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The Car Rental Industry

Market Overview

The vehicle rental industry is a multi-billion dollar sector of the US economy. The us message of the industry averages about $18. 5 thousand in revenue a year. Today, there are approximately 1. 9 million rental vehicles that service the us message of the market. In addition, there are many rental agencies besides the industry leaders that subdivide the entire revenue, that is Dollar Thrifty, Budget and Vanguard. Unlike other mature service industries, the rental car industry is highly consolidated which naturally puts potential new comers at a cost-disadvantage simply face high input costs with reduced possibility of alquiler de carros of scale. Moreover, most of the profit is generated by a few firms including Enterprise, Hertz and Avis. For the monetary year of 2004, Enterprise generated $7. 4 thousand in total revenue. Hertz came in second position with about $5. 2 thousand and Avis with $2. ninety-seven in revenue.

Level of Integration

The rental car industry faces a fully different environment than it did five years ago. According to Business Travel News, vehicles are increasingly being hired until they have accumulated 20, 000 to 30, 000 miles until they are relegated to the car industry whereas the turn-around gas mileage was 12, 000 to 15, 000 miles five years ago. Because of slow industry growth and narrow profit border, there is no forthcoming threat to backward integration within the industry. In fact, among the industry players only Hertz is vertically integrated through Honda.

Scope of Competition

There are many factors that shape the competitive landscape of the car rental industry. Competition comes from two main sources throughout the archipelago. On the vacation consumer’s end of the array, competition is fierce not only because the market is saturated and well secured by industry leader Enterprise, but competitors operate at a cost disadvantage along with smaller market shares since Enterprise has built a network of dealers over 90 percent the leisure message. On the corporate message, on the other hand, competition is very strong at the airfields since that message is under tight direction by Hertz. Because the industry undergo a massive economic downfall in recent years, it has upgraded the scale of competition within most of the companies that made it through. Competitively speaking, the rental car industry is a war-zone as most rental agencies including 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 enhancing their navy sizes and increasing the quality of earning. Enterprise currently the company with the largest navy in the usa has added 75, 000 vehicles to its navy since 2002 that assist increase its number of facilities to 170 at the airfields. Hertz, on the other hand, has added 25, 000 vehicles and widened its international presence in a hundred and fifty counties as opposed to one hundred and forty in 2002. In addition, Avis has increased its navy from 210, 000 in 2002 to two hundred and twenty, 000 despite recent economic adversities. Over the years following the economic depression, 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 thousand in 2004 which translated into a growth rate of 7. 2 percent a year for the past four years. Since 2002, the has begun to regain its ground in the sector as overall sales grew from $17. 9 thousand to $18. 2 thousand in 2003. According to industry analysts, the better days of the rental car industry have yet to come. Over the course of the next several years, the is expected to experience accelerated growth valued at $20. fifth 89 thousand each year following 08 “which means 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 progress to facilitate it distribution processes. Today, there are approximately 19, 000 rental locations containing about 1. 9 million rental cars in the usa. Because of the increasingly abundant number of car rental locations in the usa, strategic and tactical approaches are taken into consideration in order to insure proper distribution throughout the industry. Distribution occurs within two interrelated portions. On the corporate market, the cars are distributed to airfields and hotel surroundings. On the leisure message, on the other hand, cars are distributed to agency owned facilities that are easily located within most major roads and places.

In the past, administrators 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 navy or the employment level and performance standards of keeping certain cars in one navy. With that technique, it was very difficult to maintain a straight of balance that would satisfy consumer demand and the desired level of earning. The distribution process is reasonably simple throughout the industry. To begin with, administrators 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 available, most car rental companies including Hertz, Enterprise and Avis, use a “pool” which is a group of independent rental facilities that share a navy of vehicles. Basically, with the costly in place, rental locations operate more efficiently simply reduce the risk of low inventory if not eliminate rental car shortages.

Market Segmentation

Most companies throughout the archipelago gain profits based of the type of cars that are hired. The rental cars are categorized into economy, compact, intermediate, premium and luxury. Among the five categories, the economy sector assure the most profit. For instance, the economy message by itself accounts for 37. 7 percent of the total market revenue in 2004. In addition, the compact message accounted for 32. 3 percent of overall revenue. All of those other other categories covers the remainder 30 percent for the US message.

