The Car Rental Industry
Market Overview
The Car Rental Industry
The Car Rental Industry
The Car Rental Industry
The Car Rental Industry
The car rental industry is a multi billion Dollar sector of the US economy. The u.s. segMent of the industry averages about $ 18.5 billion in revenue a year. Today, there are approximately 1.9 million rental vehicles that service the u.s. segMent of the market. In addition, there are many rental agencies besides the industry leaders that subdivide the total revenue, namely Dollar Thrifty, Budget and Vanguard. Unlike other mature service industries, the rental car industry is highly consolidated which naturally puts potential new comers at a cost-disadvanTAGe since they face high input costs with reduced possibility of economies of scale. Moreover, most of the profit is generated by a few firms including Enterprise, Hertz and Avis.For the fiscal year of 2004, Enterprise generated $ 7.4 billion in total revenue. Hertz came in second position with about $ 5.2 billion and Avis with $ 2.97 on revenue.
Level of Integration
The rental car industry faces a completely different environMent than it did five years ago. According to Business Travel News, vehicles are being rented until they have accumulated 20.000 to 30.000 miles until they are relegated to the used car industry whereas the mileage was turn-around 12.000 to 15.000 miles five years ago. Because of slow industry growth and narrow profit margin, there is no imminent threat to backward integration within the industry. In fact, among the industry players only Hertz is vertically integrated through Ford.
Scope of Competition
There aremany factors that shape the competitive landscape of the car rental industry. Competition comes from two main sources throughout the chain. On the vacation consumer s end of the spectrum, competition is fierce not only because the market is saturated and well guarded by industry leading Enterprise, but competitors operate at a cost disadvanTAGe along with smaller market shares since Enterprise has established a network of dealers over 90 percent the leisure segMent. On the corporate segment, on the other hand, competition is very strong at the Airports since that segment is under tight supervision by Hertz. Because the industry underwent a massive economic downfall in recent years, it has upgraded the scale of competition within most of the companies that survived.Competitively speaking, the rental car industry is a war-zone as most rental agencies including Enterprise, Hertz and Avis among the major players engage in a battle of the fittest.
Growth
Over the past five years, most firms have been working towards enhancing their fleet sizes and increasing the level of profitability. Enterprise currently the company with the largest fleet in the u.s. has added 75.000 vehicles to its fleet since 2002 which help increase its number of facilities to 170 at the Airports. Hertz, on the other hand, has added 25.000 vehicles and broadened its international presence in 150 counties as opposed to 140 in 2002. In addition, Alamo has increased its fleet from 210.000 in 2002 to 220.000 despite recent economic adversities. Over the yearsfollowing the economic downturn, although most companies throughout the industry were struggling, Enterprise among the industry leaders had been growing steadily. For example, annual sales reached $ 6.3 in 2001, $ 6.5 in 2002, $ 6.9 in 2003 and $ 7.4 billion in 2004 which translated into a growth rate of 7.2 percent a year for the past four years. Since 2002, the industry has started to regain its footing in the sector as overall sales grew from $ 17.9 billion to $ 18.2 billion in 2003. According to industry analysts, the better days of the rental car industry have yet to come. Over the course of the next several years, the industry is expected to experience accelerated growth valued at $ 20.89 billion each year following 2008 "which equates to a CAGR of 2.7% [increase] in the 2003-2008period.
Distribution
Over the past few years the rental car industry has made a great deal of progress to facilitate it distribution processes. Today, there are approximately 19.000 rental locations yielding about 1.9 million rental cars in the US. Because of the increasingly abundant number of car rental locations in the u.s., strategic and tactical approaches are taken into account in order to insure proper distribution throughout the industry. Distribution takes place within two interrelated segments. On the corporate market, the cars are distributed to Airports and hotel surroundings. On the leisure segment, on the other hand, cars are distributed to agency owned facilities that are conveniently located within most major roads andmetropolitan areas.
In the past, managers of rental car companies used to rely on gut-feelings or guesses to make intuitive decisions about how many cars to have in a particular fleet or the utilization level and performance standards of keeping certain cars in one fleet. With that methodology, it was very difficult to maintain a level of balance that would satisfy consumer demand and the desired level of profitability. The distribution process is fAirly simple throughout the industry. To begin with, managers must determine the number of cars that must be on inventory on a daily basis. Because a very noticeable problem arises when too many or not enough cars are available, most car rental companies including Hertz, Avis, Enterprise and use a pool which is agroup of independent rental facilities that share a fleet of vehicles. Basically, with the pools in place, rental locations operate more efficiently since they reduce the risk of low inventory if not eliminated rental car shortages.
