Old guard businesses have plenty to offer sustainable economy start-ups

[By Aaron Hay, reposted from the original at the Forum for the Future blog, and his tumblr.]

“All the old companies need to fit into the new economy.” That’s what I heard from Zipcar founder Robin Chase, upon returning from Christmas break, to discover that rental car giant Avis had acquired the car-sharing upstart. Only as I began to process what this might mean for my favourite way to move a sofa-bed around London, Mike Barry at Marks & Spencer tweeted that ‘old economy businesses’ are buying into the new economy, citing Avis as the latest taker.

After hearing these two, my fears of a Zipcar-as-walking-dead scenario subsided. I started to wonder what the Zipcar’s views are on the qualities an ‘old guard’ business can bring to a partnership with seemingly incompatible new economy ventures.

Avis – and for that matter, all traditional rental car operations – bears hallmarks of the old guard. For one, they serve middle-class, twentieth-century customers well enough. By allowing holidaymakers to get to their final destinations from any airport, by equipping executives with the means to make sales calls, or by providing replacement vehicles for insurance claimants, Avis allows customers to do more of the same – drive. The rental car industry has grown and thrived as a result.

But to succeed, Avis requires another old guard qualification – lots of physical capital. Specifically, tonnes of iron, steel and aluminium, shaped into the form of automobiles, and parking lots, rental desks, and fuel to store it, lease it, and move it around. Behind all this are hefty financing programmes to balance the piles of cash required to buy fleets. For Avis, industrial-strength finance and the economy of scale afforded by over 400,000 vehicles are hand-in-glove.

By contrast, Zipcar is a brave little harbinger of the new economy. Since its beginnings, the company built a new model based on flexibility, scalability and innovation. Fundamentally, Zipcar utilises resources as efficiently as possible. It doesn’t own branches or lots; by locating its cars in car parks, it takes advantage of existing real estate. Sophisticated technology means less staff. For its customers, by easily and inexpensively renting cars by the hour, Zipcar often eliminates the need for personally-owned cars at all. Indeed, this new economy car business actually helps solve problems of personal transportation in gridlocked urban locales.

But Zipcar’s biggest battle has been for capital. An obstacle in rental or sharing start-ups is the need for up-front, sizeable investments in the assets to be shared. I discovered this in my master’s course, while building the financial model for a pram business based on collaborative consumption – and in the financial statements of Zipcar itself.

Capital expenditures must be covered in a reasonable timeframe, with some profit built in to make the venture worth it. Zipcar is acquiring pricey assets, and taking a guess at what cities, neighbourhoods or car parks its assets should ‘live in’ to be available to its most profitable customers. Although the company is now rather good at this, it didn’t have the pockets to finance rapid expansion without posting initial losses, as its public accounts will attest.

Enter old guard Avis, financial machinations in hand. With access to a pool of capital, one which Avis is likely willing to invest, the new economy Zipcar is freed from the vagaries of expanding a rental business. It’s no secret that the rental car majors have access to the lowest new vehicle prices of any industrial buyer – something that is likely to undercut the pricing Zipcar can get by several thousand pounds, thus improving the crucial capital payback period for car-sharing in ‘AvisZip’. Moreover, Zipcar now solves one of its biggest fleet problems – it can deploy underutilised Avis autos to fully deliver on pent-up weekend demand it cannot serve with its fleet alone. (Yes, Enterprise Rent-A-Car still offers $9.99 weekend specials in the United States; traditional rental operators have been trying to drum up weekend demand in their fleets for decades.)

Combining Zipcar’s urban market expertise, marketing cachet, and brand goodwill with Avis’s financial acumen, fleet management expertise and worldwide footprint may yield a very exciting old guard – new economy collaboration, indeed.

Despite Zipcar’s enhanced powers to reduce personal car-use, there’s been a chorus of naysayers across whose concerns range from the ‘blandness’ of adding Avis cars to the fleet mix, to price increases and worries about customer service. If Avis would like to realise a return on its $500m USD investment, I doubt it’ll allow these concerns to materialise. One need only look at Unilever’s acquisition of Ben & Jerry’s, or Molson Coors’ buyout of Creemore Springs, to understand that Avis will probably emulate the management philosophy of ‘separate culture, integrated benefit’.

So, what can old guard businesses learn from the Avis – Zipcar transaction? A few thoughts spring to mind:

• With (coveted) access to the old guard’s secure, affordable capital, proven sustainable businesses can scale rapidly. Avis recognised that Zipcar had not only reached a turning point in its profitability – it probably saw that this newfangled business model was beginning to eat into its share in major urban markets. By co-opting this new economy operation, Avis will directly benefit by scaling on its initial successes. Both Avis and Zipcar desire rapid growth; if this move is well-managed, that’s exactly what we’ll see from the company’s combined car sharing operations.
• As environmental change raises the cost of living, the new economy will profit the most. In the case of Zipcar, rapid depreciation and rising fuel, parking and insurance charges contribute to the cost of vehicle ownership, and thus directly to the attractiveness of its value proposition. Old guard businesses should understand which products or services in their portfolios are most vulnerable to environmental change (via increased costs or prices). More sustainable offerings from new economy startups become more attractive as the price of substitutes rise. This could be a starting point for exploring where the old guard should make new investments.
• The old guards that allow new economy cultures to thrive within will win. I’ll admit that the Avis – Zipcar deal could fail miserably if Avis fails to accommodate Zipcar’s internal and customer culture. The last thing the company needs is a revolt in its freshly acquired, urbane, web-savvy ‘Zipster’ customer base, or the exit of key Zipcar intellectual capital. Realising fleet goals and resource sharing targets while allowing the culture of the acquired to thrive will be a new, needed skill at Avis, and any other old guard for that matter.

I, for one, welcome the opportunity to shoehorn a Freecycle’d armoire into my Avis-sourced, Zipcar-booked hatchback. On a weekend, this time.