Fleet News

Rental pull-back a ‘fundamental error’

A POLICY of pulling back from fast-churn daily rental business among manufacturers could be a fundamental error that harms residual values.

That is the claim of industry experts who believe massive discounting to retail customers is doing more harm to car prices on the used car market than a bulk deal with a rental company ever could.

Recent months have seen a number of car makers announce they are moving away from supplying both fleet and daily rental markets in a bid to improve margins and still meet sales targets.

But at the same time, they are retaining aggressive sales targets to keep their market share.

The result, according to Alliance Asset Management managing director Jeremy Lavallin, is that manufacturers are offering ever-larger discounts to private buyers, wiping out profits and damaging vehicle values more than if they had retained their volume business.

He said: ‘Recently, a number of vehicle manufacturers have opted to concentrate on retail rather than fleet sales in a bid to improve profitability. But to move the vehicles in the private market they have had to offer considerable cashback and bonus schemes through their retail networks.

‘The effect of this has been to almost immediately reduce the residual value of the vehicle by at least the value of the cashback and in some cases more, which creates an immediate negative impact on the rental industry, with a corresponding knock-on effect in the leasing market.

‘The result of this uncertainty over residual values in the industry has been to drive up holding costs and squeeze margins still tighter. This is not the best way forward.’

Lavallin called for manufacturers to consider using alternative remarketing methods instead of turning their back on rental contracts.

St Neots-based Alliance Asset Management specialises in renting new vehicles to the independent daily rental sector and to the majority of international daily rental companies in the UK.

Formed in 1997, it currently purchases and de-fleets about 20,000 vehicles a year. Lavallin said: ‘Using a regional disposal route through both auctions and dealers, and identifying which cars sell best in which locality, has to be a better approach than throwing money at the market in the way we have witnessed recently with some of the manufacturers’ retail campaigns.’

The company isn’t alone in its view that fast-cycle business is not bad for residual values if it is handled effectively.

Experts from remarketing giant Manheim Europe agree.

Richard Hill, manufacturer director at Manheim Europe, said manufacturers wrongly assumed to a degree that marketing activity in the retail sector was not linked to normal residual value evaluations and there was no connection made in the markets.

He said: ‘The people who set residual values and businesses that depend upon accurate evaluations have a very well-rounded view on the market supply, manufacturer issues and buyer confidence.

‘Many finance companies own or have very strong ties with dealers and are therefore aware of the issues of individual manufacturers and able to set RVs accordingly. There is absolutely no problem in feeding the daily rental market with fast cycle business in my opinion, if the manufacturers have an effective remarketing strategy in place.’

The key is what you mean by effective, he argues.

In these circumstances, it is the ability to offer vehicles through multiple disposal channels efficiently and to link this to support for dealers in retail marketing, he added.

A spokesman for the Society of Motor Manufacturers and Traders said: ‘The reality is that cash-backs, discounts and other incentives for private buyers are just part and parcel of a very competitive new car market. Control and protectionism, on the other hand, tend to reflect less well on the industry and the Office of Fair Trading would come down like a ton of bricks on any party that moved to prevent consumers getting a better deal on their new car.’

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