Analyzing Hertz Global Holdings Performance - Research Paper Example

of Submitted: STRATEGIC ANALYSIS Hertz Global Holdings Incorporated Introduction Hertz Global Holdings Incorporated, according to Bloomberg (2011), is a worldwide, airport based used car rental brand entity that operating from 94 major airports among the 315 locations in the United States market. The New York Stock Exchange listed Hertz with symbols HTZ, majors in two markets segments, namely the car rental and equipment rental, and uses both corporate and licensed franchisees to efficiently deliver its brand services across the US market. It has been describe the New York Times as the number one airport car rental brand in the United States and at over 94 major airports in Europe (New York Times, 2011). The mission statement for the company reads, “Our mission is to be the most customers focused and cost efficient vehicle and equipment rental/leasing company in every market area we serve. We will strengthen our leading worldwide positions through a share value culture of employee and partner involvement, by making strategic investments in our brands, people and products. The focus of everything we do will be to continuously improve our shareholders value” (Statements-Slogans-Info, 2008). In terms of the Vision Statement, Hertz Director declares, “It will be the first choice brand for vehicle and equipment rental and total mobility solutions” according to Statements-Slogans-Info (2008). According to Hoovers Incorporated (2011), the major competitors for Hertz are Avis Budget Group, Enterprise- Rent-A-Car and United Rentals Inc. These companies compete in a market segment that includes car and truck rental, commercial and industrial equipment leasing and industrial manufacturing (Hoovers Incorporated, 2011). Hertz Global Holdings Incorporated had appeared in the Fortune 500 Magazine, which is a company that provides facts about top American companies that are incorporated the country, are listed publicly and are making contribution to the development of the economy, in 2008, according to Company-Statement-Slogans-Info (2008). The company targeted customers, which are served through its agents and licensees, who leases or rents vehicles, tools, heavy equipment, and used heavy equipment for sale, ranging from major industrial companies and local contractors to the ordinary leisure seeking or vacationing consumers. Services are provided via 315 branches across the country (ABC12.com, 2011). External Analysis In this industry the major activities of companies are passenger car rental and passenger car leasing according to IBIS World (2011). Since 2007 Hertz Global Holdings has seen changes in the United States and foreign countries legal and regulatory environments that has caused disruptions in operations, especially in the type and quality of insurance sold, customer privacy, data security, and insurance rates and other expenses that it had to pass on to customers by means of separate charges (Hertz Global Holdings Inc., 2007). In New York State for example, bills has been tabled in the legislative assembly to prevent agents of the company from charging higher rates to customers living in certain boroughs of the New York City (Hertz Global Holdings Inc., 2007). Leasing gained some traction in the mid 2000, according to The Gale Group Inc (2011), but the entire auto industry was severely affected by the economic recession of 2008 and 2009. Giant auto makers like Chrysler and General Motors went bankrupt in 2008 as credit sources became constricted or completely disappeared, leaving leasing companies like Hertz Global Holdings, Avis, United Rentals Inc, and other with little or no option but to underwriter their customers. The industry was also severely threatened, as some of the biggest auto leasing companies like Chrysler Financials, Chase Auto, Wells Fargo, and GMAC Financial Services ceased under writing completely. The top two competitors in the market even up to 2010 were Avis Budget Group, Enterprise, and Rent-A-Car, according to Hoovers Inc. (2011). Sales performances for these companies for 2010 were; $ 3850 m and $9850m respectively according to Auto Rental News (2011), compare to Hertz’s $7562.33 m. In contrast the smaller companies like Save Auto Rental, Tax-Rent A Car, Zip Car, Payless Car Rental, Systems Inc., and ACE Rent A- Car had sales revenue between $140 m and $100 m annually in 2010. The revenue statistics revealed an oligopolistic group in the car rental and leasing market that was dominating the trends, even to the extent of limiting the entry of smaller companies to their ranks in terms of prices and the quality of packages offered to customers. Industry Environment Analyzing Hertz Global Holdings performance in the industry using Porter’s five forces of gaining competitive advantage, namely bargaining power of suppliers, bargaining power of buyers, threats of new entrants, and the threats of substitute products and services (Porter, 2008), the