Nissan cars once again topped the regional sales charts. That the brand was able to do this in Lebanon was down to the energy of local agent Rymco, which achieved its projected annual sales targets despite the destruction wrought by the month-long summer war that wiped out a vitally important tourist season. Rymco’s CEO Abdu Sweidan recalls a challenging year, how he snatched retail victory from the jaws of defeat and explains what drives the Lebanese car buyer.
E How would you describe the major rhythms or trends that drive the Lebanese car market?
Whenever you want to talk about the Lebanese market specifically, you have to identify two major segments: B2C, or business-to-consumers, and B2B—that is business-to-business. The size of these two segments is very interesting. B2C is constant and has been constant for the past 5-6 years. B2B is the segment that varies. If the season is booming, and the country is comfortable, then B2B business grows and takes the total demand for new cars with it. If the tourist industry is slow, and corporate business is down, then demand from car rental companies and fleet operators diminishes, thus reducing the total volume of demand in Lebanon.
E So what has the industry looked like over the past few years?
In 2004, we witnessed a peak in total demand for new cars in Lebanon, hitting the 20,000 unit mark for both consumer and commercial sales. In the years prior to that—2003, 2002, 2001 and 1999—we saw record lows, especially in 2001 and 2002, when annual sales were 14,000 cars in total. But since 1999 we have seen many humps and dips: anyone in an industry like this should be extremely cautious about forecasting or planning for the next year, because when you talk about 20-25% variances in product demand in any industry—if you are trading in shirts and cottons and undershirts, it’s scary enough, what if you are dealing with the car industry where 20-25% variance translates into from 5,000-6,000 cars a year? This is potentially catastrophic.
E Planning and predicting is life or death?
All car dealers have to watch their planning processes, because unlike any other industry, we have to plan our sales and productions one year in advance, and in some instances, two years in advance. And all our quotas have to be filled, we have to buy all the cars that we order irrespective of whether the market can sell them or not. This creates heavy pressure. We have to ask ourselves, ‘Are we going to sell them? Is the country going to be safe enough in three or four or six months or next year to be able to absorb this new model?’ The scariest part is really planning and inventory management, not exceeding the ratios that are acceptable in best business practices, which allow you to have inventory from 2-3 months—but that is highly subject to continuous sales. If you have interruptions, then your inventory piles up month after month.
E Is that what happened in Lebanon in recent years?
In the last two years, we witnessed two major hits: in 2005, we had the assassination of the late Prime Minister Rafik Hariri and the 14 explosions and the six assassinations that followed. From February to November, we were subject to vibrant—in the bad sense, not in the good sense—political instability that affected the sales rotation. So we were all—car dealers, as an industry—we were all affected by a high level of inventories that stockpiled because the sales rotation of the period did not match our forecasts. Again, our cars, our inflow, come to us irrespective of whether the country can absorb them or not. So we have to find markets, and secondary markets. Then of course we had the war in 2006, and all of the instability that followed. If you add the two years together, I can tell you that in the past 24 months, we saw no more than six to seven months of stability and they fell in the first and second quarter of 2006, the only stable period in the last two years.
E Did we perform in that period?
Funnily enough, yes. This non-event period saw the best two quarters ever for us here personally, at Rymco, and for the industry in general. The total market demand for the first six months of 2006 was around 10,000 units, so we heading for the 20,000 unit cycle again and heading for a peak.
E Do you normally hit 50% of targeted sales by the first two quarters?
No. We expect to reach 50% from May to July, so we were on track for an even bigger year, because June was big, and July was expected to be bigger as car rental agencies and fleet operators were gearing up for what was supposed to be a superb season, but then we were hit with the war, so all orders stopped, all orders were cancelled, while our inventories were already in. Like all car dealers, we stock inventories during the months of the high season. 50% of our sales happen in the four months of May, June, July, August. This is our big season and we were stripped of a major opportunity to exceed the 20,000 unit mark.
E Sales must have slumped to zero?
