Economies Of Scale - The Car Rental business
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The Car Rental business
Market Overview
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Economies Of Scale
The car rental industry is a multi-billion dollar sector of the Us economy. The Us segment of the industry averages about .5 billion in wage a year. Today, there are practically 1.9 million rental vehicles that assistance the Us segment of the market. In addition, there are many rental agencies besides the industry leaders that subdivide the total revenue, namely Dollar Thrifty, allocation and Vanguard. Unlike other mature assistance industries, the rental car industry is extremely consolidated which simply puts potential new comers at a cost-disadvantage since they face high input costs with reduced possibility of economies of scale. Moreover, most of the profit is generated by a few firms together with Enterprise, Hertz and Avis. For the fiscal year of 2004, business generated .4 billion in total revenue. Hertz came in second position with about .2 billion and Avis with .97 in revenue.
Level of Integration
The rental car industry faces a wholly separate environment than it did five years ago. According to business tour News, vehicles are being rented until they have accumulated 20,000 to 30,000 miles until they are relegated to the used car industry whereas the turn-around mileage was 12,000 to 15,000 miles five years ago. Because of slow industry growth and narrow profit margin, there is no imminent threat to backward integration within the industry. In fact, among the industry players only Hertz is vertically integrated straight through Ford.
Scope of Competition
There are many factors that shape the competing scenery of the car rental industry. Competition comes from two main sources 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 operate at a cost disadvantage along with smaller market shares since business has established a network of dealers over 90 percent the leisure segment. On the corporate segment, on the other hand, competition is very strong at the airports since that segment is under tight supervision by Hertz. Because the industry underwent a weighty economic downfall in new years, it has upgraded the scale of competition within most of the clubs that survived. Competitively speaking, the rental car industry is a war-zone as most rental agencies together with Enterprise, Hertz and Avis among the major players engage in a battle of the fittest.
Growth
Over the past five years, most firms have been working towards improving their fleet sizes and addition the level of profitability. business currently the business with the largest fleet in the Us has added 75,000 vehicles to its fleet since 2002 which help growth its amount of facilities to 170 at the airports. Hertz, on the other hand, has added 25,000 vehicles and broadened its international proximity 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 new economic adversities. Over the years following the economic downturn, although most clubs throughout the industry were struggling, business among the industry leaders had been growing steadily. For example, every year sales reached .3 in 2001, .5 in 2002, .9 in 2003 and .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 accumulate its footing in the sector as overall sales grew from .9 billion to .2 billion in 2003. According to industry analysts, the better days of the rental car industry have yet to come. Over the procedure of the next several years, the industry is expected to perceive accelerated growth valued at .89 billion each year following 2008 "which equates to a Cagr of 2.7 % [increase] in the 2003-2008 period.”
Distribution
Over the past few years the rental car industry has made a great deal of expand to facilitate it distribution processes. Today, there are practically 19,000 rental locations compliancy about 1.9 million rental cars in the Us. Because of the increasingly abundant amount of car rental locations in the Us, strategic and tactical approaches are taken into account in order to insure allowable distribution throughout the industry. Distribution takes place within two interrelated segments. On the corporate market, the cars are distributed to airports and hotel surroundings. On the leisure segment, on the other hand, cars are distributed to branch owned facilities that are conveniently placed within most major roads and metropolitan areas.
In the past, managers of rental car clubs 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 carrying out standards of holding safe bet cars in one fleet. With that methodology, it was very difficult to sound a level of equilibrium that would satisfy consumer interrogate and the desired level of profitability. The distribution process is fairly straightforward throughout the industry. To begin with, managers must conclude the amount of cars that must be on account on a daily basis. Because a very noticeable problem arises when too many or not sufficient cars are available, most car rental clubs together with Hertz, business and Avis, use a "pool” which is a group of independent rental facilities that share a fleet of vehicles. Basically, with the pools in place, rental locations operate more efficiently since they reduce the risk of low account if not eliminate rental car shortages.
Market Segmentation
Most clubs throughout the chain make a profit based of the type 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 instance, the economy segment by itself is responsible for 37.7 percent of the total market wage in 2004. In addition, the ageement segment accounted for 32.3 percent of overall revenue. The rest of the other categories covers the remaining 30 percent for the Us segment.
