Avis found a loophole for selling used cars at whatever price he wanted. This became the norm for all rental companies.

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 Semple 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.

[ECO Office Ad]

Dave Young:

Welcome to the Empire Builders Podcast, Dave Young, here alongside Stephen Semple. And again, breaking from tradition, if you listen to the episode just before this, which is the Hertz Rental Car, you realize that we have a spoiler. Stephen told me the topic of this podcast, gosh, a whole podcast ago.

Stephen Semple:

That’s it.

Dave Young:

We talked about Hertz Rental cars, and now we’re going to tell the story of Avis, number two, but they try harder.

Stephen Semple:

If you haven’t listened to Hertz, I recommend go back and listen to it because these two stories kind of tie together. And it is interesting. We think about Avis as number two. They’re not number two any longer. They’re now number three. It’s now Enterprise, Hertz, Avis. But that’s a whole different thing.

Avis is still… Look, it’s a massive business. They have 5,500 locations. They do 5 billion in sales. They’re a big deal. And they were founded by Warren Avis in Detroit in 1946. So just shortly after the end of World War II.

Dave Young:

Okay.

Stephen Semple:

So the war’s over. Troops are returning home. Cars are now being produced for the domestic market. Because, if you remember, one of the things we talked about in the last episode was you could not sell a car domestically. All car production was going into the war effort. We’ve got people returning home. Roads are being built. The suburbs are the place to be. Cars are now being produced for the domestic market, and sales are exploding for cars. It’s going crazy.

And so Warren decides to open a Ford dealership. He sinks 10 grand of his own money in. He gets a $75,000 loan. But there’s one problem with being a new car dealer at this time. The federal government puts a cap on what you can charge for a car. So there’s price controls on cars. So it’s actually hard to make a living selling new cars because the margin is really thin, even though lots of people want to buy it.

Dave Young:

If you’re renting cars, you’re selling them over and over and over almost.

Stephen Semple:

Well, you’re really close. Warren finds a loophole that you can hold onto a car for six months, and then sell it as a used car, no restriction. So this is what he starts doing. However, this creates an expensive inventory problem. So it’s hard to do and hard to grow because he’s holding onto the cars for six months.

Around this time, Warren Avis rents a car from Hertz. Now, if you remember in the Hertz episode, while Hertz did amazingly well during the war because you couldn’t get a car and they had cars for rent, at the same time they couldn’t replace their cars. So the cars by this time were pretty rough.

Dave Young:

Yeah. Oh, I bet. I mean, usually rental cars now, you don’t have to have very many miles on them to have them be a little rough.

Stephen Semple:

And Hertz was also in what was now becoming poor locations because Hertz had located in downtown locations, and now people are moving out to the suburbs. So it was out of the way, kind of a crappy car. So Avis decides to take his new cars that he has on the lot, rent them, and then sell them as used at the six-month mark, which means he would always have new cars for rent.

Dave Young:

Yeah, this is the business model they’re all in now.

Stephen Semple:

Yes. This is the business model they’re all in.

Dave Young:

So Avis started this.

Stephen Semple:

Right. Now, also, if you remember, GM bought Hertz.

Dave Young:

Right.

Stephen Semple:

So Avis goes to Ford, and makes them a deal because these could then also act as a demo for Ford, just like what GM was doing with Hertz.

Dave Young:

Absolutely.

Stephen Semple:

So all the Hertz vehicles were GM, all the Avis vehicles were Ford.

Now, when he decides to grow beyond his dealership, so he starts doing it at his dealership, he looks at the market and Hertz has a lock on basically train stops and downtown locations. But there’s a new untapped market.

Dave Young:

Airplanes.

Stephen Semple:

Bingo, as air travel was growing. Because keep in mind, in the 1950s, this is a staggering number… In the 1950s, air travel increased 1500% in a decade. But airports are outside the cities, so why not bring the car rental agency to the airports?

Dave Young:

Sure.

