Car companies may be offering loyalty points to their sticky customers, but they are not having much luck with their dealers. Car dealers are suddenly playing musical chairs with a vengeance as a combination of tough business conditions and more brand options make jumping ship a top-gear trend.
As credit squeeze and falling sales put pressure on their business model, dealers are demanding more from car companies and are switching brands faster than ever before. Channel control was a much feted virtue even two years ago. But the rush of new entrants in the mass market (Volkswagen, Nissan, Renault), not to mention existing players entering the big volume small-car business (Honda, Toyota), has meant more options for dealers.
Consider the stats: GM has had at least 7-8 dealerships either shutting down or jumping ship, including an instance where the dealer took on another brand in addition to Chevrolet. World number one Toyota has had four dealerships one each in Jaipur, Agra, Jallandhar and South Delhi closing shop in recent times. A mail from Toyota to Kirloskar Motor went unanswered.
Maruti, which has always scored in the market place thanks to its channel control, has also lost dealers in Chandigarh, Cochin, Ahmedabad and Baroda while Tata has lost one of its Delhi/NCR dealers Nawab Motor. Same for Honda, Hyundai, Hindustan Motors and Ford. According to auto industry sources what has triggered this hop-skip-and-jump trend among dealers is the portent of tough times ahead. As financiers cut back on wholesale credit and car companies push inventory to make quarterly or half-yearly targets, dealers are feeling the pinch.
The car market, which saw rapid growth for nearly five years in a row till 2006, has been slowing down and is now stuck in first gear. Industry watchers expect growth to come down to single digit this year. Yet some of the big players are adding capacity as the small car rush, both domestic and global, continues in India. By 2010, the additional capacity that will come on stream will be around a million units.
Dealers are not confident the market will expand enough to absorb 2.5 million cars a year by then, which means nose-bleed competition and profitability pressure. The trouble, say dealers, is that this means the current dealer pool is not expanding as much as necessary prompting new players to poach.
Currently, there are over 1,800 car dealerships in India, which had been growing at an annual rate of around 8% for the past three years. While the growth in new network was earlier spread across the country, now new dealerships are coming up only in smaller towns and cities.
Car retail business at metro cities has reached a saturation point. There is no new dealership coming up in any major metros this year. As operating expenses rise and competition increases, a few dealerships have closed shop. Rising rentals and huge discounts on car prices have put margins under pressure, making the car retail business unviable.
What makes the scramble more frenetic is the growing non-metro push by the big volume players. Hinterland markets are risky and the retail business doesn’t pack in enough margins to take that pressure, said an auto analyst with an MNC consultancy firm.
When contacted, though, most companies maintained that the dealers who have left or closed down are non-performers. Change of dealerships is a usual phenomenon in the automobile business. If the dealer does not perform to our satisfaction, we give the opportunity to others. In all the cases mentioned above, GM had asked them to look for other options as they did not see the required commitments from their side. In one or two cases, they have decided to pursue other options as they could not meet manufacturers’ expectations. T&T had closed down because of MCD sealing problems and decided to concentrate more on their existing other businesses.
Tata Motors has chosen to part ways with Nawab Motors. The company is continuously expanding its network for both commercial vehicles and passenger vehicles and its passenger vehicles dealer network now comprises close to 200 establishments. It isn’t the only one to spread out. GM has upped count from 97 last year to 128 so and plans to hit 160 (including service centers) by this year end. Hyundai currently has around 230, up from 180 in end 2006. It wants to hit 300 by this calendar end. HM has added nine dealerships in the last seven months and wants to hit 50 by the year end.
The expansion rush apart, car companies are worried enough to try out a variety of measures to improve dealer stickiness from a more crowded product pipeline to more business options and even higher margins. Maruti was the first to offer a range of services (insurance, pre-owned cars, etc) to offer buffer margins to its dealers. It also increased margins from 2.5% to 4%. But even that isn’t enough any more and many dealers are demanding a margin revision.