Historical Levels of Profitability
The overall profitability of the car rental industry has been shrinking in new years. Over the past five years, the industry has been struggling just like the rest of the tour industry. In fact, between the years 2001 and 2003 the Us market has experienced a moderate allowance in the level of profitability. Specifically, wage fell from .4 billion in 2000 to .2 billion in 2001. Subsequently, the overall industry wage eroded further to .9 billion in 2002; an amount that is minimally higher than .7 billion which is the overall wage for the year 1999. In 2003, the industry experienced a barely noticeable growth which brought profit to .2 billion. As a corollary of the economic downturn in new years, some of the smaller players that were extremely dependent on the airline industry have done a great deal of strategy realignments as a way of preparation their clubs to cope with eventual economic adversities that may surround the industry. For the year 2004, on the other hand, the economic situation of most firms have slowly improved throughout the industry since most rental agencies have returned far greater profits relative to the previous years. For instance, business realized revenues of .4 billion; Hertz returned revenues of .2 billion and Avis with .9 billion in wage for the fiscal year of 2004. According to industry analysts, the rental car industry is expected to perceive steady growth of 2.6 percent in wage over the next several years which translates into an growth in profit.
Competitive Rivalry Among Sellers
There are many factors that drive competition within the car rental industry. Over the past few years, broadening fleet sizes and addition profitability has been the focus of most clubs 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 permanently trying to heighten their current conditions and offer more to consumers. business has nearly doubled its fleet size since 1993 to practically 600,000 cars today. Because the industry operates on such narrow profit margins, price competition is not a factor; however, most clubs are actively complicated in creating values and providing a range of amenities from technological gadgets to even free rental to satisfy customers. Hertz, for example, integrates its Never-Lost Gps theory within its cars. Enterprise, on the other hand, uses sophisticated yield supervision software to carry on its fleets.
Finally, Avis uses its OnStar and Skynet theory to better serve the consumer base and offers free weekend rental if a buyer rents a car for five consecutive days Moreover, the consumer base of the rental car industry has relatively low to no switching cost. Conversely, rental agencies face high fixed operating costs together with property rental, guarnatee and maintenance. Consequently, rental agencies are sensitively pricing there rental cars just to recover operating costs and adequately meet their customers demands. Furthermore, because the industry experienced slow growth in new years due to economic stagnation that resulted in a weighty decline in both corporate tour and the leisure sector, most clubs together with the industry leaders are aggressively trying to reposition their firms by slowly lessening the dependency level on the airline industry and regaining their footing in the leisure competing arena.
The potential 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 clubs have started addition 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 competing scenery for new comers. Because of the severity of competition, existing firms such as Enterprise, Hertz and Avis carefully monitor their competing radars to anticipate Sharpe retaliatory strikes against new entrants. Someone else fence to entry is created because of the saturation level of the industry.
For example, business has taken the first mover benefit with its 6000 facilities by saturating the leisure segment thereby placing not only high restrictions on the most common distribution channels, but also high reserved supply requirements for new firms. Today, business has a rental location within 15 miles of 90 percent of the Us population. Because of the network of dealers business has established nearby the nation, it has come to be relatively stable, more recession proof and most importantly, less reliant on the airline industry compared to its competitors. Hertz, on the other hand, is utilizing the full spectrum of its 7200 stores to accumulate 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 available for the car rental industry. From a technological standpoint, renting a car to go the length for a meeting is a less arresting alternative as opposed to video conferencing, virtual teams and collaboration software with which a business can immediately setup a meeting with its employees from in any place nearby the world at a economy cost. In addition, there are other alternatives together with taking a cab which is a satisfactory substitute relative to capability and switching cost, but it may not be as attractively priced as a rental car for the procedure of a day or more. While public communication is the most cost effective of the alternatives, it is more costly in terms of the process 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 alternative in terms of price relative to renting a car. On the business segment, car rental agencies have more protection against substitutes since many clubs have implemented tour policies that found the parameters of when renting a car or using a substitute is the best procedure of action.
According to Tracy Esch, an benefit director of marketing operations, her business rents cars up to a 200-mile trip before inspecting an alternative. Basically, the threat of substitute is reasonably low in the car rental industry since the effects the substitute products have do not pose a valuable threat of profit erosion throughout the industry.
The Bargaining Power of Suppliers
Supplier power 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 affect in the terms and conditions of supplying the rental cars. Because the rental cars are regularly purchased in bulk, rental car agents have valuable affect over the terms of the sale since they possess the capability to play one victualer against Someone else to lower the sales price. Someone else factor that reduces victualer power is the absence of switching cost. That is, buyers are not affected from purchasing from one victualer over Someone else and most importantly, changing to separate supplier’s products is barely noticeable and does not affect consumer’s rental choices.
