Zipcar Zips Ahead on First Day of Trading
Posted on April 16, 2011
Some of you might have read about the recent IPO of the car rental company Zipcar. On Thursday April 14th, zipcar car shares surged 56% on the first day of trading after an expanded initial public offering. This values the car rental company at US$1.21 Billion, at 6.5 times last years sales, more than seven times higher than the multiple of 0.9 for its competitor, Hertz!
So why do the markets love Zipcar so much more than Hertz? How does a company shake-up a staid, boring industry like car rentals and be valued at multiples more akin of much higher growth industries? You guessed it– by identifying a renaissance innovation!
Like many other capital-intensive industries, car rental companies own expensive fixed assets. To be profitable, they must utilize these assets as much as they can. Car-rental companies thus force customers to rent cars of daily increments, thus reducing their risk of underutilization of cars in non-peak hours. From the customer point of view, this meant that she had to pay for a day even if she needed the car for only a few hours.
As is typical in renaissance innovation, Zipcar rethought the allocation of risks and how this operating model was excluding an important market segment– folks who wanted to rent for short increments. It realized that the ability to rent by the hour would encourage people to switch from taxis or limos to Zipcars. It could price its offering competitively compared to alternative short-distance transportation modes and still earn a much higher hourly rate than conventional car renters. (Zipcars cost about $8 an hour, whereas the prorated cost at a traditional company is $1 to $2.)
Now, while Zipcar has to bear more risks of underutilization of cars in non-peak hours as compared to a regular car-rental company, but it can charge handsomely for it. In fact, it turns out that Zipcar is better at managing this risk (by quickly turning around cars, sharing real-time information on cars and quickly reallocating them to new customers) and thus it is better for it to bear this risk and just charge customers for bearing the risk. Unlike many of the renaissance innovations discussed on the blog (see Dell, MyFab, etc. ) Zipcar’s innovation actually increases the risks it must bear!
Essentially Zipcar’s reinvented the operating model of the car-rental business, this created a new high-growth opportunity in a traditional industry and for now, Zipcar deserves all the love coming its way from Wall Street. Bravo Zipcar!