Under Pressure

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The South African car rental industry is under pressure, with all the major players having to innovate and reinvent themselves, just to stay relevant. But, it’s not all doom and gloom. Zion Research recently released a new report with the rather wordy title of “Car Rental (Luxury Cars, Executive Cars, Economy Cars, SUV Cars, and MUV Cars) Market for Local Usage, Airport Transport, Outstation, and Other End-users: Global Industry Perspective, Comprehensive Analysis, and Forecast, 2014-2020.” According to the report, the global car rental market was valued at approximately $41.50 billion in 2014 and is expected to reach $90 billion in 2020. Here in Africa it is big business too, although the industry is increasingly finding itself under pressure, leading to a rise in prices and some interesting brand representation changes. Early-2015 saw Bidvest announce that it would no longer represent the Budget Car Rental brand in the South African market, with Avis Southern Africa granted the brand representation and the opportunity to align itself with its principal. Whilst that appears to have worked for Avis Budget, it has created a new player in the South African market, which is already under strain. “The competitiveness of the market has put significant pressure on price increases over the past five years and prices, in general, have not kept up with inflationary increases,” says Martin Lydall, Chief Commercial Officer at Europcar. The consensus appears to be that price increases in the South African market are inevitable. “Since 2010, the average compounded increase has been 5%, and this is not sustainable,” says Paulette McGhee, CEO of Bidvest Car Rental, the new player in the South African market. Her competitors would appear to agree, with Avis Budget South Africa CEO Rainer Gottschick putting the situation into perspective with an interesting corporate travel market comparison. “If you go back 10-15 years, Group B, Group C car rental used to be the same as a 3-star hotel,” he says. “Today, that hotel is costing you R900 ($57) a night, whereas the car rental is only R300 ($19).” In fact, says Lance Smith, Executive Sales Manager for Avis Budget, “once we adjust for inflation, the rates have actually fallen.” The industry seems to find itself in a position whereby it can no longer continue to absorb all the costs associated with running a viable car rental business. “The (Rand-Dollar) exchange rate is putting pressure on the motor manufacturers and we’ve already seen some of them increase their general retail prices,” says Gottschick. “It’s inevitable that car rental prices have to go up. In the last 12 months rates have gone up 1% only, which is not sustainable.” All of which adds up to a challenging environment in which to operate, never mind turn a decent profit. “Interest rates and vehicle costs directly impact us, and both these factors will heavily influence our pricing,” says McGhee. “The market can expect to see double digit increases as a result.” According to Hertz, the South African car rental industry hasn’t been helped by onerous government legislation, which has had a material impact on bottom line. “We all, as car rental companies, have had to comply with e-tolls and pay in advance, which has placed huge strain on our resources and cash flow,” says Sherl Camera, General Manager, Business Development at Hertz Rent a Car. “Of great concern to us is the collection of monies from our customers, as well as the additional gantries that increase our risk and exposure.” And the South African government is not stopping there. Finance Minister Pravin Gordhan announced a 30 cents per litre fuel levy increase in his February budget speech, along with the introduction of a tyre levy of R2.30 ($0.15) per kilogram of tyre, and an increase in the motor emissions tax rate from R90 ($6) to R100 ($6.5) for every gram of emissions/km above a certain rate for passenger vehicles, and from R125 ($8) to R140 ($9) for double cabs. “We have to find smarter, more efficient ways of working,” says Gottschick. “But in the long run, you can’t save yourself rich.” That means improved efficiencies and a complete re-look regarding what the offering is. According to Europcar, that means careful planning based on demand forecasting and constant improvements in technology, service and quality standards. For Hertz, they believe their competitive edge revolves around quality of service and incremental revenue through value-add products and services. “At Avis we use lean Six Sigma methodology with our performance excellence teams to reduce waste in our processes and to ensure that we maintain the lowest cost position,” says Smith. “We all offer similar products according to market demands,” says McGhee, “but it is when you are willing to interact with your customer to find what they may or may not need that you are able to offer a service that supports and not one that restricts.” Whichever way you look at it, the South