Walter Jacobs was an automotive geek. From the assembly line to owning a Ford dealership to Rental Car King. Walter built and Empire.

Dave Young:

Welcome to the Empire Builders Podcast. Teaching business owners the not-so-secret techniques that took famous businesses from mom and pop to major brands. Stephen Simple is a marketing consultant, story collector, and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode, a word from our sponsor, which is … Well, it’s us. But we’re highlighting ads we’ve written and produced for our clients, so here’s one of those.

[Travis Crawford Ad]

Dave Young:

Welcome back to the Empire Builders Podcast. Dave Young here alongside Stephen Semple, and we’re talking about empires. We’re talking about big businesses that started out as usually smaller businesses. None of them ever start big, Stephen, when are we going to talk about businesses that just started huge?

Stephen Semple:

I don’t know that they’re as interesting,

Dave Young:

But today we’re talking about Hertz Rental Car.

Stephen Semple:

Yes. Hertz Rental Car.

Dave Young:

And in my mind, they’ve always been the big one. They’re the big guy. They’re the top dog.

Stephen Semple:

Well, actually in the market today they’re number two. Enterprise is the largest one, and they’re number two, and then Avis is number three.

Dave Young:

But the Enterprise combined … They conglomerated a bunch of them, right?

Stephen Semple:

Yeah. And there’s even a few that are under Hertz as well these days. None of them are just one banner anymore.

Dave Young:

Yeah. Everything’s becoming one brand.

Stephen Semple:

They’re big. They do over nine billion in revenues in 160 countries, and they’re part of the S&P 600. So they’re a big deal.

Dave Young:

They’ve been big for a while.

Stephen Semple:

They’ve been big for a long time.

Dave Young:

I remember when Avis started, this was back in the Mad Men era. The big idea, the big advertising slogan for Avis was, “We’re number two, but we try harder.” So at that point, Hertz was number one.

Stephen Semple:

Yeah. We’ll find out as we go into the story, Hertz was the first national brand as well.

Dave Young:

Okay.

Stephen Semple:

So they really, and in many ways, kind of created the car rental business as we know it today.

Dave Young:

Awesome.

Stephen Semple:

They were founded by Walter Jacobs in 1918 in Chicago. And as I was saying, today they do like nine billion in revenue. So it’s 1918 in Chicago, and the Model T Ford has been out for 10 years. There’s about six million cars on the road, which is about 60 cars per 1000 people in the United States at that time. So they’re pretty new, but you’ll see a car. They’re not foreign, but they’re not new. It’s kind of at that stage where you’ll see them.

Dave Young:

Sure.

Stephen Semple:

So now back to Walter Jacobs. Walter’s this real car junkie, and he had started out actually working on an assembly line, and now he owns a Ford car dealership. He really sees cars as the future. And when he opens the dealership, he has some sales success, but he runs into a problem. Lots of people are coming in to test drive a car, but they really still see them as a novelty. So if you think about it, there’s no driver’s license. Vehicles are standard, they’re not automatic. And he would take people out for this test drive and it’s kind of exciting, and it’s a thrill, but what he’s finding is that people are coming to do these test drives for the thrill. They’re not really buying, to the stage where people come back and offer him money to take the test drive.

Dave Young:

Do another test drive.

Stephen Semple:

It was almost like an amusement ride for them. So lots of people want to drive, they don’t want to buy it. And Walter looks at it and goes, well, people like the idea of a car. At that point people were still used to getting around other ways, and most really did not need a car for every day. There might be specific need that they have for the car, plus there’s this amusement factor, but they want to experience the car.

Dave Young:

Well, the big box stores had not driven out all the local neighborhood markets yet.

Stephen Semple:

Well, the suburbs hadn’t sprung up. Everything was in walking distance. All of that.

Dave Young:

You could still walk to the store.

Stephen Semple:

He looked and said, “Well, what if I let them rent a car? What if I do that instead?” And there’s a precedent for this because Walter’s dad was a traveling salesman, and when he was on the road, he would rent a horse and buggy. So why-

Dave Young:

I didn’t know you could do that.