Correct. July sales were nil. August sales were niller, and September was nil as well. At least it was nil for all the fleet operators, which currently constitute about 45% of the total demand. So today, if you asked me, “Can you please draw me a roadmap of the car industry in Lebanon?” I would tell you, “Very simple. 10-12,000 units a year will be bought, no matter what, by you, by me, by him, by your friend, by your neighbor—this is constant. Business-to-business, however, will buy 8,000 units a year in a good year—in a bad year, it will go down to 2,000, because it is subject to business, not to a buyer’s emotional decision.” So anything above 10-12,000 units total is subject to the political instability and the tourist season in Lebanon. If it’s a good year, sales go up to 20,000, 22,000 maybe; if it’s bad, sales go down to 14,000 to 15,000, as we have seen in 2005 and 2006. Business-to-business has the potential for growth, and it is increasing, but the business-to-consumer market is stable. We don’t have baby boomers here—they are in Dubai, Qatar, the GCC and Europe.
E How did you deal with the challenges presented by the war, as a business? Did you close up shop?
No. During the war, we kept our operations up and running, with adjustments. We managed to divert most of our inbound shipments to other markets, though we did have some units stuck in Barcelona and Cyprus. After the war, we had four record months when we made offers. We had to offer extra value to the customer to sell the 2006 models. People were looking for deals, so we figured if deal hunters are on the prowl, let’s provide them with some meat. We performed so well that we found ourselves short—we had to buy 150 units from the Dubai free zone.
E How much competition do you face from the used car market? What are your strategies to woo customers into the new car market?
The market for imported used cars has diminished and been replaced by new cars, only because of the availability of financing, auto loan programs that are now available with at least 10-12 banks. And they all offer attractive rates, rates that are more attractive today in 2007 than they were in 2001. Interest rates from 2001 to 2007 have increased by at least 3-4%, but interest rates on auto loans have diminished 20% from 2001 to 2007. This is because the pressure of liquidity on the local and foreign banks here has forced the banks to find outlets for financing, and they discovered that auto loan programs are a secure instrument. So the ability of auto loan financing has migrated sales from the used car business to the new car business.
E Do you have figures?
In 2001, the total market for imported cars, new and used, was around 66% used and 33% new. Today, it’s 50/50. And the trend is continuous cannibalization for the new car against the used car. Safety requirements have become a priority, and cars are now tested for compliance on an annual basis. All this has added to the headache, the extra burden, for any adventure with an imported used car. Consumers now want a car with a 3-4 year warranty, one that is headache-free, worry-free, so they go to a dealer where auto loan finance is available: all of a sudden, your perception of a purchase is no longer the price of a car, it is what you can afford each month. You no longer think of a car as costing $30,000; you think of it costing $550 or $700 a month. The dealer is there, you have a warranty, if anything goes wrong you just go back, etc.
E How have the various car segments fared over the past two years? Which cars are still selling well, and which have taken a hit?
Over the past two years, one of the segments that has not been affected is small, family sedan cars. Typically, this car has a four-cylinder engine, 1.6 to 1.8, it’s economical and worry-free. Cost of ownership is low and repair minimal. This car can last five years without you ever having to worry about anything like the transmission or engine, and it’s priced anywhere between $15-20,000. It is sporty, trendy, and has a brand. The focus today is on the brand; people here are brand-oriented. Because of the high customs paid on these cars, it is the investment that the customers want to capitalize on when they sell the car again. They want to own it for five years, and sell it at 50% of value, and this is what’s happening amongst all major brands in Lebanon.
E 50%? That’s a good return after five years.
Of course it is. The second segment that is also growing is the small SUV. It’s a multi-purpose car. Again, they are usually 4-cylinders and again they are worry-free, again they have brand value and today, most car manufacturers are offering them. We love them here in Lebanon because of the high mountains. They are safer; they are higher up and they cost anywhere between $25-30,000. It’s better than buying a large sedan family car. It is dual purpose. The third segment, which is not surprising, is the luxury segment. The luxury segment in Lebanon has not been affected, even in the troubles of 2005 and 2006.
