Lean Pickings for Automakers from Short-Term Rentals

By Eric Volkman

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14th March 2023

No industry in the world is immune from fads and that includes the automobile industry.

Earlier this century, short-term car leasing was one of those trends, an upstart segment that some believed might disrupt the traditional auto rental industry. Likely hoping to either head off this disruption, or embrace it, US rental giant Avis Budget Group coughed up $500M to buy a short-term renter, Zipcar, at the start of 2013.

Fast-forwarding a bit over ten years to today, that hot niche business has cooled. Like its top rivals, Avis Budget Group doesn’t break out the financial performance of its short-term brand from its broader corporate results – possibly a revealing habit in and of itself. Regardless, the “other” category it lumps the division into saw 10% growth in revenue year-over-year for 2022. That pales in comparison to the company’s namesake Avis and Budget brands, which saw improvements of 33% and 27%, respectively.

If we compare 2022 to the coronavirus-infected year of 2020 the difference is even more stark – Avis brand’s two-year growth trajectory was 120% and Budget’s 146%, while Other’s lagged well behind with only 45%. According to Shahool Al Bari, senior research analyst at consultancy IBIS World: “For short-term rentals, consumers have many options (public transportation, taxis, ridesharing), so with heightened competition, the short-term segment is constrained.”

One of the segments Al Bari mentioned, almost in passing, is a major reason short-term rental hasn’t been the “killer app” taking over the broader rental industry – ridesharing (a.k.a. ride-hailing). For many consumers, it’s easier just to book one trip or, at most, several with Uber, Lyft, or any one of a number of peer services.

We shouldn’t underestimate the powerful effect ride-hailing had on the mobility market and the dent it put in short-term rental. “I would say the impact has been considerable,” said auto rental industry consultant Nicolay Nedrelid of Nedrelid Corporate Advisory. “The two came of age at about the same time and they largely overlap in terms of use cases (A to B, point-to-point etc.).”

He added: “Ride-hailing is probably more convenient a lot of the time (no need to worry about picking up a car and dropping it off), as such in most cases the user experience is potentially smoother with less friction. There are times when having access to a car to drive is convenient (shopping, multiple stops within a reasonably short time frame, etc.) but a lot of the time, ride-haling is equally, if not more convenient.”

Then again, we have the gift of hindsight these days. In the early-to-mid-2010s, few could have predicted how far and fast ride-hailing services would travel. Uber, still the sector’s king, was founded in 2009 and took some time to become well known with consumers. Arch-rival Lyft started life in 2012.

One notable disadvantage of short-term rental from the operator side is that it can be a tricky beast to tame. Nedrelid said: “The operational complexities behind (shared) mobility are significant, even more so when you factor in the on-demand component… in that you need to have a car in the right place at the right time.”

He also pointed out that there are several headaches from the customer side too. Among these are the logistics of returning a car to the pickup location (although more than a few of these services use a “free float”, system where a vehicle can be returned within a zone; still, this requirement can be daunting.

Could our slow crawl up the levels of autonomy provide a boost for short-term rental and, thus, a niche opportunity for carmakers? Not likely, according to Al Bari. “Typically, this type of technology will be costly at first, so even if it does have a smooth start, upfront costs will likely hold short-term rental for these vehicles back, at least for a few years,” he said. However, manufacturers shouldn’t completely give up hope. “The bright side is that for any consumers that want an autonomous car, the short-term rental can be an extended test run, aiding the segment,” Al Bari said.

Ultimately, though, short-term rental looks like a long-term casualty of the ride-hailing revolution. A recent report by consultancy McKinsey estimated that total revenue from the latter segment has the potential to balloon to between $450Bn and $860Bn in 2030, from the 2019 level of $120Bn to $130Bn. The category it terms “car-sharing” is much smaller, with far less potential for growth – McKinsey estimates its total take in 2019 at $7Bn to $10Bn, remaining stagnant or growing relatively weakly to $10Bn to $15Bn in 2030.

For a brief, shining moment, short-term leasing was quite the rage in certain corners of the rental market. However, as often happens in the auto industry, a new product came roaring down the street and captured the hearts of consumers. Short-term rental certainly isn’t dead or dying but it doesn’t represent a huge opportunity for automakers and associated businesses which exist elsewhere.