The Bargaining Power of Buyers
While the leisure sector has small or no power, the business segment possesses a valuable amount of affect in the car rental industry. An arresting trend that is currently underway throughout the industry is forcing car rental clubs to adapt to the needs of corporate travelers. This trend significantly reduces victualer power or the rental firms’ power and increases corporate buyer power since the business segment 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, on the other hand, have less affect over the rental terms. Because vacationers are regularly less price sensitive, buy in lesser amounts or buy more infrequently, they have weak bargaining power.
Five Forces
Today the car rental industry is facing a wholly separate environment than it did five years ago. Competitively speaking, the revolution of the five troops nearby the car rental industry exerts some strong economic pressure that has significantly tarnished the competing amenity of the industry. As a corollary of the economic downturn in new years, many clubs went under namely allocation and the Vanguard Group because their business infrastructure succumbed to the untenability of the competing environment. Today, very few firms together with Enterprise, Hertz and Avis return a slightly above-average wage compared to the rest of the industry. Realistically speaking, the car rental sector is not a very arresting industry because of the level of competition, the barriers to entry and the competing pressure from the substitute firms.
Strategic Group Mapping
As a slowly concentrated sector, there is a clear hierarchy in the car rental industry. From an economic standpoint, disparities exist from a amount of dimensions together with revenue, fleet size and the market size each firm holds in the market place. For instance, business dominates the industry with a fleet size of practically 600,000 vehicles along with its market size and its level of profitability. Hertz comes in second position with its amount of market shares and fleet volume. In addition, Avis ranks third on the map. Avis is among one of the clubs that is having issues recovering its wage margins from prior to the economic downturn. For instance, in 2000 Avis returned revenues of practically .23 billion. Over the procedure of the next several years following 2000, the wage of Avis has been significantly lower than that of 2000. As a way of reducing uncertainty most clubs are slowly 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 related to the airports.
Key Success Factors
There are many key success factors that drive profitability throughout the car rental industry. Capacity utilization is one of the factors that determines success in the industry. Because rental firms perceive loss of wage when there are whether too few or too many cars sitting in their lots, it is of renowned importance to efficiently carry on the fleets. This success factor represents a big drive for the industry since it lowers if not wholly eliminates the maybe of running short on rental cars. effective distribution is Someone else factor that keeps the industry profitable. Despite the safe bet association between fleet sizes and the level of profitability, firms are permanently growing their fleet sizes because of the competing troops that surround the industry. In addition, convenience is one of the crucial attributes by which consumers pick rental firms. That is, car rental consumers are more prone to renting cars from firms that have convenient rental and drop off locations. Someone else key success factor that is common among competing firms is the integration of technology in their business processes. straight through technology, for instance, the car rental clubs originate ways to meet consumer interrogate by manufacture 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.
Industry Attractiveness
There are many factors that impact the amenity of the car rental industry. Because the industry is slowly concentrated, it puts new market entrants at a disadvantage. That is, its low concentration represents a natural fence to entering the industry as it allows existing firm to anticipate sharp retaliations against new entrants. Because of the risks related with entering the industry among other factors, it is not a very arresting sector of the marketplace. From a competing standpoint, the leisure market is 90 percent saturated because of the active efforts of business to dominate this sector of the market. On the other hand, 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 determining factors of selecting one business over Someone else are price and convenience. Because of this reason, rental firms are very circumspect about setting their rates and that generally force even the industry major players in the position of gift more to the consumers for less just to remain competitive. Hertz, for example, offers wireless internet to its customers just to add more convenience to their tour plans. Avis on the other hand, offers free weekend specials if a buyer rents a car for five consecutive weekdays. Based on the impact of the five forces, the car rental sector is not a very arresting industry to potential new market entrants.
Conclusion
The rental car industry is in a state of recovery. Although it may seem like the industry is performing well financially, it is nonetheless slowly 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 clubs throughout the chain have a common goal that deals with lowering the level of dependency on the airline industry and arresting toward the leisure segment. This state of appeal 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 yet to come. As the level of profitability increases, I believe that most of the industry leaders together with Enterprise, Hertz and Avis will be bounded by the economic and competing 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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