The Automobile Rental Market

Market Overview

The car rental sector is often a multi-billion dollar sector on the US economy. The US segment in the
market averages about $18.five billion in revenue a year. Right now, you will discover about 1.9 million
rental cars that service the US segment from the market. In addition, there are several rental agencies
besides the sector leaders that subdivide the total income, namely Dollar Thrifty, Budget and Vanguard.
In contrast to other mature service industries, the rental automobile business is hugely consolidated
which naturally puts prospective new comers at a cost-disadvantage considering that they face high
input expenses with decreased possibility of economies of scale. Moreover, most of the profit is
generated by a handful of firms including Enterprise, Hertz and Avis. For the fiscal year of 2004,
Enterprise generated $7.four billion in total income. Hertz came in second position with about $5.2
billion and Avis with $2.97 in revenue.

Amount of Integration

The rental car or truck sector faces a completely various atmosphere than it did 5 years ago. According
to Business Travel News, autos are becoming rented till they have accumulated 20,000 to 30,000 miles
till they're relegated for the applied auto business whereas the turn-around mileage was 12,000 to
15,000 miles five years ago. As a result of slow business growth and narrow profit margin, there isn't any
imminent threat to backward integration within the sector. The truth is, amongst the sector players only
Hertz is vertically integrated through Ford.

Scope of Competition

You'll find lots of things that shape the competitive landscape on the car rental sector. Competition
comes from two primary sources all through the chain. On the trip consumers finish with the spectrum,
competitors is fierce not merely because the marketplace is saturated and properly guarded by industry
leader Enterprise, but competitors operate at a price disadvantage along with smaller market place
shares considering that Enterprise has established a network of dealers over 90 % the leisure segment.
Around the corporate segment, on the other hand, competition is very powerful at the airports since
that segment is under tight supervision by Hertz. Because the sector underwent a massive economic
downfall in recent years, it has upgraded the scale of competition inside most of the corporations that
survived. Competitively speaking, the rental car industry can be a war-zone as most rental agencies such
as Enterprise, Hertz and Avis amongst the main players engage inside a battle from the fittest.

Development

More than the past five years, most firms have been working towards enhancing their fleet sizes and
increasing the level of profitability. Enterprise presently the business with the biggest fleet in the US has
added 75,000 cars to its fleet given that 2002 which assistance boost its quantity of facilities to 170 in
the airports. Hertz, on the other hand, has added 25,000 cars and broadened its international presence
in 150 counties as opposed to 140 in 2002. Furthermore, Avis has enhanced its fleet from 210,000 in
2002 to 220,000 in spite of current financial adversities. Over time following the financial downturn,
despite the fact that most organizations throughout the market have been struggling, Enterprise
amongst the sector leaders had been developing steadily. As an example, annual sales reached $6.three
in 2001, $6.five in 2002, $6.9 in 2003 and $7.four billion in 2004 which translated into a growth rate of
7.two % a year for the previous 4 years. Given that 2002, the industry has began to regain its footing
inside the sector as all round sales grew from $17.9 billion to $18.two billion in 2003. In line with market
analysts, the greater days of the rental car or truck market have but to come. More than the course
from the subsequent numerous years, the sector is expected to encounter accelerated growth valued at
$20.89 billion each year following 2008 "which equates to a CAGR of two.7 % [increase] inside the 2003-
2008 period.

Distribution

Over the previous handful of years the rental car or truck industry has produced a terrific deal of
progress to facilitate it distribution processes. Today, you'll find about 19,000 rental locations yielding
about 1.9 million rental vehicles inside the US. Because of the increasingly abundant quantity of vehicle
rental locations in the US, strategic and tactical approaches are taken into account as a way to insure
right distribution all through the industry. Distribution requires place inside two interrelated segments.
On the corporate industry, the automobiles are distributed to airports and hotel surroundings. Around
the leisure segment, on the other hand, vehicles are distributed to agency owned facilities which are
conveniently located inside most main roads and metropolitan areas.