company on the basis of the revenue generated, marketing strategies, products and services offered, was in a select Oligopolistic group that included Avis Budget Group and Enterprise Rent-A-Car. New entrants will find it difficult to compete with this group, because they are able to use their strong buying power to achieve economies of scales from car manufacturers like General Motors and Chrysler, as well as insurance providers, and pass the savings on to the consumers in the form of low prices for rental and lease products that cannot be matched by competitors at the low end of the market scale. The dominance of the group was demonstrated when Dollar Thrifty Automotive Service began showing signs of advancing within reach of the market leaders in 2010 by growing 0.6 %. Both Hertz and Avis Budget Group made bids to acquire controlling interest in the fledging organization, but failed when the targeted entity conducted strategic maneuvers that made the takeover legally difficult to achieve, according to Market Wire (2011). Competitive Analysis The normal industry forces according to Investor Campus (2009) will minimize the possibility of anyone company getting significantly higher returns on capital employed, (ROCE), than any other in a particular region, and most will earn at the industry standard. Gearing in the region of 8:1 among competitors is acceptable even many industrialized nation, but companies a maximum of 4:1 in environments that has the right interest rate Along with strong parent company like what Hertz and its major competitors have, helps to guarantee the heavy debt burden (Investor Campus, 2009) Profitability in the industry, where the standard for Returns on Sales (ROS) is in the 8-10% region, will depend significantly on the ability of competitors to minimize cost while maximizing the use of their assets which are basically the number of cars in their respective fleet at any one time, before they are repurchased or sold at auctions. . The competitive United States rental car market is a battle zone between Avis Budget Rental, Hertz, and National; with National having a 53%, followed by Hertz with 23% and Avis having 20 % according to Sanati (2010). This was drastic reduction from the nine companies that were operating in the United States several years before, and points to the unique strategies that were implemented by each of the now dominant partners, and their ability to maximize revenues while providing excellent services and satisfactions to their customers at the same time. Avis Budget Avis Budget Group began operations as Avis Car Rental in 1958, but today is offering two distinct brands, namely Avis and Budget which consist of Budget Rental and Budget Trucks, targets different segments of the market while using the same fleet, systems, maintenance, technology and administrative infrastructure to deliver its products and services (Avis Budget Group Inc, 2011). The market strategy of the company is to strive for complementarity among the market brands which are found in 2100 locations in the United States. The third place giant generated $3850 million in sales in 2010, compared to $4000 million in 2009. Enterprise Rent-A-Car Enterprise Rent-A-Car is a United States based company that is principally engaged in car rentals, international operations, car sales, and rent-a-truck and enterprise rider share service. The company operates from 6,187 locations across continental USA and its largest market include customers in the automotive dealerships, body shops, as well as in the entertainment and production rentals, meetings, group rentals, general aviation, month by month rentals and custom Ppan specialty vehicles (Innovaro, 2011). The company is a part of Enterprise Holdings which also include Alamo and National Car Rental. It has 53 % share of the car market, achieve annual sales revenues of $9800m in 2010, focuses on the off airport segment of the US market, especially towards business drivers whose vehicles are in repair and are in need of wheels, according to Perone (2008). The market will remain an oligopolistic one, based on the dominance of Enterprise Rent-A-Car, Hertz, and Avis Budget Group in terms of sales revenue, the number of locations, market capitalization, and the strength of each brand in each specific segment. Finally, Enterprise position as the rental car market leader present serious competitive challenges for Hertz or Avis to dominate the market, in that the company has recently acquired both National Car Rental and Alamo in its portfolio, and has a niche market that differs significantly from its major competitors. Internal Analysis In an industry that depends on external financing for fleet acquisition, Returns on Capital Employed (ROCE), Returns on Equity (ROE), Operating Profit Margin, Interest Cover, Returns on Sales (ROS), and Debt to Equity (D/E) results, determines the profitability of Hertz operations and its ability to remain competitive (Investor Campus, 2009). The global economic