At a time when the auto industry has been hit by high interest rates, rising inflation and reduced margins, Reliance Retail Ltd is expanding its fledgling used cars business and has started scouting for land.
Second run: A Maruti True Value showroom in New Delhi. Experts say the entry of more organized players could, in the long run, lead to healthy growth in used-car retail.
The Mukesh Ambani-controlled company launched its first used-car store, Reliance AutoZone, in January in Jamnagar city, Gujarat, where its parent Reliance Industries Ltd has a petroleum refinery.
“We are now looking at possible sites in Maharashtra and the NCR (national capital region) to open stores in the next three months,” said a Reliance official, who did not want to be identified. A questionnaire sent to the company on Friday was not answered.
The company has started testing the waters in and around Mumbai, but is yet to open a store in the city. It first tested its business model on its employees at the Reliance Corporate Park in Navi Mumbai before selling used cars in makeshift centres elsewhere.
The business model, which Reliance hopes will set it apart from competitors, will see AutoZone selling accessories and parts besides used cars, and providing repair and servicing facilities as well.
With AutoZone, Reliance joins a list of vehicle makers such as Maruti Suzuki India Ltd, Honda Siel Cars India Ltd, Hyundai Motor India Ltd, Ford India Pvt. Ltd and Mahindra and Mahindra Ltd that run used-car operations as well, attracted by higher margins in the segment.
The used-car market was estimated to be about 10% more than that of new cars in fiscal 2007, according to projections by Maruti’s TrueValue and Honda’s Auto Terrace used- car divisions. Indians, flush with rising salaries in a fast growing economy, bought 1.4 million new cars last year.
But, the sheen in the used- car space has started to wear off. According to industry estimates, with more players entering the business, margins have narrowed to about 10% from 20% seven years ago.
Also, the Union Budget for 2008-09 cut excise duty on small cars by 4%, leading to a further decline in used car prices.
“If they’re (Reliance) looking to make profits, it’s going to take a while,” said Aarif Fazulbhoy, director of Fazulbhoy Motors Pvt. Ltd, a private player that sells about 100 used cars every month. “Margins on used cars are expected to come down to the levels of margins in the new cars space over the next three years.”
The margins for new cars are in the range of 1-2%.
Some players in the market warn that it’s not going to be a walk in the park for Reliance, as it will be a challenge to source reasonably good used cars at the right price as well as spares to refurbish these cars.
“A non-car making entity will have trouble getting spare parts to refurbish the vehicles,” said Sunil Gambhir, head, Auto Terrace.
Reliance AutoZone joins Mahindra First Choice Ltd, started by the Mahindra group, as the only second organized used-car retailer to offer all brands under its roof, and the first non-car manufacturer to enter the business in the organized space.
Organized players such as these make up a mere 13-14% of the entire used-car retailer market. The rest is dominated by private firms such as Fazulbhoy Motors and smaller outfits that likely sell just five cars a month.
Some market experts say the entry of more organized players could, in the long run, lead to a healthy growth in used cars retail. As the market becomes more organized, consumers will benefit from a wider choice of certified used cars at better prices.
“We expect a CAGR (compounded annual growth rate) of 20-22% by 2011-12,” said Ravi Bhatia, chief general manager of sales support at Maruti’s TrueValue division, the biggest organized used-car seller in the country.
Reliance Autozone chief executive Arun Dey had said in January that the firm plans to open up to 400 stores nationwide in three-four years.
In Jamnagar, Reliance AutoZone offers services for cars and bikes and also sells tyres, batteries and a wide range of automotive accessories. The facility is spread over 15,000 sq. ft and is located adjacent to Reliance Mart, the company’s hypermarket.
The store offers a warranty of six months to a year, and three free services on used cars, much as Maruti’s TrueValue does.