Rental supply investigated
19 August 2014
Over the past few years many of the large car manufacturers have publicly declared they have cut back on business with daily rental companies.
Interviews and conversations with directors at major brands have time and again referenced 'true fleet sales' and 'reducing fast-turn business', all in the name of stronger residual values, which should help fleets secure better lease rates as well as enable better finance offers for retail customers.
Vauxhall is typical of this trend. A year ago it claimed it had reduced the number of "no money" cars (manufacturer speak for daily rental buy-back vehicles) it registered by 30,000. And speaking only two months ago, Vauxhall's new managing director Tim Tozer said: "We will be number one in retail sales, but not at any price. We are an ambitious company in the market, but we are not going to go mad - we will get there with natural growth and we've got the backing of GM to do that."
Vauxhall's fleet marketing manager Paul Adler added: "All our short-cycle activity has been flat since 2012 in order to take a longer-term view of our residual values, and that's the volume that's been static and not the percentage of the market.
"We've taken a much more scientific approach both to in-fleeting and de-fleeting and the residual value position has strengthened as a result."
Ford, the UK's largest seller, offered similar comments at the Geneva motor show earlier this year. Managing director Mark Ovenden said: "Retail is what we want to grow and we want to reduce short-cycle and increase longer-cycle business. We do like rental, it's part of the mix, but we keep it at a level and that level is ideally about 15% market share. If we do a higher share then there's a downward pressure on residual values."
Meanwhile, Volkswagen's Robert Hazelwood said: "We've been focusing on true fleet and retail sales. Last year we were 6% [11,000 units] up, but we put 22,000 more cars through our dealer network."
He added that VW had done no daily rental business in February.
And it seems the brands are being honest, according to RV expert Cap's senior editor for Gold Book Dylan Setterfield.
"Manufacturers are broadly telling the truth about cutting back on short-cycle volumes. It started in 2008 when the economy changed," he says.
"Manufacturers changed the metrics against which they measured themselves or were targeted by European headquarters. So, rather than chasing volume, they changed to measuring profit per unit, or at least a mix of volume and profit per unit.
"In March this year there was, however, quite a bit of daily rental volume. Some of this was expected. For example, Fiat consciously did more daily rental volume and this is because it has changed its remarketing strategy to handle this volume, so it makes sense to increase volumes.
"March is generally a good time to do daily rental because the high retail volume means it's a lower percentage of total and because a typical eight-month daily rental contract means the cars come back ready for the January market, when there is demand.
"However, supply has been down and the daily rental firms have been starved of volume in recent years. Most counter this by holding on to cars for longer, which is fine if they've bought the cars, but means renegotiating if the cars are on a buy-back scheme from the car maker."
Commenting on the resale values for cars up to a year old, Setterfield adds: "The devil is in the detail. Where we used to produce a steady residual value curve for cars, this doesn't necessarily hold true because it can vary right down to model derivatives. There could be a blip at the one-year point for certain sectors or certain models.
Despite the claims by many manufacturers about cutting back on supply to the daily rental sector, backed up by Cap, the BVRLA's chief executive Gerry Keaney played down supply issues.
"The rental sector plays a vital role in the automotive industry, providing manufacturers with an essential means of recycling quality nearly new vehicles into the used market and providing potential customers with an extended test drive of their latest models," he says. "Our members are not reporting any difficulties in sourcing vehicles from manufacturers, nor are there any indications to suggest that rental companies are extending the life cycles of rental cars. Our latest member statistics show that BVRLA members had 240,000 rental cars on fleet at the end of 2013 - a 23% increase on 2012."
Neil Cunningham, Hertz general manager, believes the rental industry is a reliable source of registrations for manufacturers - even if it's low margin. He also admits that the length of time on fleet has increased in recent years for rental companies.
"The rental industry has two choices. You can either buy 200,000 cars a year or buy 100,000 cars a year and double the life of the holding period.
"If you go back three or fours years when manufacturers didn't have the cars to sell then you did find rental companies lengthening the life of the fleet, which you can do if you buy on risk, which we do and Enterprise does too. But if you're a buy-back company, if you're relying on buy-backs, then you can't age them unless a manufacturer agrees to age them. As the volume has gone down, the manufacturers just lengthened the buy-back period.
"Come to last year, it has got a bit tougher. That constraint isn't necessarily a bad thing because the more vehicles that go into the short-cycles market then the more uncertain the RVs are. So constraint isn't necessarily a bad thing for us and it forces us to consider high-yield business versus low-yield business. On the basis that in this world there are never unlimited resources, if you have got limited funding, a limited number of vehicles, you've got to cut your cloth and decide which ones you're going to deal with and which ones you're not going to deal with. So having a limited supply of vehicles is not necessarily a bad thing."
However, Cunningham claims things are improving this year and Hertz is expanding. He also believes that in certain circumstances manufacturers still rely on daily rental companies: "If it's not a very desirable product and they can't sell it, you know who they turn to. You can't go to leasing companies because it's user chooser and no one wants to drive it for three years.
So you go to a rental company and hope like hell it does better on the used market than on the new market, then flush it through six months later. And you do have that. 95% of our fleet are lovely, very desirable cars; 5% of our cars are cars nobody else wants to buy. They can work in rental - one-day or two-day rental - because they're badly thought-through cars.
"It's fascinating over the years how [the type of cars has shifted] for rental companies. You can really irritate your corporate customers if you have a fleet of old cars because they expect them to be under six months or under eight months and you do the same with cars that are tinny or not desirable.
"I think three years ago, through the toughest part of the recession, corporates were very understanding that rental companies were going to do them an older car and probably of a lower spec, higher mileage, in a sense to drive down cost because they in turn weren't seeing rate increases.
"I think it has started to turn slightly now where the corporates are starting to get slightly more
fussy as we come through the recovery. Through the recession a lot of corporates would extend their three-year lease into a roll-on one because of the uncertainty.
"But the leasing companies are having a really good time now, as they're cycling the cars on their anniversary rather than extending them, [and] with all of that people are expecting it to be a similar vehicle of a certain age. I think expectation is on the way up again. They're not expecting to get a three-year-old tinny thing.
"Equally, around service - [while] they can understand why you might have a cheaper car, older car, higher-mileage car, they're much more demanding about their interaction with the staff, just in terms of being civil, being polite, so we spend a lot of time training our people and measuring staff courtesy."