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No, before you ask, e-commerce titan Amazon (AMZN +0.01%) has not bought struggling car rental company Hertz Global (HTZ 0.02%), nor has it gotten into the rental car business (at least, not yet). Instead, Amazon is offering used Hertz rental vehicles for sale through its Amazon Autos service.
Here's why this looks like great news for Hertz and Amazon investors alike.
Image source: Getty Images.
Most potential car buyers won't be able to run right out and buy a Hertz vehicle on Amazon Autos. This is essentially a pilot program being rolled out in just four cities. But if you're one of the lucky few who live within 75 miles of Dallas, Houston, Los Angeles, or Seattle, you'll be able to browse thousands of used Hertz vehicles on the Amazon Autos site, schedule a test drive, e-sign paperwork, and complete the entire purchase online, then pick up the vehicle at a nearby Hertz location.
Although the scope of this partnership is limited, it's a big leap forward for Amazon Autos. When the site launched in December, it was limited to selling new Hyundai vehicles (and for most of us, still is). In early August, it began allowing Hyundai dealers in the Los Angeles area to list used and certified pre-owned vehicles on the site. As the site's first fleet dealer, Hertz's online offerings will allow Amazon to list cars from Toyota (TM +0.01%) and Ford Motor Company (F 0.02%), among others.
We don't know exactly how many used vehicles Hertz sells each year, but the company says the number is in the "hundreds of thousands." Assuming that means "more than 200,000," that could mean Hertz's annual sales approach Carvana's (CVNA +0.02%) 416,348. Both fall well short of CarMax's (KMX +0.00%) 1.3 million vehicle sales per year.
Some consumers shy away from buying used rental cars, arguing that drivers are more likely to put unnecessary wear and tear on a car they don't own. Hertz should benefit from having its vehicles listed on a site that isn't exclusively associated with its rental service. It also gains access to the hundreds of millions of customers who already shop on Amazon and trust the service. Given Hertz's spotty profitability record, every opportunity to reach more customers is a benefit.
Like the rest of Amazon, Amazon Autos will operate better at scale.
Merchants offer their goods on Amazon's e-commerce platform (despite the fees Amazon charges) because they know a lot of people look for certain types of products on Amazon first, only shopping elsewhere if they don't find what they're looking for. But if Amazon Autos never has many cars available, or only sells specific brands (like Hyundai), or is limited to new vehicles (which only represent about one-quarter of all U.S. auto sales), it'll never be the first place people look when buying a car.
By partnering with Hertz (and with Hyundai and potentially with other car dealers), Amazon gets the best of both worlds: It dramatically increases its Amazon Autos offerings and doesn't have to worry about managing, maintaining, or delivering an auto fleet of its own. It just lists the vehicles on its site (which costs next to nothing now that the site infrastructure is built) and takes a cut of any sales it generates.
If Amazon can continue to rapidly scale up its Amazon Autos service by making more deals, it could turn itself into the next CarMax. And CarMax, remember, pulls in tens of billions of dollars in revenue per year. The Hertz partnership is just the first step to achieving that scale, but I'm betting it won't be the last.