Stephen Semple:

I didn’t know that either, but it makes sense.

Dave Young:

Sure it does.

Stephen Semple:

So why not cars?

Dave Young:

My mind is blown just by realizing that back in the day, you could rent a horse and buggy.

Stephen Semple:

Yeah. So why not cars?

Dave Young:

Yeah.

Stephen Semple:

And I thought about it because we would always hear about these traveling salesmen. So of course, how did they get around?

Dave Young:

Yeah.

Stephen Semple:

Right.

Dave Young:

Okay.

Stephen Semple:

So it’s now this new market with new customers, and Walter decides to take all of his money, plus borrows 2,500 bucks and turns the dealership into a rental office. He goes 100% in.

Dave Young:

Not selling him anymore, just renting them.

Stephen Semple:

100%. People thought he was nuts. “People will steal the car, they’ll wreck the car.” Auto insurance didn’t exist.

Dave Young:

Airplanes didn’t exist.

Stephen Semple:

Right.

Dave Young:

He wasn’t near the airport.

Stephen Semple:

So he went all in with a fleet of 12.

Dave Young:

I mean he might’ve been.

Stephen Semple:

Well, hold onto that airport thought for the next one. So he went all in with a fleet of 12 cars and even had an extra fee for self-starting cars. So it was an extra fee for that, so he already was figuring out the upgrade thing, and it was a slow start because people didn’t think of it. And the most common question he had was, did it come with a driver? He decided to call the company Drive Yourself Car Rental.

Dave Young:

Drive Yourself, yeah.

Stephen Semple:

Drive yourself. And he did a marketing blitz. He did posters, he put things in the phone directory. He put billboards on the side of the cars. Word started to spread and sales started to take off. So with this advertising campaign of becoming known, how many months did it take for it to take off, Dave?

Dave Young:

Gosh, I don’t-

Stephen Semple:

What would we tell a customer today if they’re doing mass media advertising on something?

Dave Young:

Anywhere from four to eight, nine months, something like that.

Stephen Semple:

Yeah, the eight-month mark.

Dave Young:

Okay.

Stephen Semple:

The eight-month mark it starts to take off. Now how quickly does it take off? He started with 12 cars, at the eight-month mark started to take off, by the end of the year he has 30 cars and he can’t keep up.

Dave Young:

Okay.

Stephen Semple:

So when it took off, it just like boom out the gate, right?

Dave Young:

Yeah. People have to get used to the idea.

Stephen Semple:

Yeah. So it’s five years in the business, and he gets noticed by a prominent Chicago businessman. John-

Dave Young:

Sorry, I got a question. I got a question first.

Stephen Semple:

Yeah.

Dave Young:

What time of year did he start and when was the eight months?

Stephen Semple:

Oh, that’s interesting. Do I have-

Dave Young:

I’m guessing there’s a change of season. You’d advertise it starting in the spring, and then by the time fall hit and it got a little cold …

Stephen Semple:

I don’t know, because I don’t have the-

Dave Young:

That’s okay. That’s just what’s going on in my head.

Stephen Semple:

That’s a great question, though. That’s a great question. So it’s five years in the business, he’s growing, he gets noticed by prominent Chicago businessman. Guy by the name of John Hertz.

Dave Young:

Okay.

Stephen Semple:

Recognize the last name?

Dave Young:

Rings a bell. Yeah.

Stephen Semple:

So John Hertz had started actually as a car salesman, like Walter. Then he went into taxis and he now has the largest taxi service in the world. Yellow Cab. So John had started Yellow Cab.

Dave Young:

That explains Hertz’s color scheme.

Stephen Semple:

There you go. Bingo. Bingo, bingo. That’s totally it.

Now, the cab business is a hard business. It’s cutthroat, drivers are hard to find, and there’s literally taxi wars going on in some cities. People are actually getting killed in these taxi wars, and the business was successful, but Walter’s kind of a little fed up with it. And so Hertz offers to buy the business from Walter. And the thing that John learns how to do was replicate the cab business in other cities. And this is what Hertz wanted to do with car rental.

