Wednesday, April 20, 2011

Zipcar's Prospects

The Wall Street Journal's Heard On The Street column in last weekend's edition dealt with the recently-public Zipcar. What struck me was the poor quality of Rolfe Winkler's thought process by comparing Zipcar to Netflix.

According to Winkler, Zipcar has decent profitability in what he characterizes as four mature markets for the firm- Boston, New York, San Francisco and Washington. He then observes that Hertz' Connect service is already challenging Zipcar, and provides a one-way rental and drop off that the former does not.

So far, so good. Having been aware of Zipcar for a few years, it always impressed me as the sort of business model which can prosper in niches, but has little or no competitive advantage to protect itself from larger rental car companies, should its growth see it become a threat to the latter.

Winkler suggested that Zipcar "can pull a Netflix." Which is odd, considering the radically different nature of the businesses. Netflix has been around for a long time, originally offering convenience and fixed pricing over Blockbuster's legendary stock outages. Aside from some warehouses and disc inventories, Netflix wasn't a particularly capital-intensive business.

Zipcar, on the other hand, rents cars. Cars that must be, I presume, cleaned, maintained, and frequently inspected for possible repairs. Further, the risks of damage to cars would seem to be financially larger and probably more frequent than the risks of damages to DVDs.

So I don't really see much of a similarity in the two business models at all. The fact that Blockbuster failed to effectively copy Netflix's approach had, I believe, less to do with, as Winkler contends, Netflix being a "sexier rival," and much more to do with Blockbuster's already declining fortunes and poor reputation for service. Because Netflix easily became a national brand and service without locations, while Blockbuster tended to be associated with local neighborhoods, it was tough for the latter to provide a compelling value proposition when it finally got around to emulating the former's business model.

Zipcar reminds me, instead, of Minnetonka's original Softsoap product in the 1980s. While it offered a valuable new feature for handsoap, the company's product was never likely to become a market share leader for long without provoking lethal competitive response from the major soap makers. Another example might be People's Express, which also competed in a capital-intensive business. It grew profitably until it saturated smaller markets and routes. When it moved into larger markets and created route- and seat-management challenges which outstripped its primitive systems, it quickly lost momentum and money. Bankruptcy followed.

I suspect Zipcar will have similar segmentation saturation issues, even as it has identified "100 metro areas and and hundreds of colleges." Without knowing the exact numbers, I don't believe the major rental car companies will cede that much share before moving to blunt Zipcar's growth with similar services, as Hertz evidently has already begun to do.

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