Automobile Dealership Business… Kal Aaj aur Kal…
This article shows how Automobile Dealership Business has transformed over the years – Hence the name ‘Kal’ (yesterday), ‘Aaj’ (today) and ‘Kal’ (tomorrow)
Kal (The History)
The business of automobile dealerships has been glamorous from early days. It was looked upon by rich businessmen who could get car dealerships with lot of influence, have sizeable showrooms and well known by the Who’s Who of the town. A lot of people wanted to get into this business as it had a lot of glamour with celebrities attached to new cars, international conferences, and obviously a lot of media attention. Customers had to wait for days or months to get their preferred car or bike, production was limited and the demand was higher. It was post 2002-2004 (influx of multiple OEMs in India) when a lot of people got into this business considering that they would just need to make an investment and have the right people and the business would go on and they would keep making money from it.
Traditionally a car dealership was made by investing in property and with at least 50% on working capital as getting loans was always difficult those days. But with the advent of international brands and the booming growth in India along with the buzzing real estate sector – We saw that there were a lot of new entrants in this business who are willing to take the risk by paying high rents, and where also willing to borrow their entire working capital on interest. This was when landlords and banks became sleeping partners of this business, and with the complex business that a car dealer handles it takes a long time to understand whether the losses are from the profit or from the capital.
Business Transition –
The business had gone through a lot of changes with the advent of customer delight initiatives, changing technologies, fluctuating government regulations, intensive manpower orientation, factors like JD power, competition between brands to attend highest market share, lowest prices and the highest customer satisfaction. The requirement for infrastructure and new showrooms and workshops also started getting mapped with competition and aspirations of brands. Since the going was good, higher risks were taken of investing with an expectation to break even with growth in future years. We never made a provision in our thoughts or books or plans to handle any sort of situation we would not be earning for a few months for a few quarters. The question of viability and profitability shifted from actual cost and expenses to a future goal of cost and expenses.
The varying government regulations played a very important role in changing the dynamics of this business. Frequent changes in pollution norms forced dealers to sell of their stocks at low prices when the deadlines approached, the losses sometimes were five times of what the dealerships would earn on that car! The regulation by IRDA on the insurance payouts, Cost of increased manpower for complying with statutory requirements such as data entry for registration, Fast Tag, TCS (Tax Collected at Source), High Road taxes in certain states forced customers to buy or register from other states where clause were cheaper, the intervention of CCI and competition norms along with multiple dealers in cities – Discounting became rampant and again dealers started draining their margins in lieu of additional target incentives that they would achieve in future.
Automobile Dealers come under a minimum of 29 acts for statutory compliances & a lot of time & money goes in compliance of various departments & regular visits by various departments is a norm for this industry.
Demonetization brought in a sudden slowness in the business as a lot of customers especially rural started to fear to buy cars by paying in check or taking a loan, these customers where used to buying their car in cash as they were primarily agriculturists. Introduction of TCS, linking of Aadhaar to PAN card and the introduction of CIBIL ratings further slowed the process of decision making of buying an automobile. While I agree that all these developments are good for the economy and I am a firm believer that we should do clean business, but customers from different sections of the society who were used to a certain way of working from generations were finding it difficult to adapt to the new as said organised style of working!
In this journey we saw that the income sources for dealers started getting squeezed and in the journey of delighting customers and doing things differently, costs began to go up.
Just before the days of Covid19 – The Profit after Tax (PAT) of a dealership had fallen to -0.50-1% of the total turnover, which was a result of Total incomes from sales, service, other incomes & spares which was between 9-11% & the expenses were between 8% to 10% depending on location & turnover. Which means that we did not even have a cushion to survive for 25 days without running operations or even handle 3 months of slowdown of 50%.
Dealer Margins of the Automobile Brands in India (Source: FADA)
New car margins internationally are at 10-12% & interest cost in these countries is at 1%-3%; whereas in India our margins are at 2.75%-5% & interest cost is at 9%-11%.
Aaj (The Scenario as of Today)
Now with the current scenario the entire business case has gone through a change where we have restrictions on manpower due to social distancing, customers are not willing to travel, Most cities under lockdown, Interest on term loans & working capitals is piling up, Cash flows in most businesses are chocked, Dealers are still holding stocks of BS4 vehicles which are not selling & will have losses arising therefrom, Cost of sanitization has gone up & so on…
However; we need to be patient & go slow – step by step and ensure health & hygene is of utmost importance in this period.
Kal (The Way forward for Tomorrow)
The new tomorrow for this business will need dealer principal involvement to a high extent in controlling & redesigning the expense patterns of the dealership as each city/market will react differently.
Reaching a cost to income equilibrium will have to arrived after a study of the next few months & the engagement with OEMs at this stage is of utmost importance.
New ideas to generate incomes like selling health insurance, other general insurance & new streams will have to be explored.
Need to re-look at the infrastructure invested & need to trim/shut some outlets to attain cost effectiveness.
Digital initiatives are undergoing their test & results after a few months will answer whether this industry will embrace an online sale or no?, but the initial reactions of customers are that they still prefer to touch & feel the car.
We have to redesign our manpower structures which have to be top light & bottom heavy. (more productive workers & less managers)
Considering Social distancing we may have to work more shifts to ensure optimum utilization of infrastructure.
Vehicle stocks in quantity & ageing have to be on strict vigil, Spares inventory management is also a key as huge losses occur when parts get obsolete.
Restructure your loans & convert some loans to long term & ease working capital.
We need to have a strict control on credit to leasing companies, corporates, government & customers and stopping credit facility for some time is recommended under current situations.
(The article is written by Mr.Sachin Shah. He is an auto enthusiast with over 21 years of Experience in Auto Dealership Business. He has worked at all levels of a dealership – right from a Salesman to now a Dealer Principal. He has a lot of interest in the entire working process of a Dealership, Accounts, Finance & Legal. He has also been involved in various organizations like FADA, KADA & Dealer Council.)