As car rental giants battle Covid-19, are they pruning too aggressively to survive?

New vehicle sales plummeted a whopping 98.4% for April 2020, due to the lockdown.
New vehicle sales plummeted a whopping 98.4% for April 2020, due to the lockdown.
  • Tourism and car rental companies are struggling under continued travel restrictions. 
  • Two of the country's biggest logistics, freight and automotive companies are contemplating drastic measures to stay afloat. 
  • But cutting resources too aggressively may cause long-term problems.

For more than 100 days, South Africans have stayed put more than usual, despite business travel having resumed under alert Level 3.

Vehicle rental companies, like many other businesses, are feeling the pinch, with some moving to cut costs and retrench staff.

According to the Tourism Business Council of South Africa, the travel and tourism industry has lost more than R68 billion due to the lockdown. It estimates that the sector loses R748 million a day under lockdown, and that 600 000 people will lose their jobs if the sector remains closed.

This has knock-on effects for tourism and car rental companies, who continue to struggle despite partial lifting of restrictions. 

In the past month, two of the country’s biggest logistics, freight and automotive companies, Barloworld and Bidvest, have been scrambling to protect their business.

Barloworld’s automotive brands include Budget and Avis, and the company has 43 dealerships in South Africa and Botswana.

Last year, the company announced that it would sell 50% of its Avis business due to declining returns, but in March put it back on the books after the Covid-19 outbreak. 

Cutting down

The company is currently locked in a dispute with Tongaat Hulett over a R5.3-billion acquisition of the sugar company's starch business. Barloworld is questioning its profitability; Tongaat Hulett says the deal is still on.  

Meanwhile, Barloworld is still focused on trimming down wherever it can and, upon releasing its interim results last week, announced that it would be exiting logistics and had placed its automotive business under review.

The company is rationalising its car rental branch network and retrenching more than 2 500 people in both the automotive and logistics divisions, which it said was due to the impact of Covid-19.

Gugu Sepamla, group executive for corporate affairs and public policy at Barloworld, noted that the lockdown started towards the end of the company's first half financial reporting period. The management and board had implemented "decisive" cost containment measures, Sepamla said.

Devastating losses

Similarly, job cuts could also become a reality for Bidvest, which is reviewing its business and could begin retrenchments across all six of its divisions.

The company’s core businesses are in freight, branded products, automotive, financial services and commercial products.

It has reportedly begun retrenchments that could affect BidAir Cargo, Bidvest Premier Lounge and BidAir Services.

The retrenchments could affect 3 395 employees.

It also owns Bidvest Car Rental.

Bad timing?

Peter Takaendesa, head of equities at Mergence Investment, said some automotive companies such as CMH Group, Bidvest, Barloworld and Super Group had been struggling in their dealership businesses prior to Covid-19, which would justify the cost cutting and restructuring.

But Covid-19 could force them to exit their automotive businesses at the wrong time in the cycle.

"On some parts of the business that have suffered because of Covid-19, I wouldn’t be overreacting and completely shut down everything because this is probably not the right time to be exiting those division," said Takaendesa.

He added that retrenchments may not be the solution either because business has to continue after the pandemic.

"You also don’t want to permanently destroy value by cutting all the employment that you have in place because should things recover, then you’ve disabled yourself, you will not be able to participate in the recovery," Takaendesa.

However, he said the effect of the lockdown that has put less vehicles on the road might have too much of an impact on the rest of Barloworld and Bidvest’s businesses, due to their diverse divisions.

Barloworld’s automotive business contributed 29% to its revenue in the first half of 2020.

Bidvest’s automotive business contributed to 27% of its revenue, according to its interim results for the six months ended 31 December 2019.

Brent Crude
All Share
Top 40
Financial 15
Industrial 25
Resource 10
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Do you think it was a good idea for the government to approach the IMF for a $4.3 billion loan to fight Covid-19?
Please select an option Oops! Something went wrong, please try again later.
Yes. We need the money.
11% - 817 votes
It depends on how the funds are used.
74% - 5408 votes
No. We should have gotten the loan elsewhere.
15% - 1080 votes