Fuel price hike bad news for vehicle dealerships and consumers

Kelston Motor Group operations director Peter McNaughton says the fuel price hike is bad news for dealerships and consumers.

Apart from an immediate shock to the system, today’s fuel price hike of R2.43 per litre for 95 octane petrol at the coast is bad news for both motor vehicle dealerships and potential buyers in the medium to long term.

Kelston Motor Group operations director Peter McNaughton, who is based in Gqeberha, said dealership sustainability was already under “immense pressure” due to stock constraints that reduce income potential.

“With things like fuel costs climbing we are seeing a trend of increasing expenses being matched with a reduction in income – certainly from a dealership perspective.

“The effects of these increases and resulting inflationary pressures, compounded by other factors, will reduce consumers’ ability to replace their vehicles and therefore we will see a decrease in demand.”

Although increased running expenses might stimulate sales of more economic models, he said history had shown that it was not enough to offset the reduction in demand.

McNaughton – who oversees 21 dealerships in the passenger, light commercial and luxury vehicle markets across the Eastern Province and Border regions – expected new stock pipelines to improve in the months ahead, which could see prices being adapted downwards due to increased supply.

“That being said, the worldwide inflationary pressure being driven by a multitude of reasons, one of which being the higher oil price, will definitely result in higher prices on vehicles going forward.”

He warned that rising fuel costs had a secondary effect on interest rates, which might further curtail demand.

“It inflates monthly instalments if vehicles are financed and this increased cost of ownership reduces the appetite of consumers.

“We do however often see a trend of consumers ‘buying down’ when they can no longer afford the instalments of their more expensive vehicles.”

This could only work when there was positive equity in a vehicle, he explained.

“The unit must be worth more than what is left to pay the bank otherwise the consumer would need to pay the shortfall.

“With the increase in value of used vehicles post-Covid, this could be a good way for consumers to reduce their monthly expenses as interest rates climb.”

McNaughton believed that dealerships might be forced to offer better trade-in assistance to increase affordability but this was dependent on the availability of new and used stock.

“Obviously, without stock to sell, there is a reduction in volume earnings and neither the manufacturer nor the dealership can afford any form of assistance.

“Used volumes are negatively impacted by a lack of new vehicle supply as trade-ins dry up,” he explained. “If stock volumes improve, I do believe there will be trade-in assistance where possible.”

As diesel was a key input cost for farmers, he predicted the increase of R1.10 per litre across the board would create upward pressure on agricultural produce prices as the “majority of farmers are price takers in South Africa and unable to pass these costs on”.

It was tough to be positive in the current environment, admitted McNaughton, but one had to consider that inflation for South Africans was not something new.

“In 2008, it was well over 10 per cent. I do think that if you compare our inflationary numbers against places like the USA and UK, we can be proud of what the Reserve Bank has done thus far.

“A major plus was being upgraded to a positive outlook by Standard and Poors recently. If they are seeing good things coming, perhaps we should be doing the same.”