Olympic rent-a-car company Essay
Olympic rent-a-car company
Olympic is a US rent-a-car company facing some changes in the market it operates. A competitor company (Enterprise) is changing its loyalty program. Olympic managers have to evaluate the impact of those changes and to take actions in order to respond correctly to those changes without losing market share and if possible taking advantage of the situation. The aim of this study is to evaluate those changes and to propose a recommendation to respond to these market changes.
The car renting industry in US is a $24 billion industry dominated by 4 big players, Enterprise, Hertz, AVIS and Olympic with the following market revenue shares: Enterprise is the dominant player with 50% share ($12 billion) followed by Hertz with 24%, AVIS with 14%, Olympic with 7% and the other 5% are shared by smaller players.
This business is heavily dependent of the overall state of the economy and since the global crisis of 2008 were there was a 6,5% break in total revenues, the revenues are recovering since 2009 growing between 2 and 3% every year. This revenue growth is due to the growth of prices rather to the growth in the number of clients.
There are 2 big markets for the rent-a-car business, the Airport rentals and the Local rentals.
The airport rentals contribute with 50% of the total revenue ($12 billion) and are divided into leisure and business clients. Costs are higher due to fees paid to the airports that consist in 10% of the revenue plus the fixed fees for counters.
The local renting contributes with the other 50% ($12 billion) and the main clients are insurance companies. The counters are located at car dealerships and repair shops. Enterprise and Hertz are the main players in this market and Enterprise has more than 50% share.
This industry is heavily influenced by the adaptation of the car fleet to demand and between 2008 and 2012 in response to the global crisis the total number of rent-a-car cars was diminished by 0,5%.
In 2012, 27% of US adults (proximately 59.400.000 people) rented a car and the main renters were the business travelers. In 2012 airport market, 20% of the travelers were business travelers and gave origin to 80% of the revenue and the other 80% of travelers were leisure travelers and represent 20% of the revenues. Usually business travellers pay more than leisure travellers. This is mainly because leisure travelers pay smaller per day charges as they travel in lower revenue days, do preplanned trips and to loyalty program redemptions. Business travelers tend to earn points in business travelling and to spend those points in leisure travelling.
Across this industry, Rent-A-Car companies tend to use loyalty programs to develop relationship between costumers. Each company has it’s own program but they are all very similar. The customer earns points depending of the number of days they rent the car and they also receive free upgrades. The earned points can be claimed and exchanged for rental days. In 2013 Enterprise changed the way their customers gain the loyalty program points. Customers that received points based in the number of days of usage now receive points based on the money they spend. This means that they earn more points faster.
Usually clients don’t have any kind of restriction to participate in loyalty programs. Anyone that rents a car can be a member depending on the number of days they rent, as consequence people are members of several loyalty programs as they rent in different companies. The rental loyalty programs are not really differentiating rental companies they are a perk for customers.
In 2012 10% of Olympic customers were members of Olympic medalist program and these customers provided 21% of the revenues. They paid for 3.996.000 days and claimed 375.000 free days. This means $323.400.000 of revenue come from members of Olympic medalist program, to this revenue we have to subtract the fixed costs, the free days cost and the program advertising costs ($28.000.000). The fixed cost is 20% of $21 ($4,2) multiplied by the total rental days and equal $1.575.000 and the free days cost is equal to $7.629.552. This gives an economic value of $233 per Olympic medalist program customer.
The regular customers represent 79% of revenues that translate into $1.216.600.000. The total rental days for these customers are 24.681.000 and these days represent a cost of $103.660.200 (24.681.000 x $4,2). There are also the advertising costs of ($108.000.000 – $28.000.000 = $80.000.000). Subtracting to $1.216.600.000 the variable costs and the advertising costs we end with $1.032.939.800. Dividing this value by the total number of regular customers (11.052.000) the economic value of the regular customer is obtained and equals to $93. The conclusion is that loyalty program clients still have a big economic influence in the revenue structure.
