Zipcar’s future

Zipcar lost about a third of its market value last week as it reported slowing membership growth, a failed broadcast radio campaign and problems with its U.K. expansion. It also lowered revenue and income guidance for 2012, the year in which it was hoped the company would finally reach profitability. Almost every analyst on Wall Street promptly downgraded the company.

You can read the transcript of the Q2 earnings call here, and here are the key takeaways, and the implications for Zipcar’s future.

1) The membership model has to change. This was, by far, the most concerning aspect of the call for investors, but also an important step.  CEO Scott Griffith said that Zipcar is “developing a more holistic set of membership offers that will address a wider variety of member segments” but was cagey about what they’re considering other than to reassure analysts that free memberships are a non-starter and that some sort of trial package as well as a cheaper renewal option will likely surface.

Zipcar has about 730,000 members and with a $60 annual membership fee, that’s almost $44 million in annual revenue for a company that does less than $300 million in total revenue per year. If a holistic membership program reduces by even 10 percent membership revenue, that’s $4 million off the bottom line at a time when the company is struggling for profitability, even if it’s probable that a more open membership program would drive hourly usage of Zipcar’s fleet. That said, opening up the membership model is a necessary step for long term growth, if for the most basic reason that the company will face competitors like Hertz that aren’t charging membership fees.

I don’t actually think Hertz has anything to do with the disappointing membership growth numbers for Zipcar. Still, Zipcar has the worst of both worlds, a subscription fee plus a la carte pricing, and that’s going to have to soften to appeal to a broader range of customers. Griffith noted that Zipcar’s research shows there are prospective customers that want “to try the service out before committing to an annual term” and figuring out how to trial those customers at a discount without alienating current members will be the trick.

2) Marketing woes. On Friday it was announced that Zipcar’s Chief Marketing Officer Robert Weisberg was leaving the company. The failed radio campaign ballooned the cost to acquire a new member to $89, from the year ago quarter where it cost $70. And with the radio campaign now eliminated, it’ll be tough to accelerate new membership growth as we go into winter, one of the major reasons analysts aren’t excited about the next few quarters. Zipcar will look online as it wants to leverage social media and better track its ad performance. At the end of the day, services like Zipcar embody behavioral shifts among consumers and a social campaign is probably a better route since word of mouth encouragement of the product is what will drive new membership anyways.

3) Europe? Griffith alluded to the double dip recession in the U.K. as being the worst in 50 years, which is a problem, given that London is Zipcar’s most promising foreign market and Zipcar has high hopes for the rest of Europe. No doubt the European economic doldrums aren’t helping and there’s some concern that in London that Zipcar is used for weekend getaways and fun daytrips, which correspond to better times and disposable income. Many people in London don’t own cars to begin with.

What Next?

So lots of bad news, right? Well, sort of. The issue is that Zipcar remains an experiment. The Zipvan rollout is going really well, even though it’s a small part of the business right now. But it makes perfect sense. Everyone needs to rent a van for three hours to move a couch. It may not be a huge driver of usage (you only move so many couches a year) and it’ll require a different membership model (no one wants to pay a $60 member fee to move a couch), but it’s proof that Zipcar has its eyes on unmet needs in the market.

Additionally, the one figure that always stands out is Zipcar’s performance in established markets. In those markets it did just under $40 million of revenue with $8.7 million of pretax profit. Not bad, and evidence that the model can work.

Griffith said on the call that Zipcar was considering other services for its network, including peer-to-peer car sharing, one-way trips, and ride sharing. That’s pretty all over the map even if there could be synergies to trying to build one overarching “mobility network” where customers could do everything from book a ride to borrow their neighbor’s car to rent a van. 90 percent of Zipcar’s users carry smartphones and the majority of reservations are done on mobile devices.

Zipcar is still learning. And that’s what’s so disconcerting to Wall Street, particularly because expansion and trialing new programs is expensive. You add to that expectations for a constant rate of membership growth and you’re going to have some ugly days on the street.

Question of the week

Where should Zipcar focus its resources to accelerate growth?