Last week, Hertz Global Holdings (NYSE:HTZ) announced that the rental car company would soon begin renting cars from Tesla Motors (NASDAQ:TSLA) at two airport locations. Now, for $500 a day, renters can experience one of the best cars available. But what does this mean for Hertz, Tesla, and the competition?
Rental car perspective
Rental car companies have long had multiple tiers of cars to rent, from the cheapest economy options to the largest luxury cars. But in an effort to appeal to customers' desires to drive a car they could not otherwise afford, major car rental companies have begun to offer high-end cars other than the traditional Lincoln Towncars offered in the past.
Hertz is not the only one to pursue this trend. Avis Budget Group (NASDAQ:CAR) is trying to cash in on this consumer drive to drive by adding a whole line of what it calls its "Signature Series". Often times, these cars can serve as a prestige marker for the car rental company itself. Having a few BMWs in the rental lot makes the company look more upscale than if it was wall-to-wall econoboxes.
With the Tesla Model S being so popular today, by offering the vehicle, Hertz can generate positive press toward the company even though the vast majority of renters will never actually rent a Model S. A simple web search will show just how much attention Hertz has received for this announcement, and from Hertz's perspective, it's all free advertising.
But the Model S offers another feature appealing to auto rental companies. With cars being depreciating assets, it's important to have them rented out for as much time as possible. The Model S carries an advantage over internal combustion engine rivals since it requires far less maintenance that would require the car be pulled out of the rental lot.
Obviously Tesla gets to sell some cars, but the real gains won't come in the direct sales to Hertz; not at their current numbers anyway. What Tesla has is a great product too many people haven't experienced first hand. And there is compelling evidence to support the idea that Tesla rentals will drive additional Model S sales.
In its Q1 2013 conference call, Tesla noted conversions after test drives were in the region of 25% -- a very positive number for an automotive test drive. Now, some of this can be explained by the fact that the group of people test driving the Model S are also the ones most in-the-know and enthusiastic about Tesla. But based on reviews of the Model S from a performance and driving aspect, it's a top-notch car and much of the credit for those test drive conversions is due to the quality of the Model S.
For people otherwise not interested in a Model S, or those interested but who don't have the time to test drive one, renting a Model S could provide an ideal test before buying one. Additionally, even those who won't cough up the $500 a day to rent a Model S at least get to see one in the Hertz rental lot. To those who are aware of the car, it will provide a real-life look and reminder. And for those unaware of Tesla or the Model S, it could push them to research the car and learn more about it.
Both sides win
Hertz's decision to begin renting the Tesla Model S seems like a deal that will benefit both Hertz and Tesla. Hertz can add some prestige and get some free advertising while Tesla gets more people to test drive their award-winning electric car. While this deal is unlikely to cause a major change in either company's financials, it does stand to provide a boost going forward. Investors interested in this type of deal should look to see if Hertz expands its Tesla rental program or if other rental car companies follow Hertz's lead.
Alexander MacLennan owns shares of Tesla Motors. He is long $20 October 2013 Hertz calls. The Motley Fool recommends Tesla Motors. The Motley Fool owns shares of Hertz Global Holdings and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.