Historical Numbers of Earning

The overall earning of the car rental industry has been shrinking in recent years. Over the past five years, the has been struggling just like all of those other travel industry. In fact, between the years 2001 and 2003 the us market has experienced a moderate lowering of the quality of earning. Specifically, revenue chop down from $19. 4 thousand in 2000 to $18. 2 thousand in 2001. Subsequently, the overall industry revenue eroded further to $17. 9 thousand in 2002; an amount that is minimally higher than $17. 7 thousand which is the overall revenue for the year 1999. In 2003, the experienced a barely noticeable increase which brought profit to $18. 2 thousand. As a result of the economic depression in recent years, some of the smaller players that were highly dependent on the airline industry have inked a great deal of strategy realignments as an easy way of preparing their companies to face eventual economic adversities that may encircle the. For the year 2004, on the other hand, the economic situation on most firms have gradually improved throughout the industry since most rental agencies have returned far greater profits relative to the anterior years. For instance, Enterprise realized revenues of $7. 4 thousand; Hertz returned revenues of $5. 2 thousand and Avis with $2. 9 thousand in revenue for the monetary 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 drive competition within the car rental industry. Over the past few years, increasing navy sizes and increasing earning has been the focus on most companies within the car rental industry. Enterprise, Hertz and Avis among the leaders have been growing both in sales and navy sizes. In addition, competition intensifies as firms are constantly trying to improve their current conditions and offer more to consumers. Enterprise has nearly doubled its navy size since 1993 to approximately 600, 000 cars today. Because the industry operates on such narrow profit margins, price competition is not one factor; however, most companies are try really hard to involved in creating values and providing a range of amenities from technological gadgets to even free rental to meet up with customers. Hertz, for example, integrates its Never-Lost Global positioning system within its cars. Enterprise, on the other hand, uses sophisticated yield management software to manage its fleets.

Finally, Avis uses its OnStar and Skynet system to higher serve the consumer base and will be offering free weekend rental if a customer rents a car for five consecutive days Moreover, the consumer base of the rental car industry has relatively low to no switching cost. On the other hand, rental agencies face high fixed operating costs including property rental, insurance 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 recent years due to economic stagnation that resulted in a massive decline in both corporate travel and the leisure sector, most companies including the industry leaders are aggressively trying to reposition their firms by gradually minimizing the reliance level on the airline industry and recovering their ground in the leisure competitive arena.

The Potential Entry of new Competitors

Entering the vehicle rental industry puts new comers at a serious disadvantage. Over the past few years following the economic depression of 2001, most major rental companies have started increasing their market shares in the vacation sector of the industry as an easy way of assuring stability and lowering the quality of reliance between the airline and the car rental industry. While this trend has engendered long term success for the existing firms, it has enhanced the competitive landscape for new comers. Because of the seriousness of competition, existing firms such as Enterprise, Hertz and Avis carefully monitor their competitive radars to anticipate Sharpe retaliatory strikes against new entrants. Another barrier to entry is established because of the saturation level of the.

For example, Enterprise has had the first mover advantage with its 6000 facilities by saturating the leisure message thereby placing not only high constraints on the most common distribution 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 built around the nation, it has become relatively stable, more recession proof and most important, less reliant on the airline industry compared to its competitors. Hertz, on the other hand, is utilizing the full array of its 7200 stores to secure 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 quality of intricacy of entering the vehicle rental industry.

The Threat of Substitute

There are many alternatives available for the vehicle rental industry. From a technological understanding, leasing a car to go the space for a meeting is a less attractive alternative as opposed to video conferencing, virtual teams and collaboration software with which a company can immediately 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 beautifully priced as a rental car for the length of a day or more. While public transportation is the most inexpensive 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 leasing a car. On the business message, car rental agencies have an overabundance protection against alternatives since many companies have implemented travel policies that establish the guidelines of when leasing 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 and including 200-mile trip before considering an alternative. Basically, the threat of substitute is reasonably lower in the vehicle rental industry since the effects the substitute products have do not pose a significant threat of profit erosion throughout the industry.

The Bargaining Power of Suppliers

Supplier power is lower in the vehicle rental industry. Because of the accessibility to alternatives and the quality 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 significant influence over the terms of the sale simply possess the ability to play one supplier against another in order to reduce the sales price. Another factor that reduces supplier power is the absence of switching cost. That is, buyers are not affected from purchasing from supplier over another and most important, changing to different supplier’s products is barely noticeable and does not affect consumer’s rental choices.

The Bargaining Power of Buyers

While the leisure sector has no power, the business message possesses a significant amount of influence in the car rental industry. An interesting trend that is currently underway throughout the industry is making car rental companies to adjust to the wants of corporate travelers. This trend significantly reduces supplier power or the rental firms’ power and increases corporate buyer power since the business message is excruciatingly price sensitive, knowledgeable about the industry’s price structure, purchase in larger quantities and they search on the internet to force lower prices. Vacation buyers, on the other hand, have less influence over the rental terms. Because tourists are usually less price sensitive, purchase in lesser amounts or purchase more sometimes, they have weak bargaining power.

Five Forces

Today the vehicle rental industry is facing a fully different environment than it did five years ago. Competitively speaking, the wave of the five forces around the car rental industry exerts some strong economic pressure that has significantly negatively impacted the competitive attractiveness of the industry. As a result of the economic depression in recent years, many companies went under that is Budget and the Vanguard Group because their business structure succumbed to the untenability of the competitive environment. Today, very few firms including Enterprise, Hertz and Avis return a slightly above-average revenue compared to all of those other industry. Realistically speaking, the vehicle 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.

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