Stephen Semple:

So it’s 1946, and he opens at Willow Run Airport in Detroit, which is about 30 minutes from downtown. Now remember, in the late 40s, early 50s, how important Detroit was at that time. Detroit was the fourth-largest city. It was booming. It was the heart of the automotive industry, which was just massive. So Detroit was a big deal.

What Avis did is set up a rental counter at the airport baggage claim. Cheap location, and turned out to be the best location, because while waiting for bags, people are being pitched on renting a car. The car’s right there, and the test works. So he decides on opening at other airport locations.

Dave Young:

All right.

Stephen Semple:

Now here’s where things get really interesting. The next location he decides to do is Miami.

Dave Young:

Okay.

Stephen Semple:

Miami’s a big hub, huge airport, opens with 11 cars. So he’s anticipating sales are going to be amazing because it’s this much bigger market.

Dave Young:

11 cars.

Stephen Semple:

Sales are slow. Cars don’t move. Here’s what he discovers. At a large airport, it’s hard to get the word out. It’s bigger. It’s noisier. Things are spread out. But we see this with our clients as well, where they have an idea that works in the small market that’s built on small promotion and word of mouth, and they move to a large market and it doesn’t work, and they blame the idea. Where what it usually is is that share of voice. The bigger the market is, the noisier it is, the harder it is to stand out, the harder you have to work to get noticed.

So Avis doesn’t abandon the idea; he realizes he needs to promote it better, and he needs to find a better way to promote. And here’s what he notices.

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:

So Avis doesn’t abandon the idea. He realizes he needs to promote it better, and he needs to find a better way to promote. And here’s what he notices. No one’s advertising on airplanes.

Dave Young:

On airplanes. So yeah.

Stephen Semple:

He makes a deal with American Airlines to put brochures on the planes for the car rental in Miami. And he’s the first to advertise on airplanes.

Dave Young:

I bet that worked.

Stephen Semple:

Worked huge. Worked huge, especially where you’re the only one advertising. So he’s the first to do that. Business starts to soar, and he does lots more airports. He’s like, okay, I’m going to do as many airports as I can, advertising on the planes. This is how we go. By 1953, Avis is number two with 75 airport locations, including now, Chicago, Hertz’s hometown. And in 1953, Avis starts opening actually locations in Hertz’s stronghold, the city centers. At this point, this whole idea of car rental starts to catch on. The market starts to get flooded, and Avis decides, you know what? I want to get out of this. And he sells for $8 million to a competitor and basically takes his money and runs and decides to retire and do other things.

Dave Young:

8 million and Avis is out.

Stephen Semple:

8 million, and Avis is out. But 8 million in 1953, that’s some walking around money.

Dave Young:

He left their name, yeah.

Stephen Semple:

Now, the part that I loved about all of this was, again, he saw a problem, and the problem was he couldn’t make money selling cars new. So he found the loophole, held onto the cars, but he had this unleveraged asset. And the unleveraged asset was, he had cars for six months, and that unleveraged asset now ended up becoming this differentiator that allowed him to move into the car rental business. My cars will always be new, and I’ll be at more convenient locations, I’ll be at the airports. And I just thought that that was really, really brilliant. But the other part is when he went from a small market to a large market and it didn’t work, he didn’t go, oh, the idea doesn’t work. It was the promotion doesn’t work.

Dave Young:

In Miami, you couldn’t open a booth across from the baggage department, baggage carousels because there were bunches of them. It was just too big a space. So you didn’t have that focused attention.

Stephen Semple:

Right, right.

Dave Young:

Not everybody that picked up their bag would be walking past you.

Stephen Semple:

Right. So he went to, where can I get their attention? I can get their attention on the plane. I thought it was just a really interesting that, here’s one problem. If you actually look through it, here’s one problem. Can’t make money selling them new, going to hold onto them, they’re used. Problem number two is I’m holding inventory for six months.

