The Car Rental Industry
The car rental industry is a multi-billion dollar sector of the US economy. The US part of the industry averages about $18.5 billion in revenue a year. Today, there are approximately 1.9 million rental vehicles that service the US part 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 possible new comers at a cost-disadvantage since they confront high input costs with reduced possibility of economies of extent. additionally, 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 in revenue.
Level of Integration
The rental car industry faces a completely different ecosystem 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 while the turn-around mileage was 12,000 to 15,000 miles five years ago. Because of slow industry growth and thin profit margin, there is no imminent threat to backward integration within the industry. In fact, among the industry players only Hertz is vertically integrated by Ford.
Scope of Competition
There are many factors that shape the competitive scenery of the car rental industry. Competition comes from two main supplies 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 leader Enterprise, but competitors function at a cost disadvantage along with smaller market shares since Enterprise has established a network of dealers over 90 percent the leisure part. On the corporate part, however, competition is very strong at the airports since that part is under tight supervision by Hertz. Because the industry underwent a enormous economic downfall in recent years, it has upgraded the extent 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 include in a battle of the fittest.
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 US has additional 75,000 vehicles to its fleet since 2002 which help increase its number of facilities to 170 at the airports. Hertz, however, has additional 25,000 vehicles and broadened its international presence in 150 counties as opposed to 140 in 2002. In addition, Avis has increased its fleet from 210,000 in 2002 to 220,000 despite recent economic adversities. Over the years following 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 however to come. Over the time 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 2003-2008 period.”
Over the past few years the rental car industry has made a great deal of progress to ease it dispensing 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 US, strategic and tactical approaches are taken into account in order to insure proper dispensing throughout the industry. dispensing takes place within two interrelated segments. On the corporate market, the cars are distributed to airports and hotel surroundings. On the leisure part, however, cars are distributed to agency owned facilities that are conveniently located within most major roads and metropolitan areas.
In the past, managers of rental car companies used to rely on gut-feelings or intuitive guesses to make 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 continue a level of balance that would satisfy consumer need and the desired level of profitability. The dispensing course of action 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 obtainable, most car rental companies including Hertz, Enterprise and Avis, use a “pool” which is a group of independent rental facilities that proportion a fleet of vehicles. Basically, with the pools in place, rental locations function more efficiently since they reduce the risk of low inventory if not eliminate rental car shortages.
Most companies throughout the chain make a profit based of the kind 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 example, the economy part by itself is responsible for 37.7 percent of the total market revenue in 2004. In addition, the compact part accounted for 32.3 percent of overall revenue. The rest of the other categories covers the remaining 30 percent for the US part.
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. afterward, the overall industry revenue deteriorated 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 profit to $18.2 billion. As a consequence of the economic downturn 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, however, the economic situation of most firms have little by little improved throughout the industry since most rental agencies have returned far greater profits relative to the anterior years. for example, Enterprise realized revenues of $7.4 billion; Hertz returned revenues of $5.2 billion and Avis with $2.9 billion 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 the next several years which translates into an increase in profit.
Competitive Rivalry Among Sellers
There are many factors that excursion 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 regularly trying to enhance 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 thin profit margins, price competition is not a factor; however, most companies are actively involved in creating values and providing a range of amenities from technological gadgets to already free rental to satisfy customers. Hertz, for example, integrates its Never-Lost GPS system within its cars. Enterprise, however, uses complex provide management software to manage its fleets.
Finally, Avis uses its OnStar and Skynet system to better serve the consumer base and offers free weekend rental if a customer rents a car for five consecutive days additionally, the consumer base of the rental car industry has comparatively low to no switching cost. Conversely, rental agencies confront high fixed operating costs including character rental, insurance and maintenance. consequently, rental agencies are sensitively pricing there rental cars just to retrieve operating costs and adequately meet their customers demands. Furthermore, because the industry experienced slow growth in recent years due to economic stagnation that resulted in a enormous decline in both corporate travel and the leisure sector, most companies including the industry leaders are aggressively trying to reposition their firms by little by little lessening the dependency level on the airline industry and regaining their footing in the leisure competitive arena.
The possible Entry of new Competitors
Entering the car rental industry puts new comers at a serious disadvantage. Over the past few years following the economic downturn of 2001, most major rental companies have started increasing their market shares in the vacation sector of the industry as a way of insuring stability and lowering the level of dependency between the airline and the car rental industry. While this trend has engendered long term success for the existing firms, it has heightened the competitive scenery for new comers. Because of the severity of competition, existing firms such as Enterprise, Hertz and Avis carefully monitor their competitive radars to anticipate Sharpe retaliatory strikes against new entrants. Another obstacle to entry is produced because of the saturation level of the industry.
