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In declining car culture, Avis seeks jolt from Zipcar

The $500-million (U.S.) acquisition of Zipcar highlights two major changes in the North American economy – the decline of the car culture and the continuing replacement of employees with technology.

The North American obsession with cars has been a consistent phenomenon since Henry Ford opened his first factory. Those Americans who used to traipse to the showroom every two years, are now showing general disinterest – the average age of U.S. vehicles on the road recently hit a new record high at 11 years. Younger generations, content to meet online, are increasingly living without owning a car. Avis believes Zipcar's business model, which creates the flexibility to rent by the hour, will be the greatest beneficiary from the trend.

The importance of Zipcar's technology is less well recognized. Zipcar customers are able to reserve vehicles online and then use a membership card to unlock the doors and drive away. There is no need for staff – which increases profitability – or long lineups. During the conference call announcing the Zipcar deal, Avis CEO Ron Nelson noted, "I've always been a fan of this technology in terms of increasing the mobility use of our fleet in total."

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On its own, Zipcar never achieved the scale to leverage the advantages of its business model. The large number of locations that needed to be staffed relative to the small 9,000 car fleet meant that profit margins remained low. At Avis, its mammoth 500,000 car fleet, huge airport facilities and 26,000-employee work force created economies of scale that made them more profitable. Mr. Nelson's comments indicate however, that Avis believes it can apply Zipcar's technology to become more efficient, likely at the expense of employees who currently work behind counters filling out forms and handing out keys.

The Avis acquisition of Zipcar is part of the auto industry's adaptation to a wholesale change in consumer habits. In dense urban areas technology is slowly driving cars, at least in terms of individual ownership, toward obsolescence. And, as in manufacturing industries, efficiencies are being generated in a way that reduces the need for employees.

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More

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