E So what took a hit?
Low priced cars, let’s say, below $10-11,000, with no brand equity—cars that are usually bought for the fleet business. The reduction in demand from the fleet businesses affected the demand for them, not because they are not good cars—but because they are used by the fleet segment and when they see a dip in business, they do not renew the fleet. So, if you are the owner of a large pharmaceutical company, and you need to regularly replace 100 or 200 cars because you need these cars for your sales reps, in a good period you change them every 2.5-3 years. In a bad period, you say, ‘I’m not going to change my fleet.’ This business is subject to the sensitivity of the country.
E But consumers will always buy, right?
Yes. The Lebanese consumer will spend more—not in absolute terms—but if the value of the car has a monthly payment issue. Take a $10,000 car or a $15,000 car: the difference is 30% if you pay cash, but if you are financing, it might cost you only $40 to $50 more a month. So you rationalize it, saying, “For $50 a month extra, let me drive this sexy car that I really want, and not the one I can afford—I’ll cut costs elsewhere.” As I mentioned earlier, today we buy what we can afford to pay on a monthly basis. So we have to develop those segments—family sedans, SUVs and the luxury cars—and work on a strategy to encourage growth in these areas. But you need to have the right product and fortunately, at Rymco, we do. We are well-positioned within every growth segment in the Lebanese market, which is good news. Not only is it enough to be well-positioned, we must be fairly positioned, so we evaluate what our competition is doing in these segments, and what our products offer against the competition in value and in price. In all these segments, we have discovered that we are very well positioned.
We have become more of a financial engineering firm than a trading company. In Europe, the biggest departments are financing and insurance. As an industry, we are still a long way off in Lebanon—we have too many family-run firms. We are the only one listed on the BSE; we have a board of directors, we have shareholders, and we have huge leverage with our financial institutions. We are well integrated, and they know where the money is going.
E Who is your primary market for financing programs?
We are targeting the $1,200 salary bracket because we know that banks will not give a loan unless the salary is three times the monthly payment. But we also know that he might be under financial pressure elsewhere, he might be financing a fridge, so we have to be creative in helping him pay. If we aren’t, he will go elsewhere, so we tailor a program to ease the burden with an annual balloon payment or multi-balloon payments or accelerating or decelerating payment schedules. I can confirm that 47% of Lebanese households live on between $800 and $1200 a month, not including remittances. Banks don’t care about remittances, they look at what you actually earn, so we have to get the buyer ready for marriage—we have to get him hooked up with a bank.
E But how are you convincing people to splash out on a new car in such times of uncertainty?
Leasing is our new weapon. It targets the medium-luxury, $40K-50K car buyer who has either left the country, or can leave and doesn’t want to commit. Without leasing, we would not have sold so many cars in the post-war period of 2006. In the first three days, our phone lines were jammed with people inquiring about leasing. In the past, leasing never really caught on here because the proper structure wasn’t in place. Even our partners were skeptical at first, but when they saw the response, they got on board. Right now, we have three more banks that want to join us in leasing, because leasers are the customers they want.
E How does Lebanon fit into the regional automotive dynamic?
Lebanon is the trendsetter. Cars that do well here do well in the rest of the Middle East. Our disadvantage is our market. The region sells 1.2 million news cars and our most optimistic forecast for 2007 is 20,000 units. That is if all the segments, B2C and B2B are performing, and we have a good tourist season and so on. But as I said, we are a brand volcano. Manufacturers are cautious, because they want their models to work here. Many tourists from the rest of the region rent cars here, and they might like them and want to buy them. Some brands are not launched in Lebanon for that same reason—manufacturers are scared of having an unpopular car on our market.
E Lebanon is more of a trendsetter than Dubai?
Yes, of course. Dubai is a consumer bully; here, we are a brand bully. Lebanese consumers are cruel—they can reward and they can destroy.