Russian car dealers’ optimism backfires

Today’s Kommersant reports on Russian car dealers’ woes as a consequence of their optimistic sales expectations for 2012. Some of the Russian car dealers had unexplicably high expectations for 2012 and were unpleasantly surprised when the demand started to drop in the 3rd quarter of 2012. According to one of the sources, the volume of cars that remain on stock could correspond to two or three months of sales, and for some less fortunate brands the stock could be even higher – up to six months’ worth of sales. Such a development could prompt the car manufacturers to reduce their quotas for Russia in 2013, cut respective marketing budgets and charge interest on the value of unsold vehicles.

Some industry sources state another reason for disappointing sales in the second half of 2012: the requirement imposed on the dealers to import a mix of vehicles, usually consisting of 30 percent of highly marketable vehicles, 40 percent of vehicles that are in medium demand and another 30 percent of vehicles with low marketability (the source doesn’t define the criteria for determining the marketability of a vehicle). When ordering additional highly marketable vehicles, a dealer is forced to import a corresponding volume of less desirable vehicles, which eventually formed the largest part of the unsold stock. While larger dealers managed to balance their stock and partially compensate for the lower-than-expected sales in the second half of the year, smaller dealers were unable to do so and were stuck with vehicles in lower demand. In addition, the bonuses paid out by the manufacturers motivated some dealers to fulfill their quarterly plans regardless of the conditions on the market. Such bonuses usually amount to around 3 percent of total sales, which is not insignificant when compared to average dealer margins of 5-7 percent.

According to the Association of European Businesses in Russia, the Russian car market remained flat in November, with 240.3 thousand vehicles sold. November was preceded by two consecutive months of decreasing growth rates (September with 10 percent and October with a 5 percent growth rate). Sales of some foreign brands in November 2012 were noticeably, if not dramatically, lower compared to the same month a year ago: Suzuki sales fell by 33 percent on a year-on-year basis, Nissan by 27 percent, Mitsubishi and Mazda by 25 percent, Volvo by 21 percent, Peugeot by 18 percent. Some brands were helped by strong sales in the first half of the year and managed to register growth in the period from January-November 2012 (Nissan, Hyundai, Mazda, Renault). On the other hand, Suzuki and Mitsubishi sales dropped by eight and one percent in the same period, respectively, despite their solid performances in the beginning of 2012.  

It is of utmost importance for the dealers to realize their sales targets for 2012, as their performance determines the volumes that the manufacturers will allocate for next year. Failure to fulfill forecasted sales will result in financial damages to the dealers’ businesses, as the manufacturers supply most of the vehicles on a 45-60 day credit without interest; however, after the expiry of the grace period, these supplier loans begin to accrue interest. Manufacturers’ participation in marketing budgets, usually amounting to 50 percent, could also be reduced as a result of slower sales at the end of 2012. Problems for the dealers won’t end with the New Year: while experts agree that there will be no major changes in the market in the first half of 2013, the dealers already reduced their targets for the next year, which could even lead to shortages in the second quarter of 2013.

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