Artwell Dlamini
9 November 2009
Johannesburg — MCCARTHY, the retail motor group with R16bn in revenue, says its car dealers have fallen short of their profit targets even though they have steadily improved their financial health.
The difficulty in returning to profitability indicates that, for car dealers -- who do not seem to be on a growth path yet -- the going remains tough.
McCarthy CEO Brand Pretorius said last week dealers had managed to achieve a 15% return on capital employed, which was way below what the shareholder expected.
Bidvest , McCarthy's shareholder, required a 25% return on capital employed.
Pretorius said the biggest challenge facing dealers was to improve sales volumes and profit margins, which were "very low".
Fewer dealers, he said, were running at a loss than was the case 12 to 14 months ago when huge inventory, ballooning costs and dwindling vehicle sales conspired to drive some dealers out of business.
Even though monthly vehicle sales figures are improving, dealers have failed to capture much of this gain.
Pretorius said over the three months to September, car rental companies, which buy directly from car makers and thus bypass dealers, accounted for 20% of new passenger car sales.
But, he said, new car sales at retail showrooms had stabilised as extensive rationalisation and cost cutting had benefited dealers, leaving them leaner.
McCarthy, which runs one of the country's largest dealership networks, cut 420 jobs and reduced the number of outlets to 120 from 140 for the financial year to June. Over this period, its trading profit declined 32,3% to R502,9m and revenue fell to R16,5bn from R18bn.
Jeff Osborne, CEO of the Retail Motor Association, said 200 franchise dealers had shut down due to the economic crisis, as well as about 400 independent dealers and used-car outlets .
He said no dealer had gone belly-up recently, adding that there was "light at the end of the tunnel".
As there were fewer dealers, Pretorius said volume throughput per dealer was now in the vicinity of 20 per month. At the height of the economic crisis, volume throughput per dealer stood at about 16. In 2006, before new vehicle sales started their precipitous descent, volume throughput per dealer hovered around an average of 30.
"Inventory levels have normalised and cost structure is aligned to lower sales levels," Pretorius said of McCarthy's efforts to align operations, working capital and costs in line with lower sales volumes.
For the year to October, new vehicle sales have declined 28,8% to 330547. The downward cycle in new vehicle sales started in June 2006.
Pretorius said the used-car market was strong and profit margins were getting better, helping shore up dealers. Parts and after-sales business, he said, increased markedly as demand rose when companies and private consumers extended the replacement cycle.
Osborne warned that some imponderables could delay the recovery in retail motor sales, citing rising oil prices, Eskom's electricity hikes, banks' tight lending criteria and an increase in new car prices.
Both Osborne and Pretorius said they expected a meaningful recovery in new retail car sales next year.
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