IBEF: September 09, 2019
In a first for a passenger vehicle maker in the country, Maruti Suzuki India (MSIL) will soon start leasing nearly 100 outlets for showrooms and workshops to its principal dealers, based on a lottery system.
In the past few years, the carmaker has acquired land parcels to build showrooms as part of its strategy to expand its reach in rural and semi-urban markets and deploy the surplus cash on its books, said a top official at the company. At the end of 2018-19, Maruti had cash and equivalents worth Rs 37,668 crore (US$ 5.38 billion).
"The construction of these facilities has already started, and we'll begin the allotment sometime next financial year,"Kenichi Ayukawa, managing director and chief executive officer, MSIL, told Business Standard.
The size of these showrooms is expected to be anywhere between 3,000 square feet (sq. ft) and 5,000 sq. ft, which is much smaller than the regular showrooms that are spread over 25,000-30,000 sq. ft. The venture is being executed by the firm's real estate division.
While most of these new showrooms will retail mass market cars sold under the Arena-branded sales channel, some will also retail premium cars under Nexa, said Ayukawa. The company has been working on expanding Nexa’s reach to rural and semi-urban pockets through small-format stores to make premium cars (those priced above Rs 6 lakh) such as the Baleno and Ciaz more accessible.
"We have been somewhat slow with the Nexa expansion," said Ayukawa, adding this had been largely due to the current slowdown in the car market, which, in turn, has hit dealers' viability. At present, Nexa is present in over 200 cities and has more than 360 outlets.
As on September 1, 2019, the company sells its vehicles through 2,989 dealerships (Arena, Nexa, and commercial) across 1,896 towns and cities.
The groundwork for the new venture began almost five years ago when Maruti started identifying land parcels it could acquire to set up dealerships, said a source familiar with the company’s plans. The leasing business is expected to make Maruti's partnership with its dealers more viable amidst rising real estate costs and a prolonged downturn in the country's passenger vehicle market.
Passenger vehicle sales in India have been declining for over a year now. It plunged to the lowest in two decades in July as buyers postponed purchase in a slowing economy. Maruti's real estate leasing business is taking off at a time when two new players — MG Motor and Kia Motors — have entered the competitive passenger vehicle market with very different retail strategies.
While Kia has started its India innings with 300 dealer outlets, MG has chosen to have one dealer in each city. Mitul Shah, vice-president-research at Reliance Securities, said though the leasing business may not lead to high returns on investment for Maruti, it's a unique strategy and gives the company an edge amidst increasing competition and high operating costs that dealers are faced with. "It will help the company maintain its lead," said Shah.
Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.