Much ink has been spilled over a study suggesting that for every Zipcar, 15 personal vehicles are taken off the road. Auto industry analysts have greeted this with alarm, fearful that Zipcar will wipe out auto sales in the future.
Don't believe the hype. Even if we can assume that the claim of 15 private vehicles off the road for every Zipcar were true, it would have no impact whatsoever. The stark truth is that the total Zipcar fleet is tiny, no more than a minuscule percentage of the U.S. vehicle fleet.
How do I know this? Well, if you look at the Zipcar website, you can see that it claims that its fleet is "over 10,000 vehicles." If we assume, for simplicity sake, that exactly 10,000 vehicles are located in the U.S. alone, and multiply that by 15, then we get a figure of 150,000 private vehicles supposedly taken off the road. My initial curmudgeon's reaction is this -- "Who cares?!" The implication is that 150,000 private vehicles are removed from a total vehicle fleet of 251 million -- this is a rate of 0.001%! Has anyone even noticed that these vehicles are gone?
Why isn't Zipcar larger than it is? Why hasn't the "Zipcar revolution" been more profound? There are many interrelated reasons, including metropolitan sprawl and American's preference for personal independence. While vehicle manufacturers' main goal is to drive down the cost of per-unit production through achieving large economies of scale, Zipcar must laboriously negotiate for every single vehicle it places on the road, and this negotiation takes place within a context of strict constraints which builds very high overhead into the placement of individual vehicles.
Simply, the revenues earned per Zipcar vehicle need to offset the cost of placing that vehicle - and the costs of placing the vehicle may be far higher than is commonly realized. If you look at the Zipcar online booking system, you can see that the overwhelming majority of Zipcars are placed in central city or downtown neighborhoods which are densely-populated and highly-trafficked. The suburban Zipcar is almost an oxymoron, even though more than half of all Americans live in a metro-area suburb. Zipcar can't easily place vehicles in suburbs, because low population density and high per-capita vehicle ownership means that it runs a serious risk of having placed a vehicle that will not be used often enough to justify the cost of placing it there - parking permit, insurance, city authorization, etc.
Zipcar is thus left with focusing its efforts mostly on high-density downtown areas which generally have low rates of vehicle ownership. However, in downtown areas parking spots are expensive and scarce. The parking permit for an individual vehicle may cost thousands of dollars per year, especially when you build in the lobbying costs to persuade city government to issue the permit. As a result, the expense of placing that downtown vehicle may be repaid only with very narrow profit margins.
Zipcar is thus left in a quandary whereby it can only afford to place so many vehicles in high-use downtown areas, and where space is limited so that even if Zipcar could pay for it, at a certain point you can only place so many downtown Zipcars because other drivers need the spaces, too. You might think that suburban expansion might offset this issue, but then why are so few Zipcars in suburbs? Expansion into suburban areas is offset by the fact that low population densities and high rates of suburban vehicle ownership mean that the suburban cars could see very light use. Lower vehicle-placement costs may be negated by very low utilization for those suburban vehicles, thus prompting a need to spend heavily on marketing for suburban vehicles, building in additional cost per vehicle.
Either way-downtown or suburban-the company is limited by the cost of customer acquisition. To summarize, Zipcar would have to pay high vehicle-placement costs downtown for cars that would be used frequently, but perhaps not frequently enough to pay back the placement costs. In suburbs, lower vehicle-placement costs may be negated by very low utilization for those suburban vehicles.
In sum, there is a lot of micro-economic balancing for the placement of each and every Zipcar - a careful measuring of marginal benefit versus marginal cost - which creates very strong constraints against expanding the business model beyond the current boutique or niche status. The brand is interesting and compelling - but these economic forces, and not its hip cultural status, are what render it a tiny blip in the overall U.S. vehicle fleet for the foreseeable future.
There has been a lot of talk about shifting Millennials' preferences, and while some of that is undeniably true, the strategic industry implications have been way overstated due to lack of close scrutiny to the above geographic, customer acquisition, marketing, and overhead factors of the Zipcar business model.
The fact is that Millennials' smartphones cannot wish away the cold hard truth that downtown real estate is limited and expensive and that Zipcars constitute hard physical assets which have to exist somewhere in space and time. Moreover, the 2-way return trip model of Zipcar means that flexibility is highly limited and that the business model has a long way to go before it can effectively serve a greater range of personal transportation needs. At the end of the day, it comes back to business fundamentals: the impact of changing youth culture is greatly tempered by business model growth constraints which cannot be easily wished away.
Read more from the October Issue of our Fuel for Thought newsletter.
Hart Schwartz is the Research Consultant of Clarify Consulting Research. He can be reached at firstname.lastname@example.org.