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While market sentiment has improved a bit, for passenger car dealers, it will be some time before they find light at the end of the tunnel.
Dealers say the break-even period for new dealerships has nearly doubled, from the earlier one to two years to four years and above, with slow-moving inventory and mounting inflationary pressure.
Even the festive month of October saw car makers’ sales declining four per cent on a year-on-year basis. Gulshan Ahuja, secretary general, Federation of Automobile Dealers Associations (Fada), said with intense competition and slowly moving inventory, dealer margins and profitability are under pressure. “As it is, dealer margins are 2.5-3 per cent, on an average. With interest costs of the inventory working out at 1.5 per cent per month, the entire margin is wiped out if one is holding inventory for two months,” he explained.
Analysts say a revival in demand is expected in 2015-16 and the break-even periods of dealers might improve around then. “If all other factors like rentals, employee costs, etc, remain constant, the break-even period could improve once there is demand revival. But, it is very difficult to comment on that at the moment,” said Bharat Gianani, senior analyst with Angel Broking.
According to market research firm Icra, “Historically, a dealership business was assumed to have low initial investments, with a majority of the funding requirement for inventory management. However, a sharp rise in rentals and land prices, and investment towards customer-centric showrooms (with standard specifications) has necessitated sizable upfront investments for new dealerships. Consequently, the break-even volume level for dealerships has increased over the years. A dealership usually takes one to two years for achieving break-even but for some of these dealerships it has got deferred considerably, owing to flattish/declining volume levels and other inflationary pressure (including high rentals and employee expenses).”
Sukhbir Bagga, director, Group Planet Petal, which operates 32 dealerships across this state, covering six brands, said: “Around 2008-09, the initial investment to start a dealership was Rs 10-15 crore and interest rates were around 10.2 per cent, now up to 11.5 per cent on an average. Rentals and employee costs have increased commensurately for dealers, keeping in line with inflation. This has prolonged the break-even period for dealers to four to four and a half years now, from an earlier two years.”
As for signs of demand revival, the Icra report says: “After witnessing sharp deterioration in performance till FY14, an Icra dealer check suggests there have been initial signs of recovery, with the return of first-time customers and better enquiry levels but full recovery is still some time away. The overall industry revival could remain in a waiting period for the near term but dealers of some specific OEMs (original equipment makers, gradually gaining market share) could outperform the industry and should be better off as compared to peers.”
Another reason for the longer break-even is that organised multi-brand service providers have started eating into the spares business of car dealers. New vehicle sales account for 85 per cent of a dealership’s total income, while sales of spares, accessories and service account for 10-15 per cent. The profit margins are relatively much higher in the latter category.
“Currently, in India, OEM authorised dealers face stiff competition from neighborhood garages for the service business. In Tier-I cities, too, the competition is likely to rise with the entry of multi-brand service providers such as Carnation. These service providers as of date account for only one per cent of the total market, in sharp contrast to the 25-30 per cent in developed countries. Thus, dealerships have to look at ways to retain their market share by enhancing the service provided,” said Icra.
DEFLATED?
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Dealers say the break-even period for new dealerships has nearly doubled
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Slow-moving inventory and mounting inflationary pressure
- A revival in demand is expected in 2015-16 and the break-even periods of dealers might improve around then