Inside the previous, managers of rental automobile providers employed to depend on gut-feelings or
intuitive guesses to make choices about how a lot of automobiles to possess inside a specific fleet or the
utilization level and functionality standards of maintaining specific cars in one fleet. With that
methodology, it was extremely tough to keep a level of balance that would satisfy customer demand
plus the preferred level of profitability. The distribution process is pretty uncomplicated throughout the
industry. To start with, managers ought to decide the number of automobiles that has to be on
inventory on a daily basis. For the reason that an incredibly noticeable problem arises when as well
quite a few or not sufficient cars are readily available, most car or truck rental providers which includes
Hertz, Enterprise and Avis, use a "pool that is a group of independent rental facilities that share a fleet
of vehicles. Fundamentally, with the pools in place, rental locations operate far more effectively since
they lower the danger of low inventory if not do away with rental automobile shortages.

Market place Segmentation

Most firms all through the chain make a profit primarily based on the kind of cars which are rented. The
rental cars are categorized into economy, compact, intermediate, premium and luxury. Amongst the five
categories, the economy sector yields essentially the most profit. As an example, the economy segment
by itself is responsible for 37.7 % from the total industry income in 2004. Additionally, the compact
segment accounted for 32.3 % of general revenue. The rest in the other categories covers the remaining
30 % for the US segment.

Historical Levels of Profitability

The general profitability from the automobile rental sector has been shrinking in current years. More
than the past 5 years, the market has been struggling just just like the rest of the travel market. In
reality, between the years 2001 and 2003 the US industry has knowledgeable a moderate reduction in
the level of profitability. Particularly, revenue fell from $19.four billion in 2000 to $18.two billion in
2001. Subsequently, the overall industry income eroded further to $17.9 billion in 2002; an quantity
that's minimally greater than $17.7 billion that is the general revenue for the year 1999. In 2003, the
market skilled a barely noticeable improve which brought profit to $18.2 billion. Because of the
economic downturn in current years, many of the smaller sized players that had been highly dependent
on the airline business have accomplished a great deal of tactic realignments as a way of preparing their
firms to cope with eventual financial adversities that may well surround the business. For the year 2004,
around the other hand, the financial predicament of most firms have steadily improved throughout the
business since most rental agencies have returned far higher profits relative to the anterior years. For
instance, Enterprise realized revenues of $7.4 billion; Hertz returned revenues of $5.two billion and Avis
with $2.9 billion in revenue for the fiscal year of 2004. According to sector analysts, the rental
automobile sector is expected to encounter steady growth of 2.6 % in income more than the subsequent
numerous years which translates into a rise in profit.

Competitive Rivalry Amongst Sellers

There are quite a few things that drive competitors inside the automobile rental market. More than the
past handful of years, broadening fleet sizes and rising profitability has been the concentrate of most
corporations within the car or truck rental sector. Enterprise, Hertz and Avis amongst the leaders have
already been increasing both in sales and fleet sizes. In addition, competitors intensifies as firms are
regularly trying to enhance their present circumstances and offer a lot more to shoppers. Enterprise has
almost doubled its fleet size due to the fact 1993 to approximately 600,000 vehicles these days. Because
the market operates on such narrow profit margins, price tag competition is just not a aspect; on the
other hand, most firms are actively involved in creating values and offering a selection of amenities from
technological gadgets to even absolutely free rental to satisfy customers. Hertz, one example is,
integrates its Never-Lost GPS technique inside its cars. Enterprise, on the other hand, makes use of
sophisticated yield management software program to handle its fleets.

Finally, Avis makes use of its OnStar and Skynet program to better serve the customer base and gives
free of charge weekend rental if a buyer rents a vehicle for five consecutive days Additionally, the
consumer base of the rental automobile business has somewhat low to no switching cost. Conversely,
rental agencies face high fixed operating charges such as property rental, insurance coverage and
upkeep. Consequently, rental agencies are sensitively pricing there rental automobiles simply to recover
operating fees and adequately meet their clients demands. In addition, since the business skilled slow
growth in recent years on account of economic stagnation that resulted within a huge decline in both
corporate travel along with the leisure sector, most corporations including the market leaders are
aggressively looking to reposition their firms by steadily lessening the dependency level around the
airline business and regaining their footing in the leisure competitive arena.

The Possible Entry of new Competitors

Getting into the car rental sector puts new comers at a serious disadvantage. More than the past couple
of years following the economic downturn of 2001, most major rental corporations have started
growing their marketplace shares inside the vacation sector with the market as a way of insuring
stability and lowering the degree of dependency between the airline and also the car rental market.
Although this trend has engendered long-term good results for the existing firms, it has heightened the
competitive landscape for new comers. Because of the severity of competition, current firms like
Enterprise, Hertz and Avis meticulously monitor their competitive radars to anticipate Sharpe retaliatory
strikes against new entrants. Yet another barrier to entry is developed as a result of the saturation
amount of the market.

