Car-buyers’ shift squeezes Jetcon’s margin
Published:Sunday | September 4, 2022 | 12:07 AMNeville Graham - Business Reporter
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Buffeted by inflation and higher loan costs, car buyers are moving away from sport utility vehicles (SUVs) and even mid-level sedans to cheaper models. However, the lower sale prices and higher costs incurred to supply these cheaper cars are...
Buffeted by inflation and higher loan costs, car buyers are moving away from sport utility vehicles (SUVs) and even mid-level sedans to cheaper models. However, the lower sale prices and higher costs incurred to supply these cheaper cars are squeezing margins at listed used-car dealer Jetcon. For the second quarter ended June 2022, net profit was down 21 per cent to $4.2 million from $5.2 million for the corresponding three months last year.
Despite this, six-months profit shot up 140 per cent to $14 million, the clearest sign yet that amid tightening market dynamics, at year-end the car seller could still surpass its 2021 full year profit of $16 million.
Jetcon’s half-year revenue was also up 23 per cent to $506 million from $410 million in the first six months of 2021. Revenue for the quarter improved by 21 per cent, to $252 million, compared to the similar period in 2021, but cost of sales rose faster to put a damper on the second-quarter profits.
Andrew Jackson, the company’s managing director said there has been a slump in sales of higher end vehicles such as SUVs and mid-level sedans like the Toyota Corolla and Subaru models. Instead, customers are said to be going for the more basic Toyota Probox and Nissan AD. A 2016 Nissan AD Wagon, sold at just below $1 million is half the price of a 2016 Toyota Corolla, which fetches $2 million.
SHIFTED FOCUS
“We’ve shifted focus to the lower end vehicles, which, naturally, carry a lower margin, but we’ve been doing a lot of volumes in those segments,” Jackson told the Financial Gleaner.
“It’s part of a strategy to keep volumes up by cutting margins. We’ve been focusing on lower-priced vehicles, which in themselves carry a lower margin,” according to Jackson.
The move to the lower end of the market carries additional costs for the business. In addition to discounts, margins are further squeezed by the preparation that goes into making these preferred pre-owned vehicles ready for the market. This includes oil change and servicing, paint touch-up, scratch removal, and repairing torn seats.
“Some of them were commercial vehicles, and as such, they come with the scratches, and so on, that need to be repaired,” Jackson said.
The increased operating costs led to cost of sales for the second quarter outpacing the increase in revenue. Jackson expects the margin squeeze to continue in what he described as the tough and competitive used car market. Still, he is going after higher volumes, which he deems more sustainable.
“We’re back up to the 2019, pre-COVID-19 levels in terms of volumes. True, it costs more to deliver these cars to customers, but it is important to keep the units moving off our lot into the hands of satisfied customers,” Jackson noted.