Losing Relevance at the Retail Level
A few weeks ago AutoNation’s CEO publicly chastised the domestic auto companies for pushing too much inventory into his stores. Domestic brand dealers are still struggling with 90 days’ supply despite record incentives and a boost in fleet sales. With three months or more of cars on the ground and no sign of an upturn in demand for these products, dealership margins are slipping. When a shopper sees cars parked on every inch of flat land including grassy landscaping, they know that they can bargain hard while the dealer’s floorplan expenses are rising.
It is unprecedented in my memory for a dealer, even the head of the largest retail chain in the country, to suggest that the profits of his company were being adversely affected by the behavior of the manufacturers. Maybe this is a by-product of dealership consolidation where most dealers sell more than one brand and aren’t so dependent on the goodwill of one auto company. Or maybe Mike Jackson’s comments simply reflect the sorry state of Detroit’s sales at the retail level.
This year total retail demand for light vehicles will amount to about 17 million units. But GM and Ford will both lose market share even though incentives are averaging more than $4,000 per vehicle. Collectively, GM, Ford and Chrysler will be close to the 60 percent mark, even with Saab, Volvo, Land Rover and Volvo included in their count.
But there is another way of looking at the numbers that presents an even scarier picture for Detroit. Domestic auto companies have reached the point where their share of the retail market is about equal to that of the foreign brands. That is bad enough but worse when looked at in terms of sales volume per store. This year fleet sales are up for Detroit so the loss at the retail level is more than the 1.5 percentage point change implies and the impact of both the overall loss of sales and the increased dependence on fleet for more of the overall sales underscores why dealers are losing interest in supporting Detroit.
GM, Ford and Chrysler dominate the commercial, government and rental fleet businesses. These sectors represent volume for the three companies of thee million cars and light trucks a year. GM, Ford and Chrysler also spin out more “executive” cars and plenty of cars directly to employees and retirees, under various programs that are counted as retail sales. On top of that, suppliers qualify for special purchase deals. Employees at some of the companies get coupons to distribute to friends and families to buy cars at the insider price and Chrysler allows employees of Wal-mart, among others, to buy at the insider price.
It’s hard to know exactly how many units are sold through these programs but it wouldn’t surprise me if another million or more cars a year were “retailed” through these channels and have little to do with the average GM or Ford franchise.
Altogether these sales would amount to four million units a year. That means that John and Mary Consumer elected to buy only 6.2 million Detroit-sold vehicles by selecting a Ford or GM car, going to a dealership, negotiating the deal and living with the car for the next three or more years. This means that Detroit has been preserving market share by boosting sales to fleets and employees that is masking the true loss at the retail level even with record-breaking incentives.
At the same time foreign brands will sell approximately 6.8 million units in 2004, of which such institutional sales might represent 500,000 to 700,000 units. If these numbers are close to correct, foreign brand retail sales will be about 6.1 to 6.3 million units. And these units are spread over fewer dealers.
In the case of GM, Ford and to a lesser extent Chrysler, they have more stores, but the same number of retail sales as the foreign makes, so each dealer sells fewer domestic cars than the major foreign mass market brands. Although some dealers specialize in fleet deliveries, this volume is not as profitable as a retail sale, usually generating only a courtesy delivery fee.
The fleet market is a legitimate and important market segment that Detroit needs to protect at all costs. But the domestic companies have failed to understand the impact of their strategies on their own dealers. When Lee Iacocca went to Chrysler dealers and asked for their financial help and support to buy his cars and save the company in 1980, they responded with passion. That was a different era. Detroit’s just been told that such help won’t be forthcoming in the future. Maryann Keller is a veteran auto industry analyst and author of the books “Rude Awakening: The Rise, Fall and Struggle to Recover at General Motors” and “Collision: GM, Toyota and Volkswagen and the Race to Own the 21st Century.”