By way of example, Enterprise has taken the first mover advantage with its 6000 facilities by saturating
the leisure segment thereby placing not just higher restrictions around the most typical distribution
channels, but also high resource requirements for new firms. These days, Enterprise includes a rental
place inside 15 miles of 90 percent from the US population. As a result of the network of dealers
Enterprise has established around the nation, it has come to be comparatively stable, far more recession
proof and most importantly, significantly less reliant around the airline industry in comparison with its
competitors. Hertz, around the other hand, is using the complete spectrum of its 7200 retailers to safe
its position in the marketplace. Essentially, the emergence of most of the business leaders in to the
leisure market not only drives rivalry, but also it varies directly together with the degree of complexity of
entering the car or truck rental industry.

The Threat of Substitute

You will discover quite a few substitutes obtainable for the auto rental industry. From a technological
standpoint, renting a auto to go the distance to get a meeting is a less desirable option as opposed to
video conferencing, virtual teams and collaboration computer software with which a business can
instantly setup a meeting with its employees from anyplace about the globe at a more affordable
expense. In addition, you'll find other options such as taking a cab that is a satisfactory substitute
relative to quality and switching price, nevertheless it might not be as attractively priced as a rental auto
for the course of per day or a lot more. Though public transportation could be the most cost effective on
the alternatives, it truly is more expensive with regards to the procedure and time it requires to attain
ones destination. Ultimately, mainly because flying offers convenience, speed and performance, it's a
quite enticing substitute; however, it is actually an unattractive alternative in terms of price relative to
renting a car. Around the company segment, auto rental agencies have more protection against
substitutes given that lots of organizations have implemented travel policies that establish the
parameters of when renting a auto or making use of a substitute is definitely the very best course of
action.

According to Tracy Esch, an Benefit director of promoting operations, her organization rents
automobiles up to a 200-mile trip before considering an option. Basically, the threat of substitute is
reasonably low in the auto rental sector because the effects the substitute merchandise have usually do
not pose a important threat of profit erosion all through the sector.

The Bargaining Energy of Suppliers

Supplier energy is low within the car or truck rental market. As a result of the availability of substitutes
and also the amount of competitors, suppliers don't have an excellent deal of influence within the terms
and circumstances of supplying the rental automobiles. Since the rental vehicles are often bought in
bulk, rental car agents have substantial influence more than the terms from the sale considering the fact
that they possess the capability to play one particular supplier against a different to reduce the sales
price tag. One more element that reduces supplier power would be the absence of switching expense.
That is certainly, buyers usually are not impacted from acquiring from one supplier more than one more
and most importantly, changing to various suppliers goods is barely noticeable and does not have an
effect on consumers rental alternatives.

The Bargaining Energy of Purchasers

Whilst the leisure sector has little or no energy, the organization segment possesses a considerable
amount of influence inside the car or truck rental industry. An interesting trend that may be at present
underway throughout the business is forcing car rental firms to adapt for the demands of corporate
travelers. This trend drastically reduces supplier energy or the rental firms energy and increases
corporate purchaser energy because the organization segment is excruciatingly value sensitive, nicely
informed in regards to the industrys value structure, purchase in larger quantities and they use the
world wide web to force lower costs. Trip buyers, around the other hand, have much less influence over
the rental terms. Since vacationers are usually much less value sensitive, buy in lesser amounts or
purchase much more infrequently, they have weak bargaining power.

5 Forces

Nowadays the vehicle rental market is facing a completely various environment than it did five years
ago. Competitively speaking, the revolution of the five forces about the auto rental market exerts some
powerful economic stress which has significantly tarnished the competitive attractiveness in the sector.
Because of the economic downturn in current years, many firms went below namely Budget as well as
the Vanguard Group since their enterprise infrastructure succumbed towards the untenability in the
competitive environment. Currently, pretty couple of firms including Enterprise, Hertz and Avis return a
slightly above-average income in comparison to the rest with the sector. Realistically speaking, the
vehicle rental sector isn't an incredibly appealing market due to the level of competition, the barriers to
entry plus the competitive stress in the substitute firms.

