Zipcar's IPO: Should you hop on board?

The world's largest car-sharing service has been losing money since it was founded a decade ago.

By TheBigMoney Jun 2, 2010 1:14PM

This post comes from The Big Money's Matthew DeBord.

 

Is car-sharing about to have its market moment? So it would seem, as Zipcar, the country’s best-known car-sharing service (and the world’s largest) filed for an IPO with the Securities and Exchange Commission on Tuesday.

 

The Cambridge, Mass., company’s modest goal is to take what was once a stalwart of crunchy, Northeastern hippie culture (it reportedly got its start with a single VW bug), raise $75 million and position itself among the dominant players in an industry that could be worth billions. 

 

Or an industry that could never find its momentum.

 

On its face, the case for car-sharing, particularly in its traditional metropolitan redoubts, is hard to refute. Zipcar’s 400,000 members pay $50 for access to a fleet of 6,500 cars parked in various easy-to-access locations. They make online reservations for as little as a few hours and unlock the doors with member cards. Zipcar handles gas and insurance (although how much insurance is something of a serious sticking point).

Most- and least-expensive cars to insure

For people who don’t need or want to own car, Zipcar represents an ideal solution: cheap, reliable transportation on demand, with no need to wait in lines or interact with middle-men.

 

Pretty much everyone I know who uses Zipcar (and, like me, used Flexcar on the West Coast before the two companies merged in 2007) is more or less delighted with the service. I went a step further after the Zip-Flex merger and suggested that we could be looking at the early stages of a new type of business model. (For the record, I’m no longer a member.) 

 

Still, business is business, and although Zipcar has been growing steadily, it has yet to make any money, even though it has doggedly predicted that profits are just around the corner.

 

But filings with the SEC compel fairly ruthless honesty and, in Zipcar’s case, the balance sheet is laid bare. Both continued rapid growth and impending profitability are treated with judicious skepticism.

 

And for good reason. Although Zipcar is a wonderful idea that has, on a reasonably ambitious scale, been well executed (so far), it has an even more ambitious task in front of it. It must transition from recruiting members who were already ripe for its services to courting people who would otherwise be customers of conventional rental-car agencies and car dealers. It finally has to venture beyond the safety of its acolytes.

 

Flo from Progressive

 

In this sense, staging an IPO in the current business environment, with IPO appetites at historical lows, is both savvy and sort of desperate. Anyone can look at Zipcar, impressive though it is, and still see the cracks forming in its business model.

 

Apart from the food co-op ethos (Zipcar grew out of informal, grassroots car-sharing schemes that were established in such unsurprising locales as Berkeley, Calif., and Boston) the whole point of Zipcar is that is eliminates the many costs and hassles of car ownership. There’s no need to engage with Flo from Progressive or deal with the Geico gecko. You never have to check the tire pressure or pop the hood. Somebody else washes the cars. Somebody else pays for parking. Somebody else buys the gas. 

 

If the IPO comes off as planned, Zipcar will be able to shed debt and provide early investors with a way to cash out. This will allow it to devote revenue to growth, and perhaps more importantly, fend off challenges to its little-engine-that-could mojo.

 

Hertz (HTZ) and Avis (CAR) are offering their own, similar services. This will mean that Zipcar will have to devote some of its new money to marketing; thus far, it’s made its name by word of mouth (and, truth be told, through a lot of semiautomatic media attention due to its significant hipster footprint in the nation’s media capitals, where owning a car is often quite challenging). 

Find on Bing: More about car sharing

As it acknowledged in its filing, Zipcar has some very high fixed costs, most notably the care and feeding of its fleet -- a fleet that will have to expand. It may be able to gobble up some potential competitors and it can always look to acquire similar businesses abroad, as it did in April with its deal for Streetcar Limited, the biggest car-sharing company in the United Kingdom. If you’re in the car-sharing game, you need to buy cars.

 

But the real financial challenges come when you look at fuel and insurance costs.

 

For consumers, another selling point of car sharing is the limited exposure to the volatility of gas prices. Once you don’t need to buy gas to get around, you can develop a cavalier attitude to how much it costs. But if you’re buying many thousands of gallons per year, as Zipcar is, even minor increases can have a major impact on the bottom line.

 

This is why airlines get into fuel-hedging strategies.

The question is whether Zipcar, with its affront to the traditionally cozy relationship between car companies and oil companies, will have any real leverage in this area.

 

Stale coffee and patchouli

 

It’s a huge deal, as a few cents more per gallon could make a difference in whether Zipcar will have to run aging vehicles longer, skimping on maintenance, thereby introducing the possibility of breakdowns and a less-than-ideal aesthetic experience. (A Honda Civic that smells of stale coffee and patchouli may have been OK back when life was measured in road trips between Cambridge and Middlebury, but things change when you’re driving your girlfriend to the romantic weekend getaway.) 

 

Zipcar CEO, Scott Griffith told Bloomberg that sales should hit $120 million this year, but he foresees $1 billion by 2020. That means, potentially, a fleet of vehicles numbering close to 70,000 and a membership of perhaps 4 million.

Video: Why it's a buyer's market in IPO's

Those are back-of-the-envelope calculations, but the millions-of-members goal does make one thing perfectly clear: Zipcar will have to expand outside the United States to hit its targets. Let’s say it only wants to add, conservatively, 1 million new members. The entire new-vehicle market in the United States is currently hovering around 10 million. (That market will rebound, getting back to something like 12 million to 14 million in the next five years.) These are the people that Zipcar will be aiming for: Customers who would otherwise give in to the siren call of car ownership. 

 

But maybe a major expansion isn’t the right way for Zipcar to go. It could be better off if it positions itself as an investment opportunity between, say, battery maker A123 Systems (AONE), which staged last year’s most-talked-about, and now most-troubled, IPO) and General Motors (which will stage 2010's or 2011’s most-talked-about IPO). This would entail less a conventional growth strategy and more an upsell to a right-size level of membership, made up of affluent urbanites who endorse personal mobility but who don’t want to own or lease a car. 

 

At the moment, however, Zipcar looks to be betting on its brand equity in an effort to max out its prospects. A successful IPO would position it well for the future. But the management challenge down the road promises to be daunting.

 

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