Market paradigm change

Andrew Valentine studied modern languages and anthropology at Durham University.

Whilst there, he and a friend set up a student radio station, Purple FM. After graduating he
joined the shipping company P&O and worked for them for six years, doing a part-time
MBA. But in 2002 Andrew got itchy feet and, together with a friend, Brett Akker, decided he
wanted to set up his own business rather than work for other people. The problem was that
he did not have a business idea. So he and his partner set about searching systematically for
the right business. They spent 18 months researching many ideas from organic food to
training courses, meeting twice a week, before coming up with the final idea.
The final idea came from something Andrew read about in the USA – a car sharing club, but
one with a commercial orientation. It piggybacked on environmental concerns about
pollution and the problems city-dwellers face in driving and parking in their cities. The idea
is that members of the car sharing club can rent a car for as little as half an hour, replacing
the need to buy. There is a one-off membership fee with an annual renewal charge and
members then rent the cars by the hour. Cars are parked in un-manned, convenient
locations just off residential streets and are ready to be driven away using a smartcard to
open the door and start – thereby eliminating the need to go to an office to collect and
return keys. Members can make car reservations online or by phone at any time and cars
are available 24 hours a day. The cars are kept clean, serviced and fuelled – ready to go.
‘I read about a similar business overseas and immediately thought, what an amazing idea.
There were a couple of other companies already running this kind of service in Britain but
they weren’t doing it the way we imagined we would be able to do it. We thought we could
be more effective.’
Once they had the idea, Andrew and Brett spent four months holding market research focus
groups to test out the business model and developing financial projections to estimate the
resources they would need.
Initially called Mystreetcar and based in Clapham, South London, the business was finally
launched in 2004 on the back of their savings, £60,000 of outside finance and £130,000 of
lease finance to purchase the first eight cars. They did not see their competition as car
rental companies, but rather car ownership. It turns car ownership (a product) into a service
and is seen by many as a ‘greener’ alternative because it encourages less road use. The
business model challenges the basic paradigm of having to own a car to be able to use it at
short notice, even for the shortest journey.
Initially Andrew and Brett did everything themselves, working almost a 24-hour day. They
handed out leaflets at train and tube stations in the early mornings, eventually getting
family and friends to help. They answered the phone and signed up members, meeting
them to show them how to use the cars. They even washed and maintained the cars
themselves.
They offered a 24-hour service to members so, to start with, one of them had to be near to
a phone all day, every day. After three months they had 100 members, each having paid a
membership deposit and an annual joining fee, so they went out and leased 20 more cars at
a cost of £300,000.
The company changed its name to Streetcar and, in 2007, Andrew and Brett gave up 43% of
the business to Smedvig, a venture capital company, who invested £6.4 million. By 2009
Streetcar had a turnover of £20 million, with some 1300 cars based in six UK cities.
In 2010, the US company Zipcar (a company launched in 2000) bought Streetcar for $50
million (£32 million), giving the founders $17 million (£11 million). Zipcar subsequently
purchased similar businesses – Carsharing in Austria and Avancar in Spain. And in 2013 Avis,
the third largest car hire firm, bought Zipcar for $500 million (£307 million) – a 50%
premium on its share value. At this point Zipcar had 767,000 members in the USA and
Europe.

Questions:

1. What benefits did Streetcar offer to its customers? How were these different from car
ownership and traditional car hire?
2. How did Streetcar shift the paradigm of car ownership and car hire?
3. Why did Zipcar buy Streetcar, and why did Avis buy Zipcar?