Dave Young:

Stay tuned. We’re going to wrap up this story and tell you how to apply this lesson to your business right after this.

[Empire Builders Ad]

Dave Young:

Let’s pick up our story where we left off. And trust me, you haven’t missed a thing.

Stephen Semple:

And the thing that John learns had to do was replicate the cab business of other cities, and this is what Hertz wanted to do with car rental. He knew how to do that. So Jacobs agrees to sell the business and stays on running the business. And the goal is to become the first national car rental company. And they used franchising, which is also pretty new, and they used what’s called the conversion model. And the conversion model is what was used in the oil industry. So the oil industry would go to an existing mom and pop gas station and say, “Hey, do you want to be a Texaco?”

Dave Young:

Okay.

Stephen Semple:

So what they started doing was going to existing mom and pop car rental businesses and saying, “Do you want to be a Hertz?”

Dave Young:

Gotcha.

Stephen Semple:

And converting them into Hertz. And the new name is Hertz Drive Yourself.

Dave Young:

Hertz Drive Yourself. Okay.

Stephen Semple:

Along comes 1925 and they’re the first to be coast to coast with 1000 locations. So a big deal.

Now, two years after buying the business from Walter Jacobs, Hertz is approached by GM. Because GM’s looking at it going, “This is a great way to actually move automobiles.”

Dave Young:

Sure.

Stephen Semple:

And they offer Hertz $30 million, and he sells. Now, Walter … Now remember these terms because this will become interesting later. Because Walter’s like now, “Holy crap, what am I going to do?” Part of the negotiation was Walter stays on as president. Now Walter really wants to make his mark because he’s now part of GM. He creates a system to connect dealerships and allowing people to rent a car in one location and return it to a different location. So in 1933 he launches this one way rental, and it’s a huge success. The highway system is being introduced, navigation’s becoming easier, travel is increasing, and he notices also a surge in train travel as well. And so he creates another innovation. Car rentals waiting for you at the train station, called Rail Drive.

Dave Young:

That makes sense.

Stephen Semple:

1938, moves into Canada, they become the first international car company. 1941, they’re eyeing Europe, but then war breaks out. And in 1942, all sales of domestic cars in the United States are frozen. So there’s no cars for sale, but he has cars for rent. So demand goes nuts.

Dave Young:

I’ll bet.

Stephen Semple:

But a problem happens that the quality of these cars start becoming poorer, because they start falling apart and you could not get new ones. Now, keep this idea in mind, because our next podcast is on Avis. So I want you to keep this in mind. So it’s 1953, and GM decides to spin off a number of their businesses and just really focus back on the car industry, including Hertz. So once again, Walter’s wondering about his future. But guess who buys it? John Hertz.

Dave Young:

Wow, okay.

Stephen Semple:

For $10.8 million. Remember what he sold it for? 30 million.

Dave Young:

He’s timing the market right there. That’s amazing.

Stephen Semple:

Yeah. And John Hertz plans this huge expansion in Europe, and within five years they’ve got 1000 locations worldwide.

Dave Young:

Wow.

Stephen Semple:

That’s kind of the story of Hertz. But what I found interesting was this whole thing of I’m having a hard time selling cars, but all these people want to drive it. And he was probably smart enough to also, because he connected another thing, the reason why people didn’t want to buy is they couldn’t see themselves using the car on a daily basis. So he connected those dots and went, “I got cars. They don’t want them on a daily basis. Why don’t I rent them? Why don’t I rent them to people?”

Dave Young:

So how did you go get your car if you’re … I guess you rode your horse over and …

Stephen Semple:

Wandered over, walked over.

Dave Young:

And it was before sprawl. Yeah.