So then why don’t I, oh, there’s this gap in the marketplace where inconvenient locations, poor quality cars, so therefore I’m always going to have the car being new, which is now the model today. Next thing, GM has bought Hertz. So I’m going to do a deal with Ford, opens the door with Ford. Next thing, Hertz has got the train stations in downtown locations sewn up. Oh, there’s this new thing, air travel, I’m going to go there. The pieces of the puzzle that he put together, this guy is clearly very observant, very smart, very determined because any one of those roadblocks could have made you go, stop, stop, stop, stop. Right? I can’t think of one where there’s been that many pieces of the puzzle that was put together.

Dave Young:

And here’s something. I would bet you that Avis was also just the kind of guy that would say, well, here’s something I see. Let’s try this. I’ll bet you there’s a dozen things that he tried that we don’t even know about probably, right? Who did I hear say this? The riskiest thing is in not taking a risk. Not taking a risk is the riskiest thing you can do. So he had some big hits and some great ideas, but I bet he had some others because nobody just comes out of the gate with one thing, and that’s the thing that does it. They try and try again.

Stephen Semple:

True enough.

Dave Young:

And I don’t know what those stories are. I’m just saying that I’ll bet you they’re there.

Stephen Semple:

No doubt. No doubt. Because especially when this many pieces came together, going into Miami didn’t work right away and could have easily have become the, okay, well, for whatever reason, it only works in Detroit. So we know even that one, the initial foray didn’t work and you had to do another pivot on it. So I’m sure there were a whole bunch of other ones. There’s no doubt in my mind. Yeah, you’re very right.

Dave Young:

It’s probably true of so many of the empires that we’ve talked about. You never hear the stories of all the things they tried. So I think that one of the lessons is, man, you just keep looking, keep looking for opportunities and keep trying things.

Stephen Semple:

Yes. And it’s amazing how many times these businesses come from the solving of a problem, right? The problem was this problem, and then the problem was this problem, and the problem was this problem. And it’s either a business problem that needs to be solved like I always love M.M. LaFleur where they had an inventory problem. They’re like, I’m drowning in these dresses. What are we going to do? I can’t make money selling these cars new. What am I going to do? So sometimes it’s solving of a business problem. And other times, like an earlier episode we did on Sesame Street, it’s solving of a different problem. But these empires almost always come out of solving of a problem. A problem the consumer’s feeling, a problem the business has. It’s always one of those two things.

Dave Young:

Yeah, you find a solution to the problem.

Stephen Semple:

And then there’s those rare times that it’s the seizing of a new opportunity that’s created by technology, one of those three. But more often than not, those are almost the rarity ones. Most of them it’s the solving of a problem that’s right there in front of us.

Dave Young:

Yeah. Well, cool story. I’m glad to hear it. Somewhere, I don’t have it handy because I didn’t have a chance to. If you’re listening to this as a podcast, you know that we talked about Hertz a week ago, but we recorded them back to back. So I didn’t have a chance.

Stephen Semple:

Oh, you’ve giving away all the secrets.

Dave Young:

Somewhere, I have a little button. It’s just a little promotional, like a button that you’d wear in your shirt and it’s an Avis button.

Stephen Semple:

Right.

Dave Young:

It says we try harder. We’re number two, so we try. But it’s in Spanish.

Stephen Semple:

Oh, okay.

Dave Young:

So at some point, maybe it’s from the Miami spot. I don’t know.

Stephen Semple:

It could be.

Dave Young:

But I don’t have many little advertising collectible things, but that’s one of them that I have somewhere. I wish I had it on while we were recording this.

Stephen Semple:

That would’ve been fun.

Dave Young:

Well, thanks for bringing us the story of Avis and Hertz. And I feel like traveling somewhere now.

Stephen Semple:

All right, that’s awesome. Thanks, David.

Dave Young:

Thank you. 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. If you’d like to schedule your own 90-minute Empire building session, you can do it at Empirebuildingprogram.com.