Declining sales, negative customer sentiments and unclear future growth has made the business climate more difficult not only for the vehicle manufacturers but also for the auto dealers, according to a study.
"Sales volumes per manufacturer have declined by 8.6 per cent in the span of last three years; this trend of declining sales per manufacturer has been observed for the first time in last decade," a study by consultancy firm Frost and Sullivan conducted on behalf of Federation of Automobile Dealers Associations (FADA), said here today.
The study on "Competitive Benchmarking of OEM Practices for Passenger Vehicles Retail in India" aims at presenting a competitive analysis of the best OEM (original equipment manufacture) practices for passenger vehicle retail in the country and gives recommendations for improvements and sustainability of the business.
The new dealers find doing business more difficult as they grapple to break even in such market slow down conditions as compared to an established dealer, the report observed.
Also, increasing interest costs due to higher inventory has triggered a discounting trend amongst the dealers, which has worsened the situation, it noted, adding, "Majority of channel partners are now under pressure to recover their investments profitably."
The study indicated that for a good number of dealers interviewed; the overall revenue has either declined or has just marginally increased in the span of last two years.
However, on the other hand the expenditures related to interest payments, rentals, manpower and marketing cost heads, have substantially increased during the same period, which has resulted in business losses or highly reduced profit margins, it said.
The study also observed that only established dealers, who are running business with self-owned property are successfully able to withstand the slowdown conditions; which for majority of the OEM's are their outperforming dealers.
According to study, a new dealer who is running his business on a rented property could spend 1.6 per cent of its total revenue in paying the rentals; whereas in case of an established dealer with completely depreciated assets, the same amount technically boosts up its profits more as compared to a new dealer.
However, for an established dealer the difficulty is entirely different and which arises from the opportunity costs of the premises, which if sold or offloaded on rentals could generate sustainable revenue without getting into trouble of running a competitive business for the entire year, the report noted.
Commenting on the report, Frost & Sullivan MD for South Asia and global co-leader - automotive practice V G Ramakrishnan said, "The sustained slowdown in the market has impacted dealer profitability in the last few years."
Stating that while upturn in business cycle will positively impact on network profitability, he said structural changes have a long-term impact on network viability.
FADA's initiative in assessing industry best practice will help both OEM's and dealers to develop solutions that can increase long term viability of the retail value chain, he said.
These solutions apart from helping dealers' profitability will also benefit OEM's in building committed business partners when growth returns, Ramakrishnan added.
"The business of automobile distribution in India has undergone a sea of change especially in the last decade. The changed dynamics have not only made the business more challenging but also impacted its very viability," FADA immediate past president Nikunj Sanghi said.