Market Segmentation
Most companies throughout the chain make a profit based of the type of cars that are rented. The rental cars are categorized into economy, compact, intermediate, premium and luxury. Among the five categories, the economy sector yields the most profit. For instance, the economy segment by itself is responsible for 37.7 percent of the total market revenue in 2004. In addition, the compact segment accounted for 32.3 percent of overall revenue. The rest of the other categories covers the remaining 30percent for the US segment.
Historical Levels of Profitability
The overall profitability of the car rental industry has been shrinking in recent years. Over the past five years, the industry has been struggling just like the rest of the travel industry. In fact, between the years 2001 and 2003 the US market has experienced a moderate reduction in the level of profitability. Specifically, revenue fell from $ 19.4 billion in 2000 to $ 18.2 billion in 2001. Subsequently, the overall industry revenue eroded further to $ 17.9 billion in 2002; an amount that is minimally higher than $ 17.7 billion which is the overall revenue for the year 1999. In 2003, the industry experienced a barely noticeable increase which brought profits to $ 18.2 billion. As a result of the economicdownturn in recent years, some of the smaller players that were highly dependent on the airline industry have done a great deal of strategy realignments as a way of preparing their companies to cope with eventual economic adversities that may surround the industry. For the year 2004, on the other hand, the economic situation of most firms have gradually improved throughout the industry since most rental agencies have returned to greater profits relative to the previous years. For instance, Enterprise realized revenues of $ 7.4 billion; Hertz returned revenues of $ 5.2 billion and $ 2.9 billion with Avis in revenue for the fiscal year of 2004. According to industry analysts, the rental car industry is expected to experience steady growth of 2.6 percent in revenue over thenext several years which translates into an increase in profit.
Competitive Rivalry Among Sellers
There are many factors that drive competition within the car rental industry. Over the past few years, broadening fleet sizes and increasing profitability has been the focus of most companies within the car rental industry. Enterprise, Hertz and Avis among the leaders have been growing both in sales and fleet sizes. In addition, competition intensifies as firms are constantly trying to improve their current conditions and offer more to consumers. Enterprise has nearly doubled its fleet size since 1993 to approximately 600.000 cars today. Because the industry operates on such narrow profit margins, price competition is not a factor; however, most companies areactively involved in creating values and providing a range of amenities from technological gadgets to even free rental to satisfy customers. Hertz, for example, integrates its Never-Lost GPS system within its cars. Enterprise, on the other hand, uses soPh Meters of when renting a car or using a substitute is the best course of action.
According to Tracy Esch, an Advantage director of marketing operations, her company rents cars up to a 200-mile trip before considering an alternative. Basically, the threat of substitute is reasonably low in the car rental industry since the effects the substitute products have do not pose a significant threat of profit erosion throughout the industry.
The Bargaining Power of Suppliers
Supplier power is lowin the car rental industry. Because of the availability of substitutes and the level of competition, suppliers do not have a great deal of influence in the terms and conditions of Supplying the rental cars. Because the rental cars are usually purchased in bulk, rental car agents have significant influence over the terms of the sale since they possess the ability to play one supplier against another to lower the sales price. Another factor that reduces supplier power is the absence of switching cost. That is, buyers are not affected from purchasing from one supplier over another and most importantly, changing to different supplier's products is barely noticeable and does not affect the consumer's rental choices.
The Bargaining Power ofBuyers
While the leisure sector has little or no power, the business segment possesses a significant amount of influence in the car rental industry. An interesting trend that is currently underway throughout the industry is forcing car rental companies to adapt to the needs of corporate travellers. This trend significantly reduces supplier power or the rental firms power and increases corporate buyer power since the business segment is price-sensitive, excruciatingly well informed about the industry's price structure, purchase in larger quantities and they use the internet to force lower prices. Vacation buyers, on the other hand, have less influence over the rental terms. Because vacationers are usually less price sensitive, purchaselesser amounts or purchase more infrequently, they have weak bargaining power.
