Rental Companies Struggle to Replenish Fleets Amid COVID

Executives in the car-rental business can be forgiven for feeling a sense of whiplash as the vagaries of the pandemic economy continue to disrupt all segments of the automotive industry.

Rental fleet companies – which have historically bought about 11% of the 17 million new vehicles sold in the U.S. each year – were forced to make difficult decisions to stay afloat in 2020. Shutdowns abruptly suspended most travel, resulting in a sharp reduction in demand for rental vehicles. As a result, rental company executives found themselves in an unprecedented situation: selling off massive segments of their fleets to offset bleak demand for rental services.

The great rental fleet sell-off of 2020 left an indelible mark on the overall used-vehicle sector. The market had 25% fewer vehicles for sale at wholesale auctions compared to pre-pandemic levels.

By the middle of 2021, however, the market shifted. The travel sector in the U.S. appeared, in the third quarter, to be staging an impressive comeback. It left rental companies without sufficient inventory to meet surging demand. But when executives returned to the market to replenish supply, they woke up to a rude new reality.

Companies that once enjoyed special status for first dibs on certain categories of inventory with OEMs found themselves in direct competition with consumers. The profit margins automakers currently are experiencing in selling new vehicles directly to consumers is making it difficult to justify the discounted rates paid by rental companies. It has created significant challenges in the ability of executives to replenish their diminished rental fleets.

Adding insult to injury, rental companies also faced unexpectedly steep competition with dealerships. The absence of new-vehicle availability prompted rental companies to turn to high-quality used vehicles to address rebounding demand, exacerbating an already demand-intensive market. The situation was further aggravated as new online retailers such as Carvana and Vroom emerged as stronger players in the competition for used vehicles.

Then, omicron happened.

Managing an Uncertain Landscape

As the nation – and the world – hunkers down again, the rental industry is struggling with what steps to take next.

Many unknowns remain. J.D. Power expects ongoing inventory challenges to impede rental car companies’ ability to operate effectively for the foreseeable future. Ongoing pandemic-related issues – including the COVID variants, semiconductor chip shortages and low vaccination rates – continue to affect worldwide supply chains. The “COVID hangover” effect on supply networks will perpetuate the elevated level of new- and used-vehicle prices through the next few years.

David Paris 2021 (002)

To survive – and even thrive – in 2022, rental company executives will have to focus on how they can rebuild relationships with customers and suppliers through traditional and digital channels. It is the only way they will be able to dynamically manage their inventories of new and used vehicles in their efforts to meet consumer demand effectively and cost-efficiently for rental services through today’s turbulent market environment.

Developing top-level customer experiences should be a priority moving forward. To execute, it will be imperative for rental companies to invest more time and effort in developing new customer service and inventory management strategies based on a careful analysis of voice-of-the-customer insights and valuation trends to interpret critical developments in near real-time.

David Paris (pictured, above left) is senior manager of market insights at J.D. Power Valuation Services.