Olympic is one of the four biggest rent-a-car companies in the US with a share of 7% of revenues witch is the smallest share of this group. The company as chosen to be a follower and has always priced lower than Hertz. It has 464 rental locations and a fleet of 108000 cars that remain in the company for 8 to 18 months. The income per car is slightly below de industry average and the reason for this maybe the dominance of airport counters that bring more costs to the company than a local counter.
Olympic has seen an improvement on its revenues for the last 4 years and in table 1 we can see an increase of the net profit from a loss of $15 million in 2008 to a profit of $32 million in 2012. The main reason for these results is the company flexibility to adapt its car fleet to demand (table 2) as well as the adaptation of the number of counters the company has (table 3).
The recommendation is that Olympic rent-a-car doesn’t follow the Enterprise strategy.
About 1,45% of the total rental days of 2012 involved free days and a free day reward costs about $21 to cover the fixed costs and the payment to the franchisee. Of the 108000 cars fleet each car was rented about 232 days per year. With this data we can calculate the total rental days. Total rental days are equal to 108.000 x 232; this means 25.056.000 rental days per year. The 1,45% of the total rental days give us the total free days per year in 2012 this percentage represents 363.312 free days that multiplied by the cost of a free day ($21) will give us the cost of all the free days in 2012. The total cost for the free days is equal to $7.629.552.
If Olympic decides to match the Enterprise offer, the number of free days will increase to a value between 1,65% and 1,95% of total rental days this means a number of free days between 413424 and 488592 and an increase of free days per year between 50.112 and 125.280 days, this means an increase in cost of the programs free days of $1.052.352 to $2.630.880 (1 million to 2,5 millions increase of free days cost per year). Considering that the demand will not increase a lot this means a net decrease of 3 to 8% of total profits. This decrease is significant for a company that has a small operating margin of 15,8%. The way Olympic responds to the enterprise initiative will be decisive in the profitability of the company. Matching the enterprise offer will lead to an increase in the costs and no increase in market share is guaranteed.
Since no great increase in demand is predicted, following the Enterprise strategy would simply represent a 3 to 8% reduction in profits, Olympic cannot afford this reduction due to the narrow operating margin. Beside this, the fleet of Olympic rent-a-car is very well adapted to de demand and implementing no blackout days would probably let some Olympic medalist clients unsatisfied. Enterprise has a huge fleet and available cars this means that it can afford not having blackout days.
The increasing usage of the Internet to compare prices and to book services will diminish the loyalty programs importance and effectiveness. Third party consolidators the online price comparisons and bookings bring a greater relevance to prices the rent-a-car companies practice. This will affect the companies’ loyalty programs effectiveness. By focusing on price, customers will chose a rent-a-car company by the price of the service taking to a second plan the loyalty programs benefits. This means that Olympic should focus on global cost reduction in order to keep lowering the prices and therefore gain advantage over the competitors. In the future the company that has the lower prices will dominate the market.
One other market tendency is the reduction of business travelling and the growth of internet based communications. This means that in future rent-a-car companies will have less business travellers, at this moment these clients are the heavy users of loyalty programs, and the leisure clients will gain weight on the revenue share.
Olympic should maintain their loyalty program essentially due to the economic value of the loyalty programs customers ($233) much greater them the regular clients ($93) and improve the program by offering other kind of benefits that could improve the market penetration of the program. Some of these benefits could be faster pick up and drop off time for the program customers. Along the way the company could evaluate their loyalty program customers economic value and adapt to the expected decrease of loyalty program importance by reducing free rental days and using the savings of this reduction on rental price reduction. Since loyalty programs don’t benefit business companies Olympic offer the chance to this kind of customer to choose between the loyalty program benefits or a decrease in price. This should attract more large companies business maintaining the small and individual share.
To reduce the cost structure Olympic should also try to gain market in the local business dominated by Enterprise and Hertz, this would help to avoid the large costs associated to the operation in airports. This way Olympic could gain market share of a market dominated by 2 companies, maintain their business market share threatened by the teleconferencing trends (shift to insurance) and to improve the global cost structure by taking advantage of the lower costs associated to this kind of counters.