Zipcar files offering with SEC, but some bumps in road remain

By Matthew DeBord
Sunday, June 6, 2010; G02

Is car sharing about to have its market moment? So it would seem, as Cambridge, Mass.-based Zipcar, the country's best-known car-sharing service (and the world's largest) recently filed for an initial public offering with the Securities and Exchange Commission. The company's modest goal is to take what was once a stalwart of crunchy, Northeastern hippie culture (it got its start with a single VW bug, according to Bloomberg), 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 shoot down. Zipcar's 400,000 members pay $50 for access to a fleet of 6,500 cars parked in 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).

For people who don't need or want to own a car, Zipcar represents an ideal solution: cheap, reliable transportation on demand, with no need to interact with middlemen or wait in lines. Pretty much everyone I know who uses Zipcar -- and, like myself, 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 profit is just around the corner. 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 -- for good reason. Although Zipcar is a wonderful idea that has, on a reasonably ambitious scale, been well executed, 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 car-rental agencies and car dealers. It finally has to venture beyond the safety of its acolytes.

In this sense, staging an initial public offering in the current business environment, with appetites for them at historic lows, is savvy and sort of desperate. Anyone can look at Zipcar, impressive though it is, and see the cracks forming in its business model. Apart from the food co-op ethos, the whole point of Zipcar is that it eliminates the 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. That would allow it to devote revenue to growth, and, perhaps more important, to fending off challenges to its little-engine-that-could mojo. Hertz and Avis are offering similar services. So Zipcar will have to devote some of its new money to marketing; thus far, it has made its name by word of mouth (and, truth be told, through a lot of media attention because of its significant hipster footprint in the nation's media capitals, where owning a car is often challenging).

As it acknowledged in its filling, Zipcar has high fixed costs, most notably the care and feeding of its fleet -- one 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 London-based Streetcar. 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 gasoline prices. Once you don't need to buy gas to get around, you can develop a cavalier attitude about 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. 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.

Zipcar chief executive Scott Griffith said sales should hit $120 million this year, according to Bloomberg, 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. 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 wants to add, conservatively, 1 million members. The entire new-vehicle market in the United States is 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.

Maybe the major expansion isn't the way for Zipcar to go. It could be better off if it positioned itself as an investment opportunity between, say, battery maker A123 (AONE, which staged last year's most talked-about, and now most troubled, IPO) and General Motors (which will stage 2010 or 2011's most talked-about IPO). This would entail less of a conventional growth strategy and more of 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.

Matthew DeBord has written about the auto industry for The Washington Post, the New York Times, the Los Angeles Times and the Huffington Post.

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