African car rental industry is under pressure. CAR-SHARING When the global financial crisis hit in 2008, there were many spin-offs and changes in consumer behaviour. One segment of the global population affected was the employable youth, with many youngsters left without employment as a result of the bleak financial picture. What this market segment did have, however, was university degrees and access to technology. Instead of finding full-time employment, they cobbled together an income from various part-time jobs and hobbies. With a lack of financial stability, these youngsters were unable, and often unwilling, to sink themselves into debt with bank loans. “It’s not just houses. Millennials have been reluctant to buy items such as cars, music and luxury goods,” says author and economist Jeremy Rifkin in a Goldman Sachs Global Investment Research report. “Instead, they’re turning to a new set of services that provide access to products without the burdens of ownership.” Those who have purchased property or a vehicle are more than willing, however, to maximise that ownership and make a little money back by renting out those ‘assets’. Enter online portals such as Airbnb and Zipcar. These models are taking off, despite staunch resistance from city councils and traditional operators in developed countries such as the United States, where crime is less of an issue, insurance is affordable, and access to vehicles isn’t often a daily necessity. Often, public transport in large American cities meets the needs of the majority. Avis believes that car-sharing is a global trend that will change the way in which its customers consume products and services. In early 2013 Avis purchased Zipcar, which hires vehicles out by the hour, for $500 million. “Zipcar has more than a million members that is growing across the globe,” says Smith. “I have no doubt that this need will continue to grow.” With the state of public transport in South Africa, it is still a goal of many to own a car, regardless of make and model. “Owning a vehicle is still a dominant transportation option for South Africans in the relevant LSM brackets,” agrees Lydall. Crime is a major concern in the country and insurance products for a car-sharing society are few and far between. The cost of car ownership can also be prohibitive, and the hassles of maintaining a vehicle can be overwhelming or simply annoying. That being said, not everyone agrees on the potential of car-sharing taking off in South Africa. “We don’t believe that a sharing network is going to overtake vehicle ownership any time soon,” says Camera. “Car-sharing is a long way off in Africa.” “We are seeing this slowly penetrate the South African market and we anticipate on-demand and sharing to become a bigger part of daily life over time,” says Lydall. “However, a number of factors such as our socio-economic and legislative environments need to be considered. Much will need to be done in terms of access, infrastructure, security, demand and pricing in order for this to become mainstream behaviour. Camera believes that individuals are not necessarily moving away from car ownership, but that the method used to acquire that car could be very different. “It could be rental, it could be lease, it could be Hertz’s 30Thirty Plus product for example, where customers can rent for 30 days or more at a  reduced rate,” she says. THE UBER EFFECT As with everything in the modern age, innovation is key to survival, and the car rental industry is no different, particularly due to the pressure it finds itself under. But that becomes even more critical when some of the world’s leading innovators are operating in your space. Here we are talking about Uber and how they’ve shaken up the taxi and car rental industries. Gottschick has an interesting take. “Yes, there are disrupters,” he says. “But in the long-term, something like Uber is actually going to complement car rental.One thing an Uber-type model is doing globally is moving people away from owning a car.” “On short trips, Uber is cheaper as a transfer service. But when you start using those services for four straight days, it ends up being cheaper to rent a car. We haven’t really seen any losses in the corporate market. Our point-to-point business is more a pre-booked service, whereas Uber is on-demand.” With easy access to cheaper transport, would customers not opt for an on-demand serviceinstead of tying themselves to a vehicle and the costs involved in hiring one? “We don’t perceive Uber as a threat,” says Camera. “It’s rather like comparing a taxi to a VIP service. At Hertz, we offer a personalised and niche transfer service to our customer base with the rate quoted and accepted by the customer upfront.” Europcar sees Uber as symbiotic opportunity and has an existing relationship with the online portal, offering its vehicles for rental and utilisation by registered Uber drivers. Uber is operational in a number of African countries, including South Africa, Kenya and Nigeria, and the biggest worry for its drivers