Leasing Company Opportunity in Car Subscription

As drivers increasingly indicate demand for car “usage” over car ownership, subscription emerges as a viable alternative to traditional sales and leasing. Part of the mobility-as-a-service ("MaaS") movement, subscription promises very strong growth creating opportunity for leasing companies ("leasecos").

As a "new" product in a mature industry, resources required to deliver subscription already exist in established businesses.


Leasecos in particular feature key operational and fleet-related resources leaving them the opportunity to develop, acquire or otherwise partner with outstanding promotional resources.


After more precisely defining car subscription to capture available demand, leasecos appear particularly well-positioned to exploit the opportunity.

Car Subscription

A mobility-as-a-service product ("MaaS"), car subscription sits firmly between daily rental and those longer-term leasing products that have come to dominate new car sales.


Unfortunately, customer uptake has been impaired by just this lack of definition: is it an extended daily rental or is it a shorter fixed-term arrangement? More than just semantics, providers require a clear product definition to define the specific resources required to deliver at an economic price.


In an earlier article, "Defining the Product to Capture Demand", we concluded that the largest opportunity for car subscription is for:

While customers will pay for flexibility, convenience and simplicity, they neither require the excess flexibility of rolling month-to-month arrangements nor are they likely to accept the 2x to 3x price premium required over comparable longer-term leases.


Leaseco Engagement with Subscription


If subscription demand is for a shorter fixed-term arrangement (analogous to contract hire), then who better to provide the product than established well-run leasecos?

As shown at right, subscription requires certain key resources and leasecos already demonstrate expertise in operational and fleet-related resources. As in leasing, providers take on the obligation of vehicle ownership, monetising procurement, finance, refurbishment and remarketing in the customers' monthly price. Also similar to the leasing paradigm, providers take on operational responsibilities around product, customer service and contracts.

However, leasecos traditionally rely on brokers to undertake retail promotion and their brokers have already begun accommodating shorter fixed-term arrangements.


Brokers are by far the most successful eCommerce address of retail automotive to-date. Unfortunately, their transactional focus doesn't yet address the "culture" of car-as-a-service customers.

Imove's pitch (shown at right) acknowledges that subscription customers are searching for a solution and that the car itself is merely a delivery mechanism. Should leasecos elect to more conscientiously pursue the subscription opportunity, they (or their brokers) will likely need to develop, acquire or otherwise engage with a somewhat different promotional approach focussing on membership rather than individual sales.


Operating Models


Leasecos may address subscription in one of two broadly-defined operating models:

While the "lease-type" is virtually identical to the contract hire model, the "Rental-type" model yields greater profit opportunity and allows a much more flexible approach to fleet ownership/management.


Price Efficiency


Here in the UK, Cazoo followed up their acquisitions of Drover and Cluno with a significant investment in brand-new subscription stock from Ford, Mercedes-Benz, Hyundai, Vauxhall, Kia and others. As a larger commercial fleet, Cazoo seems to have secured manufacturer terms analogous to the daily rental sector (and potentially better as Cazoo will have refused any buyback option in favour of better "up front" pricing).

As a result, Cazoo is in the market with subscription pricing (shown at right) for a popular Ford Focus ST-line of somewhat better than comparable contract hire. In effect, manufacturers seem to be buying in to Cazoo's "culture" even if only on a test basis.


At scale, leasecos engaged in car subscription should enjoy access to manufacturer pricing comparable to that secured by Cazoo/Drover.

The chart at right illustrates monthly subscription prices for that same Ford Focus based on various terms (rentals in the 1/2 and 1/2/3 examples tie directly to pricing reflected on Vanarama).


While monthly rental declines with successively older inception dates and longer terms, each successive subscription term includes an additional retail premium. Should a leaseco elect to embrace the "rental-type" operating model, the rental value of three consecutive 12-month subscriptions is roughly £3,000 greater than the that for a single 36-month term.


Conclusion


Many have written that the subscription economy (defined by Netflix, Amazon Prime and others) addresses customer demand for convenience, flexibility and service. As such, many have projected dynamic growth for subscription within the burgeoning mobility-as-a-service movement.


If the largest opportunity in car subscription is for shorter-term arrangements at pricing relatable to longer-term leasing, then who better to provide subscription than well-resourced leasecos? Leasecos exhibit suitable operational and fleet-related resources and requiring they or their broker networks to develop, acquire or engage promotional resources that directly address subscription's "culture" of membership over individual sales.


The opportunity is there for leasing companies keen to address MaaS with a compelling business model.


Grace brings clarity to a chaotic retail automotive sector helping business leaders take more well-informed and impactful decisions.


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Having spent a significant career in the global daily rental and leasing sector, I can't seem to put down these issues in a disrupted retail sector.

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