recession reflected negatively on Hertz financial performance in terms of total revenues earned and the net incomes for the 2006 to 2010 period under review (MSN Worldwide, 2011). According to MSN Worldwide (2011), the total revenue, net income, interest expenses, EBITDA, and total equity for Hertz Global Holding Inc. for the 2008 to 2010 were as tabled, Year Total Revenue ($ US m) Net Income US$ m Interest Expenses (US $ m) Total Equity (US$ m) EBITDA(US $m) 2008 8525.06 -1185.96 870.0 1488.3 3043.8 2009 7101.51 -111.34 680.3 2097.4 2641 2010 7562.53 -30.6 773.4 2131.3 2822.4 Source: MSN Worldwide (2011) Revenues increase by 7 % in 2007, compare to 2006, but a downward process due to the global economic crises took place with 10%, 20%, in 2008 and 2009, until a recovery of 6.4 % increase in 2010. Financial data for Hertz according to Hertz Foundation (2010) for 2008 to 2010 were, Description 2010 $ m 2009 $ m 2008 $ m Total Assets 18,307.63 16,827.59 17,332.22 Total Liabilities 16,176 14,813.04 15,217.4 Total Revenue 7,562.53 7,101.51 8,525.06 Income after Tax -30.6 -111.34 -1185.96 Financial Ratios to be computed are Current Ratio, Net Profit Margin, and Debt to Equity. Current Ratio = Total Assets ÷Liabilities Net Profit Margin = Profit After Tax ÷ Sales Debt to Equity = Total Debt ÷ Total Assets Source (Lermack, 2003) Financial Ratio Computation 2010 Results 2009 Results 2008 Results Current Ratio TA/TL 1.13 1.135 1.138 Debt to Equity Total Debt/Total Assets 0.88 0.84 0.87 Interest cover EBITAD/Interest Payments 3.69 3.88 3.49 ROC Net Income/Book Value of Equity 1.4 % 5 % 79 % ROCE EBIT/Total Assets-Current Liabilities 3.54 3.5 4.03 Hertz financial performance for the 2008 to 2010 was very poor in terms of profitability and its leveraging ability, due to the global economic crisis that was prevailing. The Current Ratio was practically the same during the period, and this was 56 % below the accepted global industry standard of 1:2. In terms of leveraging, the company was averaging 86 %, which means there was a solvency crisis with regards to the risk associated with its equity. According to Navarro (2006), the greater the debt in relation to the equity, the greater the concerns would be for a company’s long term solvency. Hertz ROCE for 2008 to 2010 were 4.03, 3.5 and 3.54, and this reflected a sign of improvement, especially in 2010, in that the global recession of 2008 and 2009 was the major reason for the poor results, and the company, with the promise of upturn in business and leisure travels, should experience surge in sales. Returns on Capital (ROC) for Hertz impacts consumers and shareholders confidence significantly, and in 2008 to 2010, in response to an industry average of 10%, the company fell from a high of 79% at the start of the recession, to 5% and 1.4% respectively, despite earning $7.1 billion in sales in 2009, an increase of $1.4 billion over 2008, according to the United States Securities Exchange Commission (2011) The company developed and implemented strategies to ensure it remains profitably despite making losses of $ 30.6 m, $111.1 m and 1203 m in 2010, 2009 and 2008 respectively, in that according to the United States Securities and Exchange Commission (2011), it had a liquidity of $5.8 b and was able to obtain $ 3.3 b in fleet debt refinancing one year ahead of schedule and on favorable terms. Hertz had revenue change since 2007 and in relations to the US market of -12.2% of GDP (± 2.7, according to the United States Exchange Commission (2010), but in conjunction with corporate liquidity of $1916m, $1911m and $1984m in 2008, 2009 and 2010 respectively, there were indications that it was maintaining strong and improving liquidity positions. Additionally, in terms of revenue per employee, since 2006 Hertz by 2010 has achieved a 28.6 % increase. In 2006 the average rate for each employee was $25993, but significant management motivational strategies and constant monitoring of customer satisfaction and retention through surveys, an impressive rate of $33379 was realized in 2010, despite the impact of the global recession on the profitability of the company. EBITDA to Interest Cover Ratio, according to Investopedia (2011), assesses a company financial durability, by examining whether it at least profitable enough to service its expenses. Any ratio above 1 is indicative of a company in good position to meet its financial obligations. Hertz USA operations was able to achieved 3.69, 3.88 and 3.49 in 2010, 2009 and 2008 respectively, and by the industry standards these were excellent results. SWOT ANALYSIS STRENGTHS The strengths identified in Hertz Global Industries Inc. operations were, Hertz had global dominance with 315 location inclusive of 94 major airports across the US continental market The company controlled three very attractive market segmentation in its brand, namely car and truck rental, industrial manufacturing and commercial and industrial equipment leasing 29% of the market share was owned by the