does not come from car rental companies. Traditional taxi operators are the ones taking umbrage at the service. In Kenya and South Africa, unhappiness has turned violent as drivers of metred taxis vent their frustrations at the business they’re losing to the cheaper service provider. Change, though, is inevitable, and the car rental industry is certainly headed for some interesting times. OTHER CAR RENTAL TECHNOLOGY What about driver-less cars? “I believe it to be inevitable,” says car rental analyst Neil Abrams. “Autonomous vehicles are on the horizon and in the next several years.” Car rental companies are also upping the ante with their apps. In the United States, Avis, in late-2015, became the first car rental company to launch an app for the Apple Watch. It lets you email yourself a car rental receipt and retrieve car rental reservations right from your wrist. The company also upgraded its Android app to allow consumers to make reservations by voice. And Audi surprised observers by introducing an app that allows “on demand” direct bookings that bypass the car rental agency entirely. New technologies can also monitor the car. Record360, an app that tracks vehicle damage before, during, and after your rental, promises you won’t get stuck with a ‘bogus’ car rental bill. Another product, DropTag Drive, a sensor that keeps tabs on your rental like a black box, can help determine what happened to a car in case of an accident. Industry observers expect these gadgets to be more widely deployed in 2016 and beyond. Car manufacturers are slowly coming around to the digital age, with better adoption of Android Auto and Apple’s CarPlay, and the idea of a more connected vehicle, where your smartphone is interfacing with the vehicle at a deeper level, is just starting to become a reality for car rental customers. But do customers really want all of these new gizmos? They might. For example, an app that tracks car rental damage can exonerate a customer who didn’t damage a car, saving thousands of rands or dollars in unnecessary damage claims. But drivers don’t usually ask for something like that until they see a questionable claim. IN-CAR WI-FI As the world makes more online connections, wi-fi has become an integral part of daily life. Being connected while on the move is important to both business and leisure traveller. “However, in-car wi-fi relies on car features which are generally not available in the lower end vehicles on car rental fleets,” says Martin Lydall, Chief Commercial Officer at Europcar. “It will potentially become more of a requirement as additional features are added to these vehicles in the medium-term.” To help meet the needs of its customers, Europcar has introduced a data-on-the-go product. “These days everyone has access to an internet-connected mobile device,” says Sherl Camera, General Manager, Business Development at Hertz Rent a Car. “What is proving very popular with our clients is the free wi-fi service that we’ve piloted at our Cape Town International and O.R. Tambo International Airport locations. “It’s a need we identified to assist customers in terms of efficient time management when queueing for example, and is part of our strategy to provide tangible value-adds wherever possible.” It’s a simple sign-up process to access the internet in Hertz hotspots and returning customers need only to sign in for access. PAYING BY THE MINUTE A car rental firm that allows customers to pay by the minute has launched in Dubai. UDrive claims its system is more convenient and economical than conventional car hire firms. It charges 50 fils ($0.14) per minute, or if you exceed four hours then a flat rate of Dhs120 ($33) applies for the whole day. “Our concept aims to be cost- efficient as well as offering clients ease of use,” says founder Hasib Khan. “One can find our cars at a location that’s convenient to them, and then simply drive off. With petrol and insurance included in the price, and most public parking fees covered, it couldn’t be simpler, and there’s no hidden charges.” Keyless access through a mobile phone app enables the user to find the car in any car park. “The app has a map showing you all the cars dotted around Dubai in different areas – it could be on the side of the road in a parking space or in a car park, pretty much anywhere. You use the same app to unlock the car by entering a code unique to you. It then opens the car, you get in, open the glove box and take the key console, enter this passcode again and it gives you the key.” Once finished, the user can leave the car parked at their destination for the next driver to use. Moreover, UDrive cars come with free petrol and there’s also a replacement service if the vehicle breaks down. Khan believes that there is a gap in the market for a pay-by- minute rent a car. “The concept is different to regular rent a car services, as you can pick up the car in a shop, for location convenient to you and drop it off anywhere – there’s no need to take it to a specific rent-a-car shop, for example.”