High gas prices threaten Zipcar's car-sharing model—yet more companies than ever want in on the action.

Commentary about business and finance.
July 11 2008 7:45 AM

Unzipped

High gas prices threaten the car-sharing model—yet more companies than ever want in on the action.

A Zipcar. Click image to expand.
A Zipcar

By now you've heard some version of this story: Gas prices rise, industries panic, executives worry about the bottom line, and something has to give— costs go way up, sales stall, product designs change, or laymen rebel.

This particular story is about the car-sharing industry, one of the most promising and novel business models to emerge in recent years. The idea is to allow people to rent cars for very brief periods of time, as short as an hour, and thereby reduce the need of every adult to own a car. When this idea began to take hold in the late '90s, it was assumed that car-share users would pay one flat fee for a rental, gas included. That, of course, was when gas cost less than $2 a gallon. These days, the pricing structure is largely the same, but gas prices have made the business model more unprofitable than ever. Yet more companies are trying it than ever before.

As the industry leader, Zipcar is taking the brunt of the pain from higher fuel costs. Since its creation in 1999, the company has posted steady growth in members, fleet size, and metro areas served, but it's never posted a profit. (It has, though, raised $55 million in funding.) Its fleet is 5,500 cars large, and it serves 26 states and provinces in the United States and Canada. For now, it's the only car-sharing company operating nationally.

Zipcar, like nearly all the other car sharers that came before it, includes insurance and gas in the total cost of taking the car for a spin (charged by hour or by day). When you pull up to the gas station, you use Zipcar's charge card, not yours. It doesn't matter how many miles you drive or how many miles per gallon your vehicle gets—Zipcar has you covered. (Although they do charge you a flat per-mile rate if you exceed 180 miles of driving.)

This all-you-can-fuel buffet is great for the consumer, especially these days. For Zipcar, though, climbing gas prices means evaporating profits. Because the gas fee is wrapped into the overall rate you pay when you use a Zipcar, the only way the company can compensate for rising gas prices is by hiking the total cost.

But Zipcar's price increases haven't kept pace with the rise in fuel costs. This year, Zipcar has increased its prices by only 3 percent to 5 percent, at most. Gas prices, meanwhile, have risen by more than $1 per gallon—a 36 percent increase since July 2007. That disparity is the width of a Hummer's tire tread.

Why, then, hasn't Zipcar raised its prices? Several reasons. First, Zipcar's users aren't tremendous gas guzzlers. Seventy-five percent of Zipsters take the car out on an hourly basis (at usually between $6 and $10 per hour). Those drivers probably aren't re-enacting the Lewis and Clark expedition, so their gas costs, no matter the price per gallon at the pump, are small. These are high-revenue, low-cost travelers.

Also, the spike in gas prices has been a double-edged sword for the company—it's hurting their margins, but it's attracting thousands of new customers. The company is growing at three times the rate it was at this time last year, according to COO Mark Norman. It's averaging 10,000 new customers a month, which is a hefty 4 percent to 5 percent increase for a company with 225,000 total members.

More customers also means a more efficient use of its fleet. Ideally, having an extra few hundred Zipcar users in a metro area means that more of those high-revenue, low-cost riders can take out a car.

But an increase in revenue doesn't necessarily lead to an increase in profits. Asked whether the increase in gas prices helped Zipcar's bottom line, Norman dodged and answered that it helped drive awareness of the brand as it went more mainstream. He never said it was helping the company's bottom line, and it's hard to imagine that high gas prices are a net positive for the company.

So the central problem remains: If Zipcar couldn't make a profit before, when gas prices were manageable, then they're going to be hard-pressed to turn a profit now, with no crude solution in sight. Zipcar says it needs about two years in a metro area to establish itself before it can turn profit. But the company has been in operation for more than four times that time span nationwide, and it hasn't figured out how to make a profit yet. Nine years is a long time to still be in growth mode. In May, Zipcar's CEO said it should be profitable by the end of this year or early 2009. As a private company, Zipcar doesn't release financial data, but that timeline is hard to swallow given the current economic climate.

The clear solution, of course, is to raise prices more than 3 percent to 5 percent. But that move may be even riskier than relying on new membership. Zipcar's niche industry is about to get more heavily trafficked, and competition usually drives prices down. U-Haul, Hertz, and Enterprise are all dipping their toes in the car (share) pool. If Zipcar raises its prices, it could alienate its users just as new outfits come in to challenge Zipcar's stronghold.

This summer, U-Haul will push 75 PT Cruisers onto the streets of 10 cities under the not-so-clever guise of U Car. Hertz has by-hour rentals already available in some cities and is thinking about creating a full-fledged car-sharing service. Enterprise pluralizes U-Haul's initiative with a pilot program in St. Louis (PDF) called WeCar that could be expanded nationally. U Car and WeCar both include gas in the upfront fee. (Hertz could not be reached for comment.)

For the traditional rental car companies, car sharing offers a lifeline from a crashing car-rental market. Between a decrease in travel, a poor U.S. auto outlook, and high gas prices, car-rental stocks aren't in good shape. Car sharing offers a new revenue stream for the companies to explore, if to appease shareholders more than anything else. But these new entrants are going to be even worse at turning a profit than Zipcar. They have to go through the growing pains of learning a new industry that has subtle differences from their bread and butter. Plus, they can't compete too heavily with Zipcar on pricing because of the thorn in everybody's side: gas prices. Entering the fray is a fool's errand.

U-Haul knows this, but they're forging ahead anyway. Mike Coleman, the program manager for U Car, told me that the company doesn't expect to earn a profit from car sharing for a long time. Eventually they'd like to be profitable, but for now they're in it to help grow the car-sharing industry and get cars off the road. As he was describing these lofty ideas to me, Coleman sounded like a program manager for an environmental nonprofit, not a private trucking company out to make a buck.

The irony, though, is that by trying to help the industry, U-Haul and the other new car-sharing entrants may end up suffocating it. As evidenced by Zipcar's profit struggles, car sharing is still too fragile to be ready for competition. Competition will prevent companies from raising the flat rates, which will stop them from recouping losses on higher gas prices. Car sharing was originally an economic model ahead of its time. Now, though, its moment appears to have passed, without ever shifting into high gear.

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