Brazilian Market

Car rental companies in Brazil are subject to a wide range of federal, state and municipal regulations, including laws relating to labor rights, social security, consumer protection and antitrust matters. Generally, these regulations apply to any company seeking to establish operations in Brazil.

Franchising activities in Brazil are regulated by Law No. 8,955, of December 15, 1994, which governs the licensing of rights to use a brand or patent involving the transfer of know-how and the right of exclusive or semi-exclusive distribution of products. In certain circumstances, it may also govern the right to use business management and implementation technology or operational systems developed or held by the franchisor, by means of direct or indirect compensation.

Introduction

In 2017, Brazil ranked as the 9th largest car manufacturer in the world (according to the International Organization of Motor Vehicle Manufacturers – OICA). For the same year, the country had a total fleet of approximately 97.1 million vehicles (according to the National Traffic Department – DENATRAN). As reported by the National Union of Automobile Component Industries (Sindipeças), the average age of the current fleet, excluding motorcycles, in 2017, was approximately 9 years and 7 months and the ratio between the resident population and the vehicle fleet was 4.8 inhabitants per vehicle, a stable level since 2015.

The chart below illustrates the growth of the Brazilian automotive industry from 2015 to 2017:

Source: Anfavea

The growth in the car rental fleet has confirmed the importance of car rental companies in the Brazilian automotive industry.

In Brazil, car manufacturers do not offer to car rental companies an option to repurchase the cars. However, the market of used car is highly liquid in Brazil, which permits assets to be easily monetized. In addition, Unidas obtains substantial discounts from manufacturers due to the large number of cars it buys, which minimizes the initial depreciation of the Company’s cars.

Budget cars, commonly known as “popular cars”, make up the highest proportion of the car rental industry’s fleet. This is principally a result of the comparatively low purchasing power of the Brazilian population.

Brazil’s total fleet is strongly concentrated in the Southeast region, as shown in the following map:

Source: Denatran, Sep/18

Fleet Management

The Fleet Management business in Brazil started in the 1980s, when certain car rental companies began to offer companies Fleet Management services. This business had already been under development in the U.S. and European markets. This business, however, grew significantly in Brazil in the late 1990s with the expansion of the Brazilian economy and of this type of business around the world.

The Fleet Management business has certain characteristics of a wholesale business: its operations are concentrated in a central unit that manages the agreements and Unidas’ cars throughout Brazil. The fleet management business can operate with few employees and low fixed costs (due to the possibility of outsourcing the support and maintenance services required for managing the Company’s fleet). This type of operation allows Unidas to benefit from economies of scale and enter into a large volume of transactions, leading to a reduction in its fixed costs due to the intensive use of technology.

The Fleet Management business has a more concentrated customer base than the rent-a-car industry, focusing on companies. For this reason, there is generally no major exposure to seasonal variations in demand. In Fleet Management agreements, prices are typically adjusted in accordance with indices agreed upon by the outsourced supplier of fleet and the customer and vary according to several factors, including vehicle acquisition prices, depreciation, financial and maintenance expenses, type of use, fleet size and profile, and responsibilities assumed by the customer.

Fleet Management allows companies to reduce costs associated with the ownership of the fleet and frees capital. For this reason, there should be demand for these services not only in periods of economic expansion, but also in periods of greater economic instability.

Fleet Management is a capital-intensive business and demands periodic replacement of used cars. The sale of used cars can take place both through retail and wholesale channels.

Brazilian Fleet Management Market

Source: 2018 ABLA Annual Report, Frost&Sullivan research, Datamonitor and last data provided by the companies.

Brazil has a distinguishing characteristic as compared to developed countries. In many cases, car rental companies use their structure (branch network) not only to operate the car rental business, but also a corporate fleet rental business. Accordingly, the corporate fleet sector’s numbers are included in data published by ABLA.

Expansion of the outsourced fleet segment in recent years was chiefly due to the following factors:

• A trend towards the use of Fleet Management services by small, medium and large companies;
• Market consolidation; and
• Development of services related to corporate fleet rental.

The Brazilian fleet management market is fragmented, with Unidas leading this segment with a 11.1% market share in terms of revenues. The main specialized companies in the sector of fleet management in Brazil are: Unidas, Total Fleet (Localiza), Arval, LM, ALD, Ouro Verde, Leaseplan, DaVinci, Locaralpha, Lets and Master Car Rental, among others. However, practically all of the more than 11,000 rental companies in the country in 2017 also operated in this business segment.

In 2017, the Brazilian fleet management market grew 12.5% in relation to 2016, of which about 20% of this growth was concentrated in the three largest players.

International Rental Management Market

The international Fleet Management market has experienced a growth not so robust in recent years in the North American and European markets, reflecting a maturity of this business in these countries, contrary to what happens in Brazil, where the market is still recent.

It can be seen that the penetration rate of the fleet management segment in Brazil is still considerably lower when compared to the rates in other countries, as described in the following chart, which indicates a strong potential for expansion in the Brazilian market.

The car rental industry in Brazil began in the 1950s. The first car rental businesses were established in the central region of São Paulo by businessmen operating in the used car market. These businesses began renting cars as a supplementary activity to their used car businesses. In the mid-1960s, the car rental industry progressed significantly as a result of the arrival of multinational car rental companies in the Brazilian market, which forced existing rental companies to improve the quality of their services.

With the rise of financial leasing companies in the 1970s, rental companies became able to access loans for the acquisition of cars, further strengthening the development of the car rental industry. By the 1980s, the car rental industry had become an established industry in Brazil. There was noticeable growth in local car rental companies serving various regions of Brazil. During this period, car rental chains began to expand through a system of franchising.

Despite a difficult macroeconomic climate which caused an increase in car prices, the car rental industry entered the 1990s with new challenges and opportunities, such as the opening of the Brazilian economy to foreign competitors, the Consumer Protection Code, the Brazilian Traffic Code, the launching of more economical cars with one-liter engines and the expansion in the provision of credit cards to consumers. Trade liberalization made car importing easier and consumers began demanding more quality in view of the free competition and the end of protectionism on the domestic market. Together with Brazilian consumers’ demand for cars of higher quality, these factors were important in increasing the flow of imported cars into Brazil.

Growth of the car leasing market in recent years was mainly due to the following factors:

• Strong expansion of the accessibility of the population with the increase of the minimum wage and greater competitiveness of the tariffs practiced;
• An increase in both domestic leisure and international tourism;
• Improvements in airport infrastructure;
• An increase in passenger flow at airports;
• The growth of conferences and industry fairs;
• Standardization of credit cards;
• Large-scale investment in telecommunications, infrastructure, energy, agriculture and exports; and
• Access to long-term financing.

The Brazilian Rent a Car market is fragmented. In this market Unidas is among the leading companies, with 7.8% market share considering Gross Revenue in 2017 (RAC and RAC Franchises). Considering the three largest players, the concentration is only 54%, considered low when compared to mature markets, such as the United States, where the three largest companies concentrate 94.9% of the market.

Source ABLA –Annual release, this survey had its calculation methodology changed since 2014

The various growth opportunities, the still low penetration and the greater acculturation of the population to the benefits of car rental allowed the industry to grow double digits, even during the recent periods of recession. In 2017, this expansion, in terms of billing, was R$ 700 million, of which were concentrated in the three largest players in the market.