Stephen Semple:

Yeah, it was before sprawl and they were in downtown locations. What I found interesting, it would be really easy for business to go, “I’m really frustrated. I get all these people coming in doing this, and they don’t want to buy a car because they don’t see a need.” How can I convince them of the need? How do I educate them, convince them of the need? And instead he went, why don’t I just fill the need? Why don’t I figure out, just fill the need out. I’ll figure it out. And again, what most businesses will go, “Well, people will wreck the car or they’ll steal the car,” and I’m sure what he just did was factor some of that into his numbers as we tell people to do. Most people won’t. Most people won’t.

Dave Young:

We actually call it the knucklehead factor, right? So you say, look, how many people do you think are going to steal the car or wreck the car or damage it? And most business owners will, in their mind, wildly exaggerate that number. Oh my God, I bet half the people wreck the car. It turns out that half the people aren’t wrecking the car, they’re bringing it back because they don’t want to pay for the wrecked car. So you build that knucklehead factor in and plan for it.

Stephen Semple:

You sort of go, okay, if it’s 10% of the cars or 15% of the cars or whatever it is, and if this is what the cost is, you factor that into your rental fee. Yep.

Dave Young:

We’re going to have to replace this many cars that our customers just wreck. And the surprise will be that they won’t, and now your profit is that much higher.

Stephen Semple:

And the other thing is, and that’s called self-insuring. It wasn’t like he was the only one facing this challenge, but he was the only one who went, “Here’s the solution.” And I found that fascinating about the origin of Hertz is that it grew out of people coming and doing test drives.

Dave Young:

Well, I think about it this way too. Look, the old story, marketing story, nobody wants to buy a drill. They need a hole. And they actually don’t need a hole. They need a hook in the wall to hang their coat. So people didn’t know they needed a car. At first, like you said, they knew it was fun to ride in a car. “Oh my God, that was …” Because nobody had done it. There’s something about going faster than you’ve ever gone before, even if it’s 20 miles an hour. That is a thrill.

Stephen Semple:

Thrill. And they would like to have a car once a month to go out and visit Aunt May.

Dave Young:

Or when they do the one way. Oh, you mean I could drive to visit Aunt May and then catch the train home. Or vice versa. Then I don’t have to stare at the same scenery through the train windows the whole time.

Stephen Semple:

Or I’m bringing something back from Aunt May’s, so I’ll take the train there, but it’s easier to bring the stuff back in a car than haul it around on a train.

Dave Young:

And I don’t have to follow the train schedule.

Stephen Semple:

Yes.

Dave Young:

I can stop and dawdle along the way.

Stephen Semple:

Yeah. So to me it was a great observing of the problem. And instead of sort of going, “I need to change consumer behavior,” which is always really hard because he instead changed his business model to fit the need of the consumer, and I thought that was brilliant. And look, it led to the biggest car rental company of its time, and still one of the biggest out there.

Dave Young:

When you’re going into territory that’s unexplored, you cannot rely on asking people things that they … Like, “Would you do this? Would you rent a car?” Why would I rent a car?

Stephen Semple:

And not only that, recognize that you do need to promote it, because you had to put it out there. You had to put it out there.

Now, he was also attaching … The interesting thing. He was also attaching the unfamiliar to the familiar, because you could say, “Rent a car,” and people would get it because they were used to renting horse and buggies.

Dave Young:

Yeah, yeah. Cool story. I love just the problems that he solved with this. That was great.

Stephen Semple:

Yeah. Isn’t it cool? So the next one, so this is rare that we announced what the next one’s going to be. The next one is Avis, because part of the Avis story is attached to the Hertz story. So this is what we’re going to do next. So that’ll be fun.

Dave Young:

All right, I’ll see you … Hit the fast forward button and we’ll see you in the next episode.

Stephen Semple:

All right. Awesome. Thanks David.

Dave Young:

Thanks for listening to the podcast. Please share us, subscribe on your favorite podcast app, and leave us a big fat juicy five-star rating and review at Apple Podcasts. And if you’d like to schedule your own 90 minute empire building session, you can do it at Empirebuildingprogram.com.