Picture it – it’s a holiday travel weekend. You’ve braved the stress of getting to the airport on time, the TSA lines, and being in a tight space with 150 strangers for a few hours. Relieved you’re a big step closer to your final destination, you make your way through the terminal and arrive at the rental car center. It’s a mass of people. The parking lot is empty, save for a few cars that no one seems in any rush to take. No one who works for the rental car agency appears to be doing much of anything, if they’re there at all. Not fully processing the situation, you walk up to one of the few vehicles and begin loading suitcases, only to realize there’s no gas tank. You’ve accidentally selected an electric vehicle. At this point, you realize why no one else has taken this car and headed toward their final destination. Frustrated and sheepish, you take your suitcases out of the trunk and rejoin the frustrated horde waiting for the (gas-powered) vehicle you reserved months ago.

I’m guessing this scene has played out across countless Hertz locations over the last couple years – I’ve been the person described in the last paragraph twice in the last few months, once over Christmas and again landing in Boston on my way to Vermont a couple weeks ago. Once was bad enough, twice had me doubting my 15 year loyalty to Hertz.

For a company with a pandemic-driven bankruptcy in 2020, followed by a quick rebound in demand from post-COVID “revenge travel”, Hertz could’ve been a solid recovery story. Instead, its stock is down 75% since emerging from bankruptcy in mid-2021, versus Avis Budget Group and the broader Dow Jones Travel and Tourism Index, both of which are up slightly over the same time period. While Hertz’ bankruptcy was COVID-related in that (i) consumer demand for rental cars is obviously tied to travel which was curtailed during 2020 and 2021 and (ii) a drop in used car prices in 2021 (remember when not everything felt insanely expensive?) meant Hertz was selling its aging fleet at lower than expected returns, limiting its ability to reinvest in new vehicles or service its debt.

Hertz’ current issues are largely capital allocation issues; in that they overbought electric cars and didn’t buy enough gas-powered cars. You would think that CEO Stephen Scherr, who joined Hertz while it was in bankruptcy after departing his role as the CFO of Goldman Sachs, would be about as good of a capital allocation wizard as a company could find. However, I’d argue an astute Hertz board could’ve seen this coming. Before becoming CFO, Scherr was also an architect of Marcus, Goldman’s consumer banking push that ultimately drove over $1 billion of annual losses for Goldman by 2022. Between the culture clashes and technology issues, it was clear by the time Scherr joined Hertz that Goldman was unequipped to make Marcus a success, and that allocating Goldman’s resources to building a consumer division was not a prudent use of capital.

However, focusing on building a consumer bank like Marcus sounded like a great strategy on earnings calls. After all, consumer banking is a huge market, and building a consumer division could materially improve Goldman’s image with the general public by making it relatable. After all, we get our credit cards from Chase, our wealth management advice from Morgan Stanley, and our mortgages from Wells Fargo, whereas for most people, their interactions with Goldman are limited to articles calling them a Vampire Squid.

Maybe I’m being overly cynical, but with a new CEO at the reins and lots of bankruptcy-related articles to bury, why not announce multiple large electric vehicle purchase agreements in quick succession with Polestar, Tesla, and GM, totaling hundreds of thousands of vehicles. That sounds like a positive story and the analysts and journalists might say nice things about us! In late 2022, Hertz’ public goal was electrifying 25% of its fleet by the end of 2024. In contrast, only 1% of all registered cars on the road in the US are electric, and even looking at monthly new car sales, only 6.5% of vehicles sold in February 2024 were electric. There is only one state where current consumer demand for electric vehicles is 25%, measured as the percentage of new vehicle sales that are electric. Yep, California. Even blue states with strong charging infrastructure and relatively short distances between major cities, like Massachusetts, Maryland, and Vermont are in the high single digits / low teens.

Simply put – the vast majority of consumers do not want to buy or use electric cars right now. “If you build it, they will come” is a pretty terrible consumer strategy, particularly for long-lived assets like a fleet of cars. Yes – electric car penetration is growing, but not nearly as fast as one would think based on Hertz’ long-term purchase agreements and electrification goals. Not only did the geniuses at Hertz ignore some basic data, but they neglected some critical consumer behavior information that I’d argue would make the penetration of electric cars in rental fleets lower than new vehicle penetration. By the time Hertz realized this error and cut off some of the purchase agreements, the fleet was already 11% electric (and they probably had some pissed-off automakers to deal with).

Think about the last time you rented a car – where were you going? Did you know what the electric car infrastructure was going to look like when you got there? Were you driving for a long time? Were you potentially unclear about the charging infrastructure available on the way? Travel is stressful enough – why add the additional uncertainty of accessing fuel for your vehicle, when there is a gas station at basically every highway offramp in America? Electric car adoption started with people making shorter-distance and predictable trips – home to work and back, local errands, etc. Eventually, electric cars moved into “daily drivers” – but that’s for users. For non-users, wouldn’t it be more reasonable to expect a consumer to buy their first electric vehicle as a second vehicle in a two car household, and over time, get more comfortable? As opposed to packing the family into something that might require some unexpected stops, or worse, run out of juice in unfamiliar territory? Hmm, not doing that.

Now, let’s add insult to injury. One drawback of new durable products is that maintenance and resale are probably less predictable versus something with millions of fielded products – and maintenance costs and resale prices for new vehicles are critical to Hertz’ financial health. And its electric vehicles were more expensive to maintain than expected. Heavy electric vehicles burn through tires and brakes relatively quickly – now imagine someone driving it who (i) doesn’t have long-term incentive to keep it in good working order and (ii) may not appreciate how quickly it starts and stops. The “total cost of ownership” argument for a personal electric vehicle relies on not buying gas, instead using lower-cost energy, because electric vehicles typically cost more to buy and roughly the same to maintain as gas vehicles. But in a rental vehicle situation, fuel costs are directly paid by the renter, whereas purchase, maintenance, net of value as disposition is wrapped up in whatever charge the lessor charges to rent the vehicle. Said simply – you’re paying $50/day to Hertz to cover what they paid for the car plus the cost to maintain, less what they can sell the car for, with the impact of their asset utilization model. But wait, there’s more! Used electric vehicle prices are falling off a cliff! The average price of a used EV declined over 30% last year, and gas vehicles were down 4%. That’s a painful trend if you’re a family and own one Tesla you’re trying to sell off…now imagine you have tens of thousands. I’m guessing that wasn’t baked into Hertz’ model – which is why they took a $245 million writedown on EVs last quarter.

Hertz may be right that 25% of new car sales, and 25% of the carpark, will eventually be electric. It’s going to take a lot of charging infrastructure and government intervention to get there. Being way too early is the same as being wrong, particularly on capital allocation decisions that are expensive to undo, and now Mr. Schorr is rightfully out of a job. Hopefully Hertz can remedy this fleet makeup issue and get some more normal gas-powered SUVs and sedans so that consumers can have better experiences going forward. Otherwise, you’ll see me at Avis.