CAZ Investments eyes coming transformation of car-rental market

Why this is important: a transformation in the rental car market could provide major investment opportunities.

When Christopher Zook, chairman and CIO of CAZ Investments, recently told Buyouts his firm was betting on Uber stock after its disappointing IPO, he was highlighting one of CAZ’s most prominent themes: transportation.

“We love the space,” Zook told Buyouts. “We believe the transport revolution, with rideshare being the most actionable, is a generational change.”

Zook said CAZ is especially eyeing the rental-car industry, which he called ripe for disruption. He compared rental giants like Hertz, Avis and Enterprise to Blockbuster Video, the once-mighty but now-defunct video-rental chain that failed to get out ahead of the streaming revolution.

“If I was managing any of the car-rental companies right now, I would feel like there is literally a hurricane-force wind in my face,” he said.

“There will be a time — and it’s already there in some cities — where you will not rent a car in the traditional way. … There will be cars along the street that with your app you can have drive to pick you up, take you wherever you want to go … that will completely revolutionize and take over the car rental market.”

Neil Abrams, an expert on the car-rental field and owner of Abrams Consulting Group, told Buyouts  that CAZ is far from the only player paying attention.

“We do a lot of adviser calls with PEs, VCs, investment bankers, hedge funds,” he told Buyouts.  “How could they not be interested?  You’re talking about an enormous shift in how transportation will work.”

The rental companies are doing fine for now. According to Auto Rental News, the industry’s revenues hit a record last year, passing $30 billion for the first time. Hertz and Avis, which are public companies, both posted revenue growth in 2018.

Certify, which tracks corporate expenses, reported after Q1 2018 that use of ride-hailing services by business travelers spiked 63 percent from 2014-2018, while rental cars decreased 32 percent. Bloomberg later pointed out that Certify’s data counts only the number of spending filings, not actual spending, and when calculated for that, the numbers show a change but a “less than stunning” one.

Nevertheless, Abrams said the major car-rental companies are facing an almost unheard-of situation that they must address: competition from other industries for the same customers, with car makers and tech companies working to cater to the demand for what Abrams called “personal mobility.”

“It’s really a social and cultural revolution that’s part of this transition. … They have to face those challenges,” Abrams said. “They’re not going out of business…but the handwriting is on the wall and they are going to be forced to transition.”

Even while reporting the record revenues, Auto Rental News shared the view that “transportation is changing,” and recommended rental companies start finding ways to create more personalized experiences for customers, creating a “to-do list” for the industry that included creating app-based experience for customers and partnering with “autonomous tech players.”

Abrams and Zook agree that competition from more tech-oriented companies like Lyft, Uber, Google and Apple are making things interesting.

“Their ability to actually adjust and adapt is going to be tough, and so it wouldn’t surprise me if we saw consolidation in the industry,” Zook said.

Rental companies are trying new things. Avis has owned Zipcar since 2013, Enterprise has operated a car-sharing service since 2008 and Hertz began renting cars in its fleet to rideshare drivers.

Abrams told Buyouts that autonomous vehicles are the future, which customers will be able to rent automatically — and that vehicle manufacturers, tech companies and rideshare companies will all be investing in this technology.

That, along with peer-to-peer vehicle loan services like GetAround, will pressure the rental companies and everyone else to come up with a workable solution.

“Right now, it is a horse race,” Abrams said. “If I was an M&A company, if I was a PE, you know, I’d be looking at possibilities for a combination of companies that all bring something to the table. … Rental companies have collectively hundreds of millions of customers and they’ve got millions of vehicles that can be optimized in many different ways.”

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