How Enterprise trounces Hertz and Avis
This St. Louis company has quietly become the No. 1 car-rental agency in America -- here's how the Taylor family aims to keep it on top.
By Carol J. Loomis, Fortune editor at large

(FORTUNE Magazine) -- There are a couple of things you might not know about Enterprise Rent-A-Car of St. Louis.

One is on the order of business trivia: The privately held company hires more college grads than any other American corporation (and promptly puts them to work washing cars).

enterprise.03.jpg
Enterprise founder Jack Taylor at the wheel. Clockwise from his right are son Andy, granddaughter Chrissy, daughter Jo Ann, and granddaughter Carolyn.

The second one is a bit more significant: Though the fact amazes many businesspeople, Enterprise is by far the largest and most prosperous rental-car company in the United States.

For its fiscal year ending July 31, Enterprise will have about $9 billion in revenues, against the $7.5 billion that the runner-up, Hertz, recorded in calendar 2005. This is not a one-shot phenomenon. Enterprise has led Hertz in revenues since the late 1990s, with the other big rental names - Avis, Budget, National - eating the dust behind.

(This is an extract from Carol Loomis' feature on Enterprise from the July 24 issue of Fortune. Read the full-length version.)

Most of all, Enterprise is a classic American success story - constructed by a down-to-earth, quintessentially Midwestern family named Taylor.

Jack Taylor, now 84, started a tiny auto-leasing business in 1957 and eventually renamed it after the aircraft carrier Enterprise, on which he had served as a Navy aviator.

Jack's son, Andy, 58, became president in 1980 and CEO in 1994. To the entrepreneurial engine that Jack had built, Andy added strong, professional management of a quality that surely makes him one of the best CEOs in the country.

His sister, Jo Ann Taylor Kindle, 56, handles much of the Taylor and Enterprise philanthropy, which has enriched many a cause, particularly in St. Louis. And coming on is the third generation: five girls in all, two of whom work for Enterprise.

In a recent interview, Jack described Andy as perhaps "more earnest than I am." At age 16, Andy jockeyed cars at Enterprise. Today he works prodigiously, flying up to 300 hours annually on business and coming into his St. Louis office on Saturdays when he's home. "Our branches are open on Saturday mornings," he says. "My father worked then, and I do too."

The Taylors, who own almost all of Enterprise, do not publicly disclose how much it makes. But FORTUNE's interviews and various triangulations allow us to estimate with some confidence that profits this fiscal year, on that $9 billion in revenues, will be upwards of $700 million. That compares with the $378 million that Hertz made in 2005, which was its best year ever.

Consider too what Enterprise might be worth were it public. Last year Ford sold Hertz to a private-equity group, which - wasting no time, obviously - is right now preparing to sell new shares to the public at an equity valuation of perhaps $7.5 billion. That would be about 20 times last year's earnings. Were Enterprise to be valued in the same simplistic way on, say, $725 million in profits, it would be worth close to $15 billion.

As a business, however, Enterprise is superior to Hertz in more than dollars - not nearly as cyclical (partly because it has very little exposure to the volatilities of air travel), much less leveraged, and sounder all around. Enterprise's true equity market value is probably in the neighborhood of $17 billion.

But that's all academic, because the Taylors devoutly wish to retain what Andy Taylor calls "the privilege" of being private.

Here comes competition

Hertz isn't standing still -- during the past few years it has been moving into Enterprise's territory. Still, going by Enterprise's record, you might not want to bet against the company in any competition.

Hard work, an intense focus on the customer, an imaginative and unceasing use of incentives - these are the fundamentals of Enterprise's Taylor-made culture.

As the business grew in St. Louis in the 1960s, Jack Taylor laid down rules for doing things right. One of his sayings is today often quoted at the company: "If you take care of your customers and employees, the bottom line will take care of itself."

In time, success with that philosophy encouraged the risky leap out of St. Louis - first to Atlanta, then very gradually nationwide. Along the way, Enterprise branch managers, typically operating out of the same kind of low-cost, storefront locations they do today, sent St. Louis new ideas they'd tried that gained business.

The concept of picking up customers at their homes was a field innovation that bordered on genius. Never mind that it often leaves a branch's employees scrambling to both tend the store and shuttle cars. It is the one feature that most identifies Enterprise and is therefore priceless.

In another early-years feat, Enterprise developed a remarkable system of both hiring employees and spurring them along with incentive pay.

On the bottom employee rung are all those college graduates Enterprise signs up as management trainees: about 7,000 a year, recruited from 220 U.S. and international campuses.

Starting pay currently is mid-grade, $30,000 to $38,000 (depending on location), and the work is hard. Staff is required to be in business dress, including shirts and ties for the men (among whom facial hair is not applauded). The job isn't for everyone - that's for sure - and almost half of the new hires don't last a year.

But if a young kid makes it one rung higher, to assistant manager of a branch, he or she gets slotted into a powerful incentive-compensation system that sweeps right up to Andy Taylor. In this structure, each branch is a profit center - a small business run by managers whose monthly compensation depends heavily on the profits they make.

The comp scheme then ladders up the line to areas, regions, and groups (all staffed by homegrown employees). Enterprise's field operations end up being a collection of pyramids, with supervisors at various levels earning percentages of all that is made below them. At the top of the pyramids, pay can be in the millions.

In the early 1990s, furious at reports of customer complaints and a general collapse in service, Jack developed the Enterprise Service Quality index, or ESQi, derived from prompt follow-up phone calls to one out of every 15 Enterprise customers.

The survey asks just two questions: First, on a scale ranging from "completely satisfied" to "completely dissatisfied," how would you rate your last Enterprise rental experience? Second, would you rent from Enterprise again? The answers to the first question are next compiled into an index. Each segment of the company - each branch, for example - then gets its score.

And here is the kicker: If the ESQi for your bailiwick doesn't at least meet the company average, you don't - absolutely don't - get promoted.

In March, Enterprise's overall ESQi reached, for the first time, a level of 80 - meaning that 80 percent of all respondents had answered "completely satisfied" - an extraordinary score given that there are surely some people who couldn't bring themselves to give that answer under any circumstances.

Andy Taylor is an enthusiast about ESQi, and he expects it to be a key engine of the growth he sees stretching before him. In his vision, Enterprise will enjoy steady progress in all its businesses.

Meanwhile, Taylor will be plotting alternative ways to grow, in an organization that just can't imagine not getting bigger and more profitable year after year. Hertz will have Taylor's close attention, no question about that. But in talk, he virtually lays down the gauntlet: "We own the high ground in this business, and we aren't going to give it up."

One person who has long watched Taylor's optimism in motion is analyst Betsy Snyder of Standard & Poor's, who rates the debt of U.S. car-rental companies. She knows everything about Enterprise, including past profits and future expectations, and she is a believer. "They have always delivered," she says admiringly. "If they say they will do something, they do it." For any company, that is a high-class definition of success.

(This is an extract from Carol Loomis' feature on Enterprise from the July 24 issue of Fortune. Read the full-length version.)

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