonably attractive future returns. The industry is capital-intensive and customer price sensitive, so it is possible that the leaders could lose pricing discipline and slip back into Overcapacity and Hostility. However, pricing discipline and profits are more likely. So is slow growth.

The ride hailing business has two powerful industry leaders who control virtually all of the market. Their returns are high because they have good control of pricing and limited price competition. It is unlikely that we will see any of the car rental companies successfully enter that market. They would have a great deal of difficulty establishing any unique Function, Reliability, or Convenience benefits on which to challenge these current leaders, who also have overwhelming economies of scale and the capability to withstand a period of low prices from entering competition. This adjacent business is not attractive for a car rental company.

The car sharing business is relatively new. There are two separate businesses in car sharing, traditional competitors like Zipcar who own the cars and the software platform, and more emergent competitors like Turo who compete in the peer-to-peer market where private automobile owners rent to other private consumers who use Turo’s software platform. This market is growing at about 5% a year. Both Zipcar and Turo dominate their respective markets. Still, the market attracts new customers every year which offers the possibility of Positive Volatility to new entrants to the market.

The recent developments in the car sharing market illustrate the challenge of entering a new adjacent business. The car sharing market attracted both Avis and Enterprise early in its development. Avis bought and has successfully developed Zipcar, but with undisclosed profits. Enterprise developed a car sharing concept called WeCar around the same time as Zipcar emerged. Enterprise wrapped the WeCar concept into its Enterprise CarShare business in 2013 and discontinued the name. In recent years, Enterprise has backed off its formerly strong commitment to this car sharing market due to demand challenges caused by ride hailing and peer-to-peer car sharing competition. The experience of Enterprise serves as a warning to other car rental companies who look longingly at the car sharing market. Sometimes, experience in one market does not translate into Performance or cost benefits in another.

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