For example, Enterprise has taken the first mover advantage with its 6000 facilities by saturating the leisure part thereby placing not only high restrictions on the most shared dispensing channels, but also high resource requirements for new firms. Today, Enterprise has a rental location within 15 miles of 90 percent of the US population. Because of the network of dealers Enterprise has established around the nation, it has become comparatively stable, more recession proof and most importantly, less reliant on the airline industry compared to its competitors. Hertz, however, is employing the complete spectrum of its 7200 stores to obtain its position in the marketplace. Basically, the emergence of most of the industry leaders into the leisure market not only drives rivalry, but also it varies directly with the level of complexity of entering the car rental industry.
The Threat of Substitute
There are many substitutes obtainable for the car rental industry. From a technological standpoint, renting a car to go the distance for a meeting is a less attractive different as opposed to video conferencing, virtual teams and collaboration software with which a company can closest setup a meeting with its employees from anywhere around the world at a cheaper cost. In addition, there are other alternatives including taking a cab which is a satisfactory substitute relative to quality and switching cost, but it may not be as attractively priced as a rental car for the time of a day or more. While public transportation is the most cost efficient of the alternatives, it is more costly in terms of the time of action and time it takes to reach one’s destination. Finally, because flying offers convenience, speed and performance, it is a very enticing substitute; however, it is an unattractive different in terms of price relative to renting a car. On the business part, car rental agencies have more protection against substitutes since many companies have implemented travel policies that establish the parameters 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 different. Basically, the threat of substitute is reasonably low in the car rental industry since the effects the substitute products have do not present a meaningful threat of profit erosion throughout the industry.
The Bargaining strength of Suppliers
Supplier strength is low in 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 meaningful 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 strength 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 consumer’s rental choices.
The Bargaining strength of Buyers
While the leisure sector has little or no strength, the business part possesses a meaningful 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 travelers. This trend considerably reduces supplier strength or the rental firms’ strength and increases corporate buyer strength since the business part is excruciatingly price sensitive, well informed about the industry’s price structure, buy in larger quantities and they use the internet to force lower prices. Vacation buyers, however, have less influence over the rental terms. Because vacationers are usually less price sensitive, buy in lesser amounts or buy more rarely, they have ineffective bargaining strength.
Today the car rental industry is facing a completely different ecosystem than it did five years ago. Competitively speaking, the dramatical change of the five forces around the car rental industry exerts some strong economic pressure that has considerably tarnished the competitive attractiveness of the industry. As a consequence 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 ecosystem. Today, very few firms including Enterprise, Hertz and Avis return a slightly above-average revenue compared to the rest of the industry. Realistically speaking, 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, disparities exist from a number of dimensions including revenue, fleet size and the market size each firm holds in the market place. for example, 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 quantity. In addition, Avis ranks third on the map. Avis is among one of the companies that is having issues recovering its revenue margins from prior to the economic downturn. for example, in 2000 Avis returned revenues of approximately $4.23 billion. Over the time of the next several years following 2000, the revenue of Avis has been considerably lower than that of 2000. As a way of reducing uncertainty most companies are little by little 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 connected to the airports.
meaningful Success Factors
There are many meaningful success factors that excursion 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 dispensing is another factor that keeps the industry profitable. Despite the positive relationship between fleet sizes and the level of profitability, firms are regularly 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 inclined to renting cars from firms that have functional rental and drop off locations. Another meaningful success factor that is shared among competing firms is the integration of technology in their business processes. by technology, for example, the car rental companies create ways to meet consumer need 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.
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 obstacle 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 90 percent saturated because of the active efforts of Enterprise to rule this sector of the market. however, 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 calculating factors of choosing one company over another are price and convenience. Because of this reason, rental firms are very circumspect about setting their rates and that generally force already the industry major players in the position of offering more to the consumers for less just to keep competitive. Hertz, for example, offers wireless internet to its customers just to add more convenience to their travel plans. Avis however, 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 possible new market entrants.
The rental car industry is in a state of recovery. Although it may seem like the industry is performing well financially, it is nonetheless little by little regaining its footing relative to its actual economic position within the last five years. As a way of insuring profitability, besides seeking market shares and stability, most companies throughout the chain have a shared goal that deals with lowering the level of dependency on the airline industry and moving toward the leisure part. 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 however 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 realizing success in the car rental industry.
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