The rental revolution — or how not to buy a car
ý Before Covid, our private cars spent as much as 80% of the time parked — an appalling waste for such an expensive item.
And the pandemic, by keeping people inside their homes, made car owners use their vehicles even less than that.
Those trends are bound to cause drastic changes to car use and ownership patterns.
Insurance firms will feel this acutely and Naked Insurance, one of the newcomers to SA’s shortterm insurance market, says changes are likely to outlast the pandemic.
This new environment means flexible products should thrive.
For example, fluid work-fromhome arrangements could result in fewer private cars on the road during commuting hours.
“People are used to working from home and companies have made the technological investments to support a remote workforce, and it remains to be seen whether things will ever return to the way they were before we heard of Covid,” says Naked Insurance co-founder Ernest North.
Those patterns will benefit ride hailing apps. Uber Sub-Saharan Africa GM Frans Hiemstra says the shift from an office space to working from home has also changed mind-sets and spending habits. Some people have seen there is no longer a need to own a car; others have opted to own one vehicle in a family, as their vehicles sit idle in a garage while payments still need to be made.
“This is where options like Uber are key. There is no need to pay for insurance or maintenance fees or to struggle to find parking spots —
The new trend for big-ticket items such as vehicles is to forgo ownership and debt in favour of monthly payments
Uber completely removes those requirements,” says Hiemstra.
A McKinsey report about mobility trends suggests more consumers may be open to forgoing car ownership in favour of vehiclesubscription services.
It says while such subscriptions are still niche products, they show strong promise, and demand may be particularly strong for fully flexible products such as leasing models for a nonbinding duration.
The report touches on new attitudes to auto financing and vehicle ownership, such as consumers being open to financing their vehicles through digital channels.
One such local product is FlexClub, an online car subscription marketplace that launched its consumer offering last December. It connects users who are looking for flexible access to cars over a long term from a variety of vehicle partners.
Co-founder Tinashe Ruzane tells the FM that SA consumers are waking up to the understanding that financing a car through balloon payments is essentially a rental service from the bank, but with the obligation to purchase the vehicle from the bank at the end. He says:“We believe car subscriptions are well placed for growth as a better alternative for consumers looking for more flexibility and convenience, without the financial burden that comes with balloonpayment financing deals.”
He says FlexClub’s consumer subscription model has gained “significant traction in SA since it partnered companies such as Barloworld, Avis, Europcar and Motus.
But the FM’s attempt to request a vehicle wasn’t a success. That demonstrates that working with multiple partners could yield an inconsistent experience.
The company’s response is that it is working on a concierge service that will deliver a five-star experience regardless of who the provider of the vehicle is.
Ruzane says that in spite of the hiccups, more than 5,000 people have applied for car subscriptions as an alternative to traditional finance, and that private subscriptions are increasing by over 250% each month.
“In the past three months we have more than doubled the size of our active member community, with consumer subscriptions now accounting for the majority of our active members.”
FlexClub says the average price of a new car in SA in 2020 was R321,715, which is beyond the budget of the average wage earner. In a country like SA, consumers typically spend half their salaries on financing a vehicle at an average of R6,800 a month over five years.
“The total cost of car ownership is, of course, much higher than this figure suggests. Once maintenance, insurance and other costs are factored in, the average new car buyer carries a total cost of over R8,000 a month,” he says.
FlexClub’s consumer offering has different tiers. Pricing starts at R3,781 a month and goes up to R17,135. This fee includes insurance and maintenance, with the option to pause or cancel the service at any time with no penalties or settlements. Everything is covered with the exception of fuel costs. Excess for insurance differs between providers, and there are specific risk factors among models.
Thanks to the rise of e-commerce and a growing preference for service-driven business models over product-driven ones, buying the underlying product is no longer the unchallenged default, he says.
But will SA consumers, who typically spend money on cars they cannot afford, switch to services such as these?
Ruzane says FlexClub fits in with the very latest consumer trends, which take the approach that “life is a service”, and that the idea of ownership has started to lose its relevance. All big-ticket goods such as cars and homes can be procured as a service by paying a monthly fee instead of through debt, Ruzane says. “In most economies, those two goods alone make up the majority of household debt and consumption.
“The incredible growth of carsas-a-service is something we expect will continue globally, especially as the hikes in car prices outpace increases in disposable income,” Ruzane says.
Consumer prices rose 4.2% in April from a year earlier, the biggest jump in more than a decade. The largest increases are in categories where demand is rebounding after collapsing during the pandemic, like travel and restaurants
US unemployment fell to 5.8% in May, down from 6.1%. It is still a long way from the 3.5% rate before Covid
However the rate at which workers quit their jobs–a proxy for confidence in the labour market– matches the highest going back at least to 2000
Companies are complaining they can’t find enough workers
Sources: The New York Times, Wall Street Journal