Strategic Group Mapping

As a moderately concentrated sector, there's a clear hierarchy in the auto rental business. From an
financial standpoint, disparities exist from a number of dimensions including income, fleet size and the
market place size every single firm holds within the marketplace location. For example, Enterprise
dominates the sector with a fleet size of around 600,000 autos together with its industry size and its
degree of profitability. Hertz comes in second position with its quantity of market shares and fleet
volume. In addition, Avis ranks third around the map. Avis is amongst one particular of your companies
that is possessing challenges recovering its income margins from before the economic downturn. For
instance, in 2000 Avis returned revenues of around $4.23 billion. More than the course of your next
various years following 2000, the income of Avis has been significantly reduced than that of 2000. As a
way of lowering uncertainty most organizations are progressively lessening the level of dependency
around the airline sector and emerging the leisure market place. This trend may not be in the very best
interest of Hertz given that its business method is intricately linked to the airports.

Key Achievement Factors

You will discover lots of essential achievement variables that drive profitability all through the car or
truck rental industry. Capacity utilization is amongst the variables that determines results inside the
sector. For the reason that rental firms knowledge loss of income when you can find either as well few
or also a lot of cars sitting in their lots, it's of paramount importance to efficiently handle the fleets. This
achievement factor represents a large strength for the market given that it lowers if not fully eliminates
the possibly of operating short on rental cars. Effective distribution is an additional factor that keeps the
industry lucrative. Despite the good connection between fleet sizes plus the degree of profitability, firms
are continually expanding their fleet sizes due to the competitive forces that surround the business. In
addition, comfort is amongst the critical attributes by which shoppers choose rental firms. That is
definitely, automobile rental buyers are extra prone to renting automobiles from firms which have easy
rental and drop off places. An additional important success element that is definitely popular amongst
competing firms may be the integration of technology in their small business processes. By means of
technology, for example, the car rental organizations build methods to meet customer demand by
producing renting a car or truck an extremely agreeable ordeal by adding the convenience of on line
rental among other options. Moreover, firms have integrated navigation systems along with roadside
help to provide customers the piece of thoughts when renting cars.

Business Attractiveness

You'll find lots of variables that influence the attractiveness of your auto rental market. Since the market
is moderately concentrated, it puts new industry entrants at a disadvantage. That is, its low
concentration represents a organic barrier to entering the business because it allows current firm to
anticipate sharp retaliations against new entrants. Due to the dangers associated with getting into the
sector amongst other aspects, it is not an incredibly appealing sector with the marketplace. From a
competitive standpoint, the leisure market is 90 percent saturated because of the active efforts of
Enterprise to dominate this sector with the marketplace. Around the other hand, the airport terminals
are heavily guarded by Hertz. Realistically speaking, entry inside the industry presents low profitability
relative towards the expenses and risks linked. For most buyers, the principle figuring out factors of
picking one firm more than an additional are value and comfort. Because of this cause, rental firms are
extremely circumspect about setting their rates and that generally force even the business major players
in the position of supplying a lot more towards the shoppers for less simply to remain competitive.
Hertz, for instance, provides wireless internet to its clients just to add additional convenience to their
travel plans. Avis around the other hand, presents free weekend specials if a client rents a car or truck
for five consecutive weekdays. Based on the impact in the 5 forces, the auto rental sector will not be a
very appealing business to potential new market place entrants.

Conclusion

The rental vehicle business is within a state of recovery. Although it might seem like the market is
performing effectively financially, it is nonetheless progressively regaining its footing relative to its
actual economic position within the final five years. As a way of insuring profitability, besides seeking
market shares and stability, most firms all through the chain have a typical target that deals with
lowering the degree of dependency on the airline sector and moving toward the leisure segment. This
state of motion has engendered some fierce competitors among business competitors as they attempt
to defend their market shares. From a futuristic perspective, the much better days of your car or truck
rental industry have but to come. Because the amount of profitability increases, I think that most of the
business leaders such as Enterprise, Hertz and Avis will likely be bounded by the economic and
competitive barriers of mobility of their strategic groups and new comers will have a superior
opportunity of infiltrating and realizing accomplishment in the vehicle rental market. Find out more click
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