Five Forces
Today the car rental industry is facing a completely different environment than it did five years ago. Competitively speaking, the revolution of the five forces around the car rental industry exerts some strong economic pressure that has significantly tarnished the attractiveness of the industry competitive. As a result of the economic downturn in recent years, many companies went under namely Budget and the Vanguard Group because their business infrastructure succumbed to the untenability of the competitive environment. Today, very few firms including Enterprise, Hertz and Avis return a slightly above-average revenue compared to the rest of the industry. Realisticallyspeaking, the car rental sector is not a very attractive industry because of the level of competition, the barriers to entry and the competitive pressure from the substitute firms.
Strategic Group Mapping
As a moderately concentrated sector, there is a clear hierarchy in the car rental industry. From an economic standpoint, international exist from a number of dimensions including revenue, fleet size and the market size each firm holds in the market place. For instance, Enterprise dominates the industry with a fleet size of approximately 600.000 vehicles along with its market size and its level of profitability. Hertz comes in second position with its number of market shares and fleet volume. In addition, Alamo ranks third on the map. Avis is among one of thecompanies that is having issues recovering its revenue margins from prior to the economic downturn. For instance, in 2000 Alamo returned revenues of approximately $ 4.23 billion. Over the course of the next several years following 2000, the revenue of Avis has been significantly lower than that of 2000. As a way of reducing uncertainty most companies are gradually lessening the level of dependency on the airline industry and emerging the leisure market. This trend may not be in the best interest of Hertz since its business strategy is intricately linked to the airports.
Key Success Factors
There are many key success factors that drive profitability throughout the car rental industry. Capacity utilization is one of the factors that determines success in the industry.Because rental firms experience loss of revenue when there are either too few or too many cars sitting in their lots, it is of paramount importance to efficiently manage the fleets. This success factor represents a big strength for the industry since it lowers if not completely eliminates the possibly of running short on rental cars. Efficient distribution is another factor that keeps the industry profitable. Despite the positive relationship between fleet sizes and the level of profitability, firms are constantly growing their fleet sizes because of the competitive forces that surround the industry. In addition, convenience is one of the crucial attributes by which consumers select rental firms. That is, car rental consumers are more prone to renting carsfrom firms that have convenient rental and drop off locations. Another key success factor that is common among competing firms is the integration of technology into their business processes. Through technology, for instance, the car rental companies create ways to meet consumer demand by making renting a car a very agreeable ordeal by adding the convenience of online rental among other alternatives. Furthermore, firms have integrated navigation systems along with roadside assistance to offer customers the piece of mind when renting cars.
Industry Attractiveness
There are many factors that impact the attractiveness of the car rental industry. Because the industry is moderately concentrated, it puts new market entrants at a disadvantage. That is,its low concentration represents a natural barrier to entering the industry as it allows existing firm to anticipate sharp retaliations against new entrants. Because of the risks associated with entering the industry, among other factors, it is not a very attractive sector of the marketplace. From a competitive standpoint, the leisure market is saturated because 90 percent of the active efforts of Enterprise to dominate this sector of the market. On the other hand, the airport terminals are heavily guarded by Hertz. Realistically speaking, entry in the industry offers low profitability relative to the costs and risks associated. For most consumers, the main determining factors of choosing one company over another are price and convenience. Because of this reason, rental firms arevery circumspect about setting their rates and that generally force even the industry's major players in the position of offering more to the consumers for less just to remain competitive. Hertz, for example, offers wireless internet to its customers just to add more convenience to their travel plans. Avis on the other hand, offers free weekend specials if a customer rents a car for five consecutive weekdays. Based on the impact of the five forces, the car rental sector is not a very attractive industry to potential new market entrants.
Conclusion
The rental car industry is in a state of recovery. Although it may seem like the industry is performing well financially, it is nonetheless gradually regaining its footing relative to its actual economic position withinthe last five years. As a way of insuring profitability, besides seeking market shares and stability, most companies throughout the chain have a common goal that deals with lowering the level of dependency on the airline industry and moving toward the leisure segment. This state of motion has engendered some fierce competition among industry competitors as they attempt to defend their market shares. From a futuristic perspective, the better days of the car rental industry have yet to come. As the level of profitability increases, I believe that most of the industry leaders including Enterprise, Hertz and Avis will be bounded by the economic and competitive barriers of mobility of their strategic groups and new comers will have a better chance of infiltrating and realizingsuccess in the car rental industry.
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The Car Rental Industry