company for at least 10 years, thereby it had a name brand that was enduring Hertz uses the same maintenance fleet to service all the units in each market segment , and as such achieve considerable cost savings throughout its global operations New entrants cannot easily enter the US market and compete due to the low prices offered, the diversity of product lines, low cost of vehicles and insurance from suppliers, and the threats of being taken over by Hertz or any of the market leaders. The company can consolidate its position in the face of threats and relocate to more profitable area with minimal losses- it can enter and leave any market it finds favorable or unfavorable. Licensed Franchise operators helps to ensure the company maintain its market dominance especially at airports, and contribute to revenue generation which in favorable economic times ensure high levels of profits. Product and service offerings like Hertz no.1 Club Gold ®, Never Lost ® customized on board navigation systems, SIRIUS XM Satellite Radios, unique cars and SUV are delivered through Adrenaline and Green Travelers Collections, points to a niche market that is not easily replicated globally The company has a lucrative repurchasing contract with manufacturers for its fleet at the end of every 12 months, and this enhances its asset protection Annual Revenue per employee has grown by 28.8 % since 2006 to reach an impressive $33,369 Hertz has achieved and maintained a liquidity of $ 5.8 b in 2009, as well as a favorable debt refinancing for $3.3b of its fleet debt one year in advance. These milestones will help to enhance its financial stability and profitability in the future. WEAKNESSES The possible weakness observed were, Hertz profitability was susceptible to changes in the laws, rules and regulations in the country especially from insurance and environmental perspectives. Global economic crises reduces the volume of passengers travelling on vacation, the number of executives taking business trips, as well as the number of employees the company can recruit, train and retain. Apart from seeking to acquire Dollar Thrifty Automotive Services, Hertz has not sought to challenge its competitors in the market segments areas like off airport locations, business drivers market, and low budget customers to see capture some of those sales, based on its high environmental visibility. The company incurred losses of -$1185 m, -$111.34 m and -$30 m in the period 2008 to 2010 respectively and as such was not able to determine ROC, ROE, ROS financial ratio performances. This may affect investor confidence as it was not able to declare dividends. OPPORTUNITIES Hertz opportunities in the current market includes, The company should use percentages of its revenue during boom periods to invest in recreational, wellness, environmental, hospitality, and other industries that are related to its business operations, so that it could generate revenues for multiple sources and reduce the impacts of future recessions on its financial stability. The company with its base of $ 5.8b liquidity in 2009 and the one year in advance favorable term $3.3b fleet debt refinancing, is well positioned to make more significant investment on electric and solar cars so that it will be able to significantly reduce the negative impact of global recession and the rise in the price of oil on its revenue generation propensity. Hertz should develop its own financing company to reduce its dependence on other major suppliers who may fail to deliver during crisis periods, or may go bankrupt leaving gaps that may affects its continued marketability globally. The company should continue its drive to acquire not only Dollar Thrifty Automotive Services, but also other budding companies, that may become a threat to its market share. Hertz could enhance its sales revenue by developing special advertizing marketing strategies during periods of low travel. This should include offers to business executives and family especially those who are frequent customers Hertz should consider the use of robotics technology to service its vehicle across all its locations, as this would minimize labor cost and improve reliability, efficiency, safety, and productivity in the vehicles being rented. The strategy may save the company millions in the future. THREATS The threats faced by Hertz were, The possibility that its major competitors Avis Budget Group and Enterprise Rent-A-Car may form alliances that can remove the company form the market leadership position is an ever present threat, especially from innovative aspirants in the industry who are not prepared to accept the status quo. Hertz may have spread its operations too thinly and as a result are incurring employment, environmental, legal and other cost that decreases its annual net income, as well as return on assets for shareholders. Hertz Ethics should be examined and changed, especially with regard to charging customers in different locations in the New York Boroughs separate