Wednesday, July 06, 2005

Detroit Finds a BandwagonIn 'Employee Discounts'

Rivals Copy Successful Pitch By GM, but It Could Make Low Prices a Costly Norm


Detroit's Big Three auto makers made "0% financing" a synonym for hot deal in a wide array of industries. Now, Detroit's got a new buzz phrase: Employee discounts for everyone.
Yesterday, General Motors Corp. declared that it will extend its highly successful "Employee Discounts for Everyone" sales promotion through Aug. 1. This time, Ford Motor Co. and DaimlerChrysler AG's Chrysler Group, which had refused to follow GM in June, quickly followed suit, although GM's two rivals excluded certain hot-selling models -- such as the Ford Mustang and Chrysler's 300C and Dodge Charger sedans. GM's offer excludes the Chevrolet Corvette, the Pontiac GTO and all medium-duty trucks.
By offering consumers the chance to pay the company insider's price on a new vehicle, GM struck gold with consumers who, thanks largely to the Internet, increasingly believe that only ill-informed or hurried shoppers pay list prices for all sorts of goods.
A New Approach to Selling Cars07/05/05
The good news for consumers is also good for Detroit, at least in the short run. Higher sales in response to the discount offers could allow auto makers to pare their inventories and keep factories running. But the longer-term consequences could be less rosy: consumers addicted to a new form of lower prices, and more resistance from unions to proposed cuts in health care.
It's not clear that Detroit's latest big marketing and pricing idea will catch on in other retail sectors. After GM successfully used no-interest loans to lure consumers back to showrooms in October 2001, furniture and consumer-electronics makers, among others, offered similar deals.
Employee discounts have long been offered in other retail sectors, such as clothing. But outside of limited offers of "friends and family" discounts, usually around the holidays, big retailers haven't offered their insider prices to the general public. A spokeswoman for Bloomingdale's, for example, said the department store doesn't extend its 20% employee discount to the public.
The price breaks offered by auto makers under the employee-discount deals vary from model to model, but typical prices are about 4%-6% below the dealer invoice price, or more if the company is offering additional cash. Ford, for example, is offering the four-wheel drive Explorer XLT SUV for $24,739, including a $4,000 cash rebate; that's about $8,100 below sticker price.
For GM, the decision to put its considerable marketing heft behind a single, compelling offer boosted the struggling auto giant's sales in June to their highest level in nearly 19 years. GM boosted its market share in June to 32.4%, compared with 25.5% in May.
The June sales surge slashed the inventory of unsold GM vehicles to about 994,000, down from 1.2 million, at the end of April.
That's good news to Wall Street, where investors and analysts have worried for months that GM's inventories -- especially of large sport-utility vehicles and pickup trucks -- were too big, and portended profit-draining production cuts.
"In terms of production, it now looks like [the third quarter] will be the last of the bad quarters for Detroit," Merrill Lynch & Co. auto analyst John Casesa wrote in a report to clients yesterday. Mr. Casesa said industry inventories are back to normal levels at about 67 days' supply, clearing the way for a rebound in production in the fourth quarter and 2006.
Moreover, GM officials say they were able to offer the employee-discount prices without substantially increasing total marketing spending. Among other things, GM cut back on local advertising spending, and spent less to promote vehicle leases -- a decision that could save the company money in the long run by limiting potential losses on leased vehicles when they are returned by consumers.
GM's stock traded up 12 cents yesterday, to $34.77 in 4 p.m. composite trading on the New York Stock Exchange. But GM shares remain 19% below their level of a year ago. The company's debt has been downgraded to junk status by two major credit-rating agencies. It lost $1.1 billion in the first quarter and has declined to forecast results for the full year. The company also faces a potential conflict with its largest U.S. union, the United Auto Workers, over demands by management that the UAW agree to cuts in health-care benefits.
The employee discounts carry risks, as well. When GM launched its across-the-board 0% financing deals in the aftermath of the Sept. 11 terrorist attacks, the gambit was supposed to last about a month. Instead, GM and its Detroit rivals found that consumers stayed home when the promotions lapsed.
GM's goal is to use the employee-discount offers as a bridge to 2006 model prices that in certain cases could be lower than sticker prices for 2005 models, but not as low as the current "employee" prices. But some analysts and rivals are skeptical that consumers will be easily persuaded.
Then, there's the UAW. Pressed by GM management to agree to midcontract cuts in health-care benefits valued at as much as $1 billion a year, UAW President Ron Gettelfinger has expressed doubts that GM is in sufficiently bad shape. He has said the UAW wants to conduct its own analysis of GM's financial condition.
GM's whopping June sales gain, up 47% from a year ago, would appear to make it more difficult for management to plead poverty.
UAW spokesman Paul Krell said June's sales strength was obviously good news for the company and the union will be "watching closely to see if GM can sustain its momentum." He declined to speculate on how it would affect the discussions over health care.
Another challenge for the Detroit Big Three will be communicating a mixed message about the new deals. On the one hand, they want consumers to believe employee prices are the best they can expect. On the other, the car makers don't want investors or debt-rating agencies to get the idea that they are giving cars away.
In fact, officials at the three companies stress the employee-discount deals aren't much more costly to the bottom line than the hodgepodge of rebates and interest-rate promotions they used in May.
GM, for example, spent an average of $3,865 per vehicle in discounts to consumers in June, up only $136 from May, according to, an auto-information Web site. Meanwhile, Ford increased its discounts by $249, to $3,188, according to Edmunds. But Ford's sales rose less than 1% in June and its market share fell 1.7%, to 15.9%.
After switching to employee pricing, "we expect July incentive costs to be in line with other recent months," said Paul Wood, a Ford spokesman.
Throughout June, executives at Ford and Chrysler said they didn't want to follow GM's lead and offer a one-size-fits-all discount program that would effectively overwhelm their ongoing efforts to convince customers that their products were worth the asking price.
Ford's top North American sales and marketing executive, Steve Lyons, said in an interview in early June that offering all vehicles at a rock-bottom employee price would effectively tie dealers' hands in negotiating other dimensions of a deal, such as how much to give a customer for a trade-in.
Indeed, one Ford dealer said yesterday that he wished Ford had not matched GM's offer. California dealer Bert Boeckmann, one of Ford's largest dealers, said dealer profits are squeezed by the program, because of increased overtime for salespeople. Mr. Boeckmann said he expects sales to increase, but at the expense of lower sales in future months. In June, Mr. Boeckmann said his Ford sales rose 12%; he credits some of that to GM enticing people to start car shopping.
Florian Zettelmeyer, associate professor of marketing at the University of California Berkeley Haas School of Business says the employee-discount deal worked because it "brings a breath of fresh air into the promotions game." But Mr. Zettelmeyer said the program could have "a very significant downside" by further undermining sticker prices.
Many analysts also question whether extending the deals for a second month will have the same effect for GM, or whether offering the deals will work for Ford and Chrysler. GM said 150,000 of its nearly 558,100 sales in June were to new customers.
So far, there's little indication that the Big Three Japanese auto makers in the U.S. -- Toyota Motor Corp., Honda Motor Co. and Nissan Motor Corp. -- intend to follow suit. In general they don't suffer from the underlying structural problems that have driven Detroit's selling strategies. GM, in particular, is motivated to push sales volume because it pays wages to its UAW workers and must cover health-care benefits for active and retired workers whether GM factories are producing vehicles or not.


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