Buying-down trend presents challenges for SA car dealerships

With new car prices outstripping core inflation, thanks to the prolonged deterioration of the Rand against major foreign currency, the automotive industry is experiencing a shift in buying patterns. As consumers in the market for a new car feel the pinch, the automotive industry is in fact anticipating an explosion in more affordable, entry-level car sales. It’s this buying-down trend that is putting pressure on dealership margins.

Growth in new car sales over the past few years was influenced by a number of factors. A reduction in the replacement cycle, benign new vehicle consumer price index (CPI) and historical low interest rates were among these. The extension of purchase contract periods, which was put into effect by the National Credit Act (NCA) in 2011, has also played a role.

According to WesBank CEO, Chris de Kock, the market has been further influenced by dealers and OEMs, who have aided growth through excellent marketing support programmes such as trade-in assistance, cash back and discount structures, as well as the introduction of a wide range of highly fuel efficient new models with high specifications.

However, de Kock says most of the other support mechanisms are running out. “The replacement cycle is extending again, interest rates and new car prices are on the rise and average contract periods are reaching the maximum term. This therefore only leaves the manufacturer-support programmes and new models to maintain the new vehicle sales numbers in the short term,” explains de Kock.

WesBank recently released its prediction for new vehicle sales growth for 2014 and while not likely to be as severe as initially thought, a projected negative growth of 0.6% nevertheless means the South African automotive industry is headed for a downturn. de Kock says, “As a whole WesBank anticipates passenger car sales to decline by 2% for 2014, while light commercial vehicle (LCV) and heavier commercial vehicle sales should grow by 2% and 4% respectively.”

It’s a tough year ahead for dealers, who will need to optimise 2nd Gross profit, in order to subsidise the reduced 1st Gross margins. Ian Adendorff, Head of Dealer Business at Tracker Connect says, “At challenging times like these, dealers will want to avoid any unnecessary costs so effectively securing their assets – being all of their stock vehicles – will go a long way towards avoiding the financial repercussions of theft and insurance claims.”

With most dealers today being self-insured, this will provide a great benefit by avoiding additional financial outlay. In fact, by partnering with a reputable vehicle tracking company, dealerships can not only avoid high costs associated with insurance claims but they can also actually benefit from improved back-end performance as a result of increased 2nd Gross.

Adendorff explains, “As with any business involved in the services industry, dealerships have stringent customer service standards to which they need to adhere. They are measured on a whole range of criteria, in order to qualify for certain rebates from the manufacturers and so we at Tracker can have a significant influence on the customer service rating, based on the fitment of our tracking devices. If we can ensure speedy, hassle-free fitments, we’re impacting positively on the customer’s overall experience of the dealership.”

Recognising the importance of on-the-ground experience, Tracker Connect ensures its team have a solid understanding of the dealership environment, with most team members having previously worked at dealers and therefore have firsthand experience of the day-to-day challenges.

Most new vehicles in South Africa are imported, so any cost increases can’t be absorbed and are therefore passed on to the consumer. With car technology that offers safety and convenience – previously found predominantly in high-end vehicles – having increased significantly in the last few years, even in entry-level models regarded as budget cars, the growing number of tech-savvy customers on a tight budget are more likely to opt for entry-level vehicles. To compensate for the effect the anticipated consumer buying trends will have on sales figures, dealerships will need to re-evaluate their capacity to generate 2nd Gross profit in order to remain viable.