By
Rachel Beck
NEW
YORK - General Motors Corp.’s “Employee
Discount for Everyone” program sent the automaker’s
sales soaring last month to the highest monthly total
in two decades and allowed it to unload huge amounts
of inventory.
Now, Ford Motor Co. and Daimler Chrysler AG’s
Chrysler Group are launching pricing schemes of their
own.
These are busy times for U.S. automakers, and GM’s
recent success is the first bit of good news to emerge
from the world’s largest automaker in a long
while. Whether that can be sustained may hinge on
how all the automakers play the promotional game going
forward. Big discounts can often be a blessing for
bolstering sales, but they can also become a curse
for profits.
Automakers might want to look at the retail industry
to see how discounting can help as well as hurt business.
Merchants, especially department stores, have become
increasingly reliant on promotions to lure consumers
into their stores.
But shoppers have become somewhat numb to the constant
discounting. They often wait until they know it is
the absolute lowest price before they buy (just think
of the success of the post-Christmas sales). While
that might clear out inventory, it doesn’t do
much for profits.
The auto industry isn’t in such a predicament
yet, but it has come to rely on promotions to drive
customer traffic. That push largely started after
the Sept. 11 terrorist attacks, when automakers launched
zero-percent financing deals to revive sales, and
they have rolled out other promotions since.
But the current scheme extends beyond what has been
done before - which is exactly what has some industry-watchers
worried.
On June 1, GM began offering its vehicles to the public
for the same price that GM’s employees pay.
That allowed customers to buy vehicles for an average
of $400 to $500 less than they spent in May, before
major cash rebates. GM spent an average of $4,458
per vehicle on incentives in June, up $449 from May.
Those discounts, which took the haggling out of car
buying, hit a positive note with car buyers. GM tallied
a 41 percent jump in its sales in June compared with
a year ago, the highest monthly total in nearly 19
years and a big gain from the single-digit growth
it has seen so far this year. In addition, GM inventory
declined 26 percent to 980,000 units, an important
reduction before 2006 models arrive later this year.
Given the robust response, GM is extending the program
through Aug. 1.
But now it will face competition, with Ford and Chrysler
both announcing that they would offer similar deals
starting this month.
|
 Automakers
say that these deals are only for the short term, but
whether that holds true is unclear. For one, should
sales slow dramatically after the employee-discount
programs end, they might be forced to consider cutting
prices again.
There also are particular concerns over what happens
when the 2006 models are launched later this year. Consumers
may balk if they perceive the prices are significantly
higher than what’s in the showrooms now. Analysts
say that could mean that the automakers are left with
no choice but to implement another round of promotions.
“Now we are at employeelevel discounts. Is there
a level below that, like $500 more off that price, that
they will have to go to next because that is what consumers
expect?” asked B. Craig Hutson, a senior bond
analyst at Gimme Credit, a research company specializing
in corporate bonds.
Should Detroit’s Big Three automakers continue
the promotions, some analysts worry that will cause
the sales effect to fizzle over time.
Morgan Stanley auto analyst Stephen Girsky said in a
note to clients this week that, “The longer these
programs last, the less successful they will be,”
and suggests that is exactly what happened with GM’s
“Keep America Rolling” zero-rate financing
campaign in 2001, which was an initial success.
There is also the issue of what the heavy discounting
does to a brand over time. It’s possible that
a brand’s value diminishes if consumers associate
an automaker with its promotional programs.
Even with all those concerns, GM should get credit where
credit is due. It set off major car buying with this
promotion, even for its SUVs that it had been struggling
to move out in recent months. In addition, GM managed
to win over customers who have not bought its cars before.
Its market share climbed above 30 percent last month,
well above the 25.7 percent realized year-to-date, Hutson
said.
It’s rare to see a such a successful discount
program, which is why all U.S. automakers need to plan
their next move carefully. |
