2020 Auto News Auto Sales Indian automobiles

Covid takes a toll on dealer development as cost-cuts and downsizing become norm

Automobile dealerships are getting overhauled across India as they brace the Covid-19 impact forcing them to alter business models. Sluggish retail and slow demand are forcing many dealers to change business plans by trimming rentals as they opt for smaller and smarter outlets to move out from pricier locations to remain viable at a lower-cost model.

New Delhi: Maruti Suzuki is facing the largest disruption in its retail business as its priced dealer principles are looking for options to cut cost and keep the sales going as customers trim buying in the Indian economy facing severe challenges and uncertainty.

Not just the segment leader, Maruti Suzuki is also much ahead of rivals in getting the business pioneered with new concepts and strategies. It started with the all-new NEXA retail, which just completed its fifth year this month and now faces new emerging challenges.

For the first time, there could be an amalgamation of sorts with NEXA getting erected side by side along with Arena, the original longstanding retail powerhouse spread across India and the company’s sales spine.

According to sources in the automobile industry, there has been a major blow from the lockdown on the retail businesses where consolidation is the only way out to keep it running. Dealers, primarily small entrepreneurs with limited financial might are facing a cash crunch in the light of huge rentals and diminishing sales and returns.

“Many are left with no options but either downsize their businesses or let it wither away,” said a senior automotive executive.

This major disruption is surely going to change the face of automobile retail. Across India. While the new sanitization norms have jacked up the cost of operating outlets, the sluggish demand for major brands has kept most dealers on tenterhooks. Profiles are diluting. Maruti has already closed or its dealers have surrendered few NEXA outlets even after the company diluted the norms, standards and size obligation of the dealership. More are expected to follow and the trend could be seen across various auto brands.

“NEXA is the third-largest retail chain in India and successfully complete its five years operations. For Maruti Suzuki, the data shows a churn of around 4-5 outlets or dealers every year, which are part of our strategy and very well within our normal limits. There were similar closures in 2019, during the pre-covid days and the situation is fully in control of our strategic plans for the market,” says Shashank Srivastava, Maruti Suzuki’s executive director for marketing & sales.

According to sources, most of the dealerships are extremely over-leveraged and in the Covid era, profitability is at an all-time low. Many of the dealers have taken the strategy of shutting down unviable ones and many are evening merging with larger dealerships as the consolidation allows them the required liquidity and inventory funding for their business continuity.

Automobile industry sources say that most of the vulnerable dealerships are concentrated in the metros and major tier 1 cities, where manpower and cost of operations are extremely high along with the rentals.

“It is quite a challenge to run the dealership with such high costs. We have been rationalising the costs to keep the business viable as sales are low and the cost of acquiring new vehicles is rising. Funds are not available easily to run the businesses and lower sales per outlet have pushed up costs,” says a senior functionary of Federation of Automobile Dealers’ Association of India preferring anonymity.

In recent years around 400 dealers and outlets have shut shops signally tougher times for the business. Automobiles have been rather high capital intensive with regular fixed costs and huge amounts of lending taken by the entrepreneurs to satiate their growth appetite. This is only compensated by the high volume that has been going down for the past few years and per outlet sales are down for most of the automotive brands. The cyclical industry has added to the woes of the dealers.

SIAM or the Society of Indian Automobile Manufacturers’ has already given a start projection of the sales with almost a 30-50 percent contraction in sales for the ongoing fiscal disrupted by Covid-19 and reduced demand for new vehicles.

In order to keep the business viable, the dealers have been demanding revision of the margins on each vehicle sold. Except for Maruti Suzuki, a little has been yielded by most automakers. While some of the dealerships got liquidity boost and packages during the lockdown as the thin margins for Indian dealerships at about 3-4 percent against the globally acceptable of being close to 8-10 percent have not kept the business viable. Along with it the cost structures and diminishing returns from dealerships have gone haywire leaving little choice for dealers to continue the business without much support.

SIAM data portrayed a dismal picture of sales. It estimates a decline in the range of 26-45 percent in FY2021 with depleting investments and weaker economic scenario that hasn’t changed in the unlock period, so far. As per the latest fiscal data up till June 2020, just 1,53,734 passenger vehicles were dispatched in Q1, a drop of 78 percent over 7,12,684 units sold a year ago. Rajan Wadhera, President, SIAM says, “There are multiple challenges. While the rising number of coronavirus cases is yet to be controlled along with the constrained supply of components remains a challenge for smooth production that makes its difficult in a situation of depleting investments and weaker economic scenario.”

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