A new term starts today at Northwestern and I will be teaching a couple of sections of the core ops class. That means I will almost certainly be leading a discussion about Zipcar.
One of the first points that we make in the core class is that operations must be linked to strategy. How a firm chooses to carry out its quotidian obligations needs to be aligned with what it is trying to do in the marketplace. If that alignment is missing, it is going to be very hard for the firm to meets its obligations to customers. Or, it is going to be very easy for a competitor to come in to take its lunch money.
Comparing Zipcar with take your pick of standard rental car companies is a nice way of illustrating this point. Zipcar and, say, Avis are in the same business: They rent cars. However, Zipcar is set up for replacing car ownership in densely populated areas while Avis is set up for accommodating travellers far from home who need to get to a meeting. Zipcar is not set up to handle people getting off an aeroplane and Avis is not set up to help yuppies get out to the Target in the burbs. It’s not that Zipcar or Avis wouldn’t want to make those sales, it’s that their operational choices make it somewhere between difficult and impossible to fulfil those customer needs. (For more, see here.)
Great example. Works well in class. But what does it say about Avis’ proposed acquisition of Zipcar?
This is an interesting transaction that has generally gotten favourable press. The argument goes that Zipcar will benefit from Avis’ scale in purchasing new vehicles as well negotiating better insurance rates. There is also some talk that cars can be shared across the two businesses (Avis to Buy Car-Sharing Service Zipcar, Wall Street Journal, Jan 2).
[Avis Chief Executive Ron] Nelson said Avis could help Zipcar achieve better profitability by leveraging Avis’s fleet and infrastructure, as well as offer more vehicles during peak rental periods.
Avis expects the deal to lower the companies’ combined costs by $50 million to $70 million a year. Mr. Nelson said the synergies were tied to three components: lower fleet costs, better fleet utilization and increased revenue by targeting corporate clients, one-way rentals and airport bookings.
Mr. Nelson said Zipcar utilization is low during weekdays but spikes during weekends, resulting in excess fleet vehicles during the week that often aren’t used. Avis, meanwhile, has utilization that peaks during the midweek commercial-travel period and has excess capacity on the weekends.
The deal would allow Avis to reduce the number of cars at Zipcar locations during the week, but also to use Avis’s excess weekend inventory to meet Zipcar’s strong weekend demand.
There are, of course, nattering nabobs of negativism. The New York Times wonders whether Avis will impose age restrictions on Zipcar as it does in its mainline business (Zipcar, Avis and Age Discrimination Against Renters, Jan 3) while the Washington Post opts for total paranoia (How Avis will ruin Zipcar, Jan 2).
The real issue in these deals is culture. Zipcar has a way of doing things that is particularly appealing to the young, hip urbanites who walk, bike and use public transportation most of the time and don’t own a car. They like the types of cool cars (Mini Coopers, Toyota Priuses) that Zipcar provides, the convenience of picking them up in their neighbourhood and the very idea of “sharing” cars with people like themselves. Everything about the company — from its marketing to its customer interface to its rules — supports that brand identity.
The only way for Avis to realise its over-promised cost savings will be to force Zipcar to consolidate the two operations and become more like Avis in everything it does. Eventually, all the old Zipcar executives will be fired or will migrate somewhere else. Auto purchasing will be centralized, as will the pickup points. The Zipcar Web site and computer system will be merged into the Avis Web site and computer system. Avis will want to do package deals with airlines and hotel chains and drag Zipcar customers into its loyalty program. They’ll even try to upsell Zipcar customers every time they reserve a car: Wouldn’t you like something bigger for only $2 more? Wouldn’t you like extra insurance?
We will leave aside the question of whether it counts as ruining a business if that business has been at best marginally profitable and more generally just losing money.
It is interesting to see how this will play out. I think that the Post article is barking up the wrong tree in suggesting that Avis will significantly consolidate Zipcar’s locations. It simply can’t. A car sharing service competes on convenience. It has to be cheaper than owning your own car while being more flexible and readily available than taking the bus or catching a cab. That means a block or two walk to pick up the car. If you have to grab a cab to get the car, why not just take the cab to run your errands?
But that similarly makes me dubious of Avis’ plans to use its existing fleet to bolster Zipcar’s sales. A quick look at Avis’ website shows that they have all of four locations in Chicago. Two are at the airports. One is in the Loop and one in Lakeview. Those last two might possibly be an option for some Zipsters but in reality that is a pretty limited set of locations from which to offer car sharing. Of course, one could have customers travel to the Loop to get a car but again if it takes a cab to get the car, why not just take cab for the whole trip?
The alternative is to bring additional cars to existing Zipcar locations throughout the city. Avis could move cars from O’Hare to Lincoln Park for the weekend. This basically puts Avis in the position of a bike sharing service having to regularly re-position its inventory. But repositioning cars is much harder. A reasonably sized truck car carry 20+ bikes and bike sharing stand can accommodate dozens of bikes. One guy with a truck can reposition a lot of inventory in a couple of hours. Car sharing locations are in relatively costly locations. Parking spaces in Lincoln Park don’t come cheap. That’s one of the reasons why car sharing is a viable business! Is Zipcar going to contract for extra parking spots in urban garages while planning on them being empty the majority of the week? How are they going to get cars to the spots? Are they going to run cars out one a time from the airport? Are they going to send out a car carrier every Friday morning?
Buying Zipcar might ultimately be the right thing for Avis to do. Maybe they can lock Zipcar users into Avis when they travel. Maybe they can get Zipsters to opt for daily rentals from Avis instead of taking a scarce urban Zipcar for eight hours. Maybe there are untold synergies in purchasing and insurance. All of those are worth something. However, I don’t see how they use Avis cars for regular Zipcar rentals. The business models are too different and the logistics just become to complicated.
This post originally appeared at The Operations Room
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