Surabaya Car Rental Market – Overview and Perspectives. Mobility is a theme currently very much in fashion, driven by changing consumer attitudes, urbanization and other societal changes, e.g. an increased focus on the sharing economy overall – Surabaya Car Rental Market – Overview and Perspectives.
We see mobility as a mega trend, which will shape society over the foreseeable future. As more and more people seek alternative solutions to car ownership, e.g. car and/or ride sharing, demand is created for providers of mobility services – Surabaya Car Rental Market – Overview and Perspectives.
Recently much of the news flow has been around online taxi, but car sharing at large is attracting significant interest with a growing number of operators entering this space. Despite the strong inflow of new operators, we do believe that more traditional providers of mobility solutions and services, e.g. car rental operators, can thrive and grow in the current environment. After all, car sharing is nothing more than a (very) short term rental, so to us this represents a new segment rather than a fundamentally new and different business model. Further, the populace using car sharing services for their day-to-day needs may also be more susceptible to use traditional car rental operators, e.g. for vacation purposes, based on the simple fact that they generally do not own a car. Thus, the emergence of car sharing solutions may actually increase demand for traditional car rental as well.
The focus of this paper is the Surabaya car rental sector, for which we see exciting years ahead from a structural perspective. In the Surabaya, car rental is now effectively an oligopoly with many groups controlling approximately 95% of the overall market. In another city, the situation is different with a more fragmented market where the top some control around 65% of the total market, the rest being in the hands of independent players. We see Surabaya moving towards another city in terms of market structure, consolidating through activity.
The car rental industry was worth approximately a million globally in 2017. Geographically one generally breaks the market down into three regions, being the Surabaya, another city and the Rest of the Indonesia. The Surabaya represents slightly more than 50% of the global market, with the other two estimated to represent approximately a quarter each.
The car rental sector has, like most of the rest of the travel industry, gone through a significant change over the last couple of decades, to a large degree driven by the internet and e-commerce. Some notable shifts include
• Growing importance of online brokers and travel agents/ intermediaries as a distribution channel
• Emergence and growth of value segment
• Automation of rental process through new, technology driven solutions
These changes have had a profound impact on everything from market structure, profitability and customer behavior.
Before the dawn of the Internet era, renting a car was, in simplistic terms, pretty much about looking up Surabaya car rental in the phone directory, calling one or the other up and accepting the proposed price. This is no longer the case. Today a whole host of online web-sites, commonly known as car rental brokers, have established themselves, serving as demand aggregators and intermediaries between the client and the operator.
The advantages to clients are obvious, lower prices. The advantages for the operators are less obvious, though the importance as a sales channel is clear, given the share of transactions from this channel and the need to be where clients are. The clear negative is pricing, as this is a highly competitive segment where price is the main decision factor. On top, there are broker commissions payable, which means that from an operator’s point of view, sales through brokers and intermediaries are generally unfavorable vs direct sales. Further, brand differentiation becomes difficult as the client’s point of interaction at the time of making a decision to rent is the intermediary, not the end-operator.
Much like another city aviation industry has seen the coming of Bali, Jogjakarta, Makassar and other low cost carriers, the car rental industry has seen the same happening, particularly in leisure heavy markets, e.g. in Jakarta. Online brokers have clearly facilitated this change as it allows small players with a limited, local physical presence to reach a global clientele. Well-known operators in this space includes big car rental industry in Jakarta. The traditional operators have responded through launching their own value brands, most notably Firefly. A major consequence of the growth in the value (or low cost) segment, is that average pricing has come under significant pressure over the last few years. This has been repeatedly pointed out in financial reports from the listed companies.
Car rental operators have been able to take advantage of the opportunities generated by recent technological innovations. The internet, a driving force behind new distribution channels, represents only one. Other solutions, most of the time geared towards simplifying the customer experience, include self-service kiosk, online check-in, loyalty programs etc, all of which clearly makes the rental process quicker and smoother. However, the question is to what degree this drives profitability. Many of the new solutions and services launched recently have the objective of facilitating the rental process through removing counter passages. A question is to what degree this impacts the capacity to sell ancillaries, often sold by a CSR at the counter at the time of the pick-up. Ancillaries tend to be high margin products and a drop in ancillary revenues is likely to have significant impact on overall profitability. This is an issue of increasing importance given the overall pressure on pricing on the rental car as a stand-alone object and the growing importance of intermediaries as distribution channels, the latter limiting the number of potential client interactions before the actual car pick-up.