prices, rather than charging the same price. This could negate the corporate image of the company, in the consumers in that highly populated state could see the company as greedy and take their business to other companies. Industry Environment IBIS World (2011), defines this industry of which Hertz, Enterprise Rent-a-Car and Avis Budget Group are the dominant players, as one in which companies rent or lease passenger cars to customers for 30 days or less, as well as lease for 12 months or more without the service of drivers. The impact of the pressure on the market was reflected in a report by IBIS World (2011), which showed the industry revenue to be $25.5b, its growth rate projected at 41 %, and the 2643 enterprise involved in the market were paying approximately one sixth of their revenues in labor cost alone. This pointed to a possible falling out of a number of entities as the completion increases going into 2011. The industry has an accumulated Gross Product of $8.66b, 1709 business units, 121, 787 employees and 2643 enterprises, but was dominated by an oligopolistic group that include Hertz, Global Holdings, and Avis Budget Group. However, the latter had a distinct advantage over its rivals, in that it enjoyed complementary demands on a weekly basis, with commercial customers during the week and leisure customers on weekends. These customers have access globally to the company 345,000 rental vehicles as well as its 27, 000 budget trucks, and as a result new entrants and competitors offering substitute products and services, may find it difficult to lure customers in their directions. Conclusion Hertz should remain a going concern for many years to come, as its strengths are phenomenal and far outweighs its market, cultural, technology, organizational weakness, questionable ethics and debt servicing weaknesses and threats. The financing strategy embraced by Hertz, may reduce its ability to successfully maneuver during future global recessions, and should develop alternate approaches like establishing its own financing company to minimize its dependence. This would reduce its payables and increase its profits. Hertz strategy to acquire Thrift Dollar Automotive Services, if approved by the government regulation agencies, will increase its market shares to at least 33 % of the United States rental market and increase its revenue earning to more than that of Enterprise Rent-A-Car. Technology should be seen as weapon that can be used to reduce the market dominance of the leading competitor, and Hertz could embrace in a more widespread manner, from the servicing of its vehicle to every aspect of customer service, so that the company can enhance its relationship management nationally. This should include investment in alternate energy projects like solar and electric cars so that customer’s fuel cost per car can be reduced and the number of rental and leases increase at the same time, especially in difficult economic times. Hertz management structure was not seen as one that was conducive to serving a diverse car rental market, and should be restructured to reflect the national population make up, so that that philosophies of the various ethnic markets can be captured and used to develop strongly appealing advertising and promotions programs that will enable it to outperform its competitors. Ethically, the company needs improvement especially with regards to its indifferent pricing policy and the bad perceptions consumers will develop regarding its honesty and customer friendliness. The company should learn from its three successive losses during the economic recession as well as in 2010, and diversify its business portfolios away from the present structure so that it can have more revenue streams to help reduce the threats to its solvency and leveraging capacity during economic downturns, and remain viable. Should the company constantly identify and address its strengths, opportunities, threats and weaknesses, which include improving the products and services offerings and the applying energy related technologies, it should return to greater profitability and be a constant threat to all its competitors in the market going forward. Reference 1. Bloomberg (2011) Hertz Global Holdings Inc. www.bloomberg/apps/quote?ticker=HTZ:HS , 09/25/11 2. The New York Times (2011). Hertz Global Holdings Inc Business www.nytimes.com/topics/;business/companies/hertz/-global-holdings-inc/index.html 09/25/11 3. Company –Statements-Slogans-Info (2008). Hertz Global Holdings www.company-statements-slogans-.info/list-of-companies-.html 09/26/11 4. Hoovers Incorporated (2011). Hertz Global Holdings Inc. Competitive Landscape www.hoovers.com/company/hertzglobalholdingsinc/cytss-1-1injea3.html 09/26/11 5. 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United States Securities and Exchange Services Commission (2011). Hertz Global Holdings Inc www.yahoo.brand.edgar-online.com/EFX_dl/EDGARPR.dl?fetchilings.html1?D=775223&SessionID=CTZFHL 10/.25/11 Read More