Prepare for a 12-month income gap

Vehicle dealers are facing a 12-month “income gap” because of the disruption of new-vehicle sales by the COVID-19 lockdown and the defleeting of car rental companies.

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National Automobile Dealer Association (Nada) chairman, Mark Dommisse, said rental and government sales historically accounted for about 15% of total vehicle sales.

However, the National Association of Automobile Manufacturers of South Africa (Naamsa) reported last week that an estimated 3.7% of total reported industry sales of 37 407 vehicles in September represented sales to the vehicle rental industry while sales to government were estimated at 5%.

Dommisse doubted overall industry sales for 2020 would reach 400 000 vehicles compared to about 535 000 in 2019.

“So realistically, if we get to 380 000 overall vehicle sales this year, it means almost 160 000 cars are not going to be on the road this year. It’s going to have a huge effect over time,” he said.

The COVID-19 lockdown has had a massive impact on vehicle rental companies because of the prohibition on local and international tourism and the reduction in local government and corporate travel, which led to a significant decline in vehicle utilisation levels.

This has resulted in significant defleeting by vehicle rental companies, which have also reduced their footprint by closing some of their vehicle rental outlets.

For instance, Motus, the vehicle business that was unbundled from Imperial Holdings and separately listed, confirmed last month that it has defleeted 7 000 vehicles from its vehicle rental fleet and plans to defleet a further 2 000 vehicles to reduce its vehicle rental fleet from 21 000 to 12 000 vehicles.

So realistically, if we get to 380 000 overall vehicle sales this year, it means almost 160 000 cars are not going to be on the road this year. It’s going to have a huge effect over time

Motus also reported that it was closing 19 vehicle rental outlets.

Dommisse said the defleeting by vehicle rental companies would be a big challenge for vehicle dealerships in a 12 cycle, with the reduction in the rental vehicle parc and decline in overall sales creating an “income gap” in this period.

He explained that this “income gap” would result from thousands of rental industry vehicles, which all have service plans, not coming back to dealers for servicing and parts and ultimately not ending up on dealer floors as used vehicles.

“That whole value cycle of those vehicles is going to be felt in the future until rental starts coming back,” he said.

However, Dommisse is not concerned about the defleeting by vehicle rental companies negatively impacting the profit margins on used vehicles. He admitted there was initially concern among vehicle dealers that they would be sitting with used vehicle stock and rental cars would come into the market, resulting in the existing used-vehicle stock of dealers losing about 20% of their value. But he says this did not happen for a number of reasons.

“The rental defleets are very different to the average used-car floor. The average used-car floor in a franchise environment will have cars from R120 000 to R500 000.

“Your rental cars are very specific cars - Polo Vivo and Toyota Corolla and those types of vehicles. The good thing about them is that there weren’t a lot of them on dealer floors anyway,” he said.

Dommisse added that the defleeting by vehicle rental companies had also been staggered “quite well” in the market while used vehicles “represent a huge amount of value for COVID-19 down-buying so it’s actually suited the market”.

“Generally speaking, these cars are doing very well, the margins are much stronger than new cars, and sales have been very healthy,” he said.

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