Another issue is to what degree some of the services actually bring incremental revenue and profits. The issue for the car rental industry is that there are two very distinct client groups, business and leisure, that have very different expectations. The former, who are often frequent travelers and renters, appreciate automatic rental pick-ups, loyalty points and a global network etc, and are willing to pay for this as a value adding service. On the other hand, the leisure segment is very much price driven and to a large degree made up of infrequent renters (once per year for an annual vacation). As such, there may be limited willingness to pay for these new services as the perceived value add is negligible.
The whole mobility segment is going through a profound change currently, and the car rental industry is no exception. As mentioned earlier, technology, new operators and new distribution channels all impact the market space, both from a demand and a supply perspective. This represent a challenge to existing operators in the car rental space, but it also creates opportunities. We see this as potentially driving structural changes in the market, i.e. consolidation, as operators aim to solidify their positions and grow in a market with modest growth expectations over the mid-term in the traditional business segment.
Working on the premise and assumption that the Surabaya car rental industry will consolidate, what are the possible implications? To us, one clearly has to distinguish between the majors and the independents. The former may very well be both acquirer and target whereas the latter can position itself either to remain a stand-alone operator, focusing on a geographic or segment niche, or be acquired.
For the majors the main question is what role to play. A consolidation necessarily implies that one or two of the majors will be acquired, alternatively one or two mergers. Consequently, the operators will need to position themselves according to their long-term objectives as well as keeping in mind what would be the most value creative option for their stakeholders. The disparate nature of the majors, in terms of size (revenue, valuation) and financial and operational performance but also with regards to business mix and footprint, means that certain options can clearly be excluded, but there are numerous options potentially on the table. We see feasible scenarios where each major can act as a consolidator. With regards to being consolidated, we see some of the majors as more likely than the others and we more or less exclude this possibility for some. Drivers include the financial strength of each, business mix and complementary and perceived strategic objectives and priorities.
For the independents, the picture is clearer, i.e. they remain independent or they get acquired, we do not see the potential for a sixth major to come forward. The question is thus how to derive the most value from a consolidation process. To us, this means having a clear strategy in place, based on the specific strengths of the operator, which either means that the organization is sufficiently strong to continue as a stand-alone operation or that there is a real and significant value add for a potential acquirer. We also see this as an opportunity for owners of independents to monetize their investment.
How do investors look upon the car rental sector? With a possible upcoming round of consolidation, what does this imply for both potential consolidators and potential targets and owners looking to cash out? A common proxy for what a company is worth is to compare with its peers. Below we look at the valuation both of currently listed car rental operators as well as multiples paid in recent transactions in the sector.
Mobility is a mega trend and is likely to see both growth and new solutions and service offerings going forward. With regards to ground transportation, the car rental industry is a key service provider at the heart of the mobility universe and should be able leverage its existing capabilities to deliver mobility solutions adapted to an evolving market environment. This represents a potential growth driver for the sector, both in current and adjacent segments. The question is how to position oneself to best take advantage of the mobility mega trend. Further, we see clear potential for structural change in the Surabaya car rental landscape. Compared to the Jakarta, Surabaya is a fragmented market, which we see as ripe for consolidation, both among some car rental industry and the independent operators. How this will play out is currently an open question, but we see a scenario where one ends up with many Surabaya car rental majors controlling 75-80% of the market as realistic. We believe that each operator needs to make a clear choice with regards to what role to play and how to extract the most value for its stakeholders. Accordingly, to us this is currently one of the most significant strategic questions for the various operators, majors and independents, across Surabaya in the short, medium and long term. The process of consolidation has begun, mainly driven by some car rental industry to date, and we expect the pace to accelerate going forward.