Fleet Sales and Push Marketing



In April I wrote a column on the auto industry’s continuation of “push marketing,” despite assertions from the industry acknowledging the ills created by the practice. I wrote the column in the context of Toyota’s public relations and sales challenges. In response to a severe sales downturn, in the wake of the safety recalls and associated adverse publicity, Toyota bought back market share with huge incentives. This precipitated a similar effort by Toyota’s competitors in an effort to keep pace. This effort included the recently bankrupt GM and Chrysler, who had specifically disavowed “puh marketing” as a part of restructuring. The incentives included rebates, subvented financing, dealer “trunk money,” and optimistic lease subventions. In the case of Chrysler there have also been additional payments to consumers who use leasing or residual based financing through credit unions and other independent lenders.

Along the same lines, I am reading a new book, written by ex dealer Mark Ragsdale, entitled “Car Wreck, How You Got Rear-Ended, Run Over & Crushed by the U.S. Auto Industry.” In the book Ragsdale rails against “push marketing” practices employed by OEMs to artificially boost sales. He details how “push marketing” has contributed to the issue of “negative equity” in consumer trade ins and how this has led to increasingly longer term financing, rebates, diminished resale value, and the vicious circle that has rendered a huge percentage of consumers “un-financeable,” even those who are employed.

“Push marketing” strategies also include aggressive fleet sales. Noted automotive journalist, Jim Henry, recently provided input on the most recent June sales figures by noting that “fleet sales for the month were up 59% over the same period last year to just over 200,000 units." To be fair, last year at this time Chrysler and GM were in the throes of their bankruptcies. The Asset Backed Securities market, which had provided financing for most fleet and rental units, was barely functioning. This year the huge increase in fleet volume has been largely due to the replenishment of daily rental fleets due to an increased availability of funding and pent up demand. As I rent vehicles these days, I am no longer provided a beat up 40,000 mile “beater.” While this rental replenishment is a good thing, and indicative of renewed health in the ABS market, it should not be construed as evidence of a real retail resurgence.

There is an underlying weakness in retail demand in the automotive market at a time when real good news is desperately needed. The retail SAAR for June came in at only 8.6 million units, according to J. D. Power. This is down from May 2010. While fleet sales are much more profitable than before for the D3 due to the recent restructurings, it is retail demand that the economy and the auto industry desperately needs. GM and Chrysler are positioning for initial public stock offerings, GM as soon as the first week of July. Used car values are at historical highs, which should somewhat alleviate consumers’ negative equity positions in their trade ins. But the average trade in is a much higher mileage vehicle these days due to consumers, fleets, and rental companies having had to hold on to vehicles longer. The OEMs are able to break even or make money on lower retail sales even while paying huge incentives. The Detroit 3 no longer are required to pay UAW members to stay home and watch Oprah in the case of a plant shutdown. But consumer confidence is still weak and unemployment high. The European financial problems have shaken investors, which has been reflected by the recent drop in the Dow Jones average. This has rubbed off on consumers. Yes, the country's economic recovery is proceeding at a slower pace than expected.

As long as financing for fleet and rental sales is available we might expect to see an even higher sales rate of these subsidized sales. Under “normal” circumstances we might be complaining about how these fleet and rental sales contribute to the rapid depreciation of like model pre-owned vehicles recently purchased by consumers, contributing to their negative equity situation. But in today’s environment, aggressive short term lease subventions and aggressive daily rental recycling just may be the ticket to bolster the industry until other fundamentals have time to fall into place. In addition, the current and future pre-owned market needs the availability of additional pre-owned inventory. As always, it’s a question of balance. Will the industry know when to hit the brake pedal on fleet and rental sales?

Wards July 2010

Conspiracy Theory and Push Marketing

After the taxpayers took ownership in General Motors and Chrysler there have been a couple of interesting conspiracy theories take arise. The first was the assertion that the Democratic administration singled out Republican dealers for termination. I haven’t heard much about that one recently. It might have been because it was determined that the majority of auto dealers self identified as Republicans in the first place. The second was the assertion that the government had sat on information that Toyota had experienced a raft of sudden acceleration occurrences and had only brought it to light recently to give the domestic manufacturers, including the two owned by taxpayers, the opportunity to gain ground on the industry leader. Talk show host Michael Savage seems to be the only one talking about that these days.

Toyota hasn’t taken their problems lying down and has launched the most aggressive incentives in their history in an effort to stem their recent loss of market share and volume. Their sales results were up 41% from March 2009. Toyota’s incentives, valued by Edmunds.com, averaged $2,256 per vehicle. This represents a record high for Toyota.

In an effort to keep pace the other OEMs, including the Detroit 3, have also launched aggressive incentives of their own. These “push marketing” strategies include some dramatically sub vented leases which include residuals that most likely won’t “come true” at lease end. This practice allows an OEM to avoid a large up front rebate that immediately comes off the corporate books in its entirety, in exchange for a real number dictated by whatever the market dictates at lease termination down the road. While OEMs may set up some reserves in anticipation of future losses, it is quite likely the end result is that current quarterly results will look better than they should.

As GM is aiming for an Initial Public Offering this year to buy out the taxpayers, there may be some additional motivation to shape current quarterly results.

In the case of Ford, the UAW is selling a large block of Ford stock to fund it’s VEBA (Voluntary Employee Beneficiary Association). Ford intends to sell additional stock this year to produce cash to reduce their debt load. This dilution of Ford stock could reduce it’s stock price, which is considered to be fully valued in the range of $12.00 to $13.00 per share. Showing healthy profits now, while gambling on a minimal loss down the road in an attempt to maintain the current stock price, might also be a part of Ford’s strategy. Ford is promoting extremely aggressive short term leases, in particular on select Lincoln models.

In the meantime, Chrysler is just trying to maintain whatever market share they can until they can bring new products to market.

The industry was up 24% over March 2009. Before the exultation begins, let’s recall how horrible March 2009 was. But the news from March 2010 was mostly favorable. But the bottom line is the results were largely incentive driven. Are we back to full bore “push marketing?” The upshot? Downward pressure on the value of late model pre-owned vehicles which impacts consumers who own them, rental car companies, and fleets. Brand image suffers. And it becomes increasingly likely that the projected residuals will fall short of projections.

“Push marketing” sells new vehicles, produces lots of tax revenue, and creates jobs. OEMs might add over time to their schedules, put on additional shifts, and/or call back laid off workers. If GM and Chrysler launch even more aggressive incentives it might spur the other OEMs, especially the ones who manufacture in the U.S., to follow suit. There might even be a reopening of shuttered assembly plants. The impact would ripple through the supplier base. States and municipalities would welcome the additional sales tax revenue. And the administration could show a decrease in that bothersome unemployment statistic in an election year. That's my conspiracy theory.

The D3 has shed enough cost through the Chapter 11 bankruptcies, and subsequent concessions to Ford, that they can actually make money at aggressive rates of incentives.

The long term incentive situation is further fueled by the fact that OEMs, in particular the ones partially owned by taxpayers, have made a major commitment to smaller more fuel efficient vehicles. The near term CAFÉ requirements will mean aggressive incentives on those vehicles if consumers don’t buy them in large numbers in the face of steady fuel prices.
We have mostly been on the incentive drugs since Joe Garagiola hooked us in 1975. Given the fact that the government could, in theory, "encourage" GM and Chrysler to return to even more aggressive “push marketing,” what are the chances?
Or will the Toyota recall situation, which fueled the current round of aggressive incentives, die down and allow the industry to let normal demand dictate production and sales, protecting the value of consumer’s vehicles?

written by David Ruggles for Auto Finance News