Incentives Bulge To Keep Big Pickups MovingBy Bill Visnic October 6, 2011
Auto-industry discussions following Mondays release of September sales figures focused on sales of full-size pickups, which are up by about 7 percent for the year and soared to double-digit increases compared with the year-ago September. But winning those gains likely was expensive. In an analysis of full-size pickup sales trends, data show that based on Edmunds.com's proprietary True Cost of Incentives (TCI) metric, domestic automakers have piled on incentives in recent months to boost full-size pickups sales in a shaky economy.
From a low that generally occurred around April, Ford Motor Co., General Motors Co. and the Chrysler Group LLC have markedly hiked incentive spending on full-size pickups. In April, the average TCI for the full-size pickup category which also includes the almost statistically insignificant Toyota Tundra, Nissan Titan and Honda Ridgeline was $3,261 per vehicle. At the end of September, the average incentive for full-size pickups ballooned by more than 30 percent to $4,281 per vehicle.
One reason incentives are on the rise could be concern over inventories as the industry heads into the final quarter of the year, with October and November traditionally slow sales months. One automaker analyst notes that the measure of inventory as a portion of total industry pickup sales is running at reasonably acceptable levels. At the end of September, full-size pickup inventory for the entire industry was about 439,000 units, about three times current monthly sales, which this analyst said is an entirely comfortable ratio and well below earlier points. In April, when incentives had reached a low, the inventory-to-sales ratio was 3.86 to one. A year ago in August 2010, the ratio was 3.39 to one. Based on that measure, current pickup inventories appear far from dangerous.
But full-size pickups are taking longer to sell than earlier this year, before world-economy worries began anew. In Edmunds.coms Days To Turn (DTT) metric, the measure of how long it takes to sell a vehicle once it reaches the dealer, full-size pickups generally have been taking longer to sell. Fords F-150 (top) went from a DTT of 44 in April to 55 at the end of August. The Chrysler Groups Ram 1500 went from a DTT of 82 in April to 110 at the end of August. For GMs Chevrolet Silverado, DTT climbed from 55 in April to 75 at the end of August.
Inventory levels and slowing sales despite increasing incentives may trouble the industry moving into the years final quarter, particularly if the global financial future remains uncertain. General Motors, for one, has trimmed full-size pickup production several times this year, with the latest manufacturing cutback announced late last month. At the end of September, GM had 208,000 pickups in inventory for what it said is an 88-day supply. The figure has been pared from a days supply that exceeded 115 in mid-summer. It is generally believed the complexity of full-size trucks requires something more than the 60-day supply that has long been accepted as ideal for the broad market, but GM has been trying to whittle its stocks for much of the year and even the current 88 days supply likely is too high. Ford sources said full-size pickup inventory at end of September was in the low- to mid-60-days supply, but the companys 298,000-strong truck inventory at the end of September still was nearly a full 20 percent higher than at the same time last year.
Month Now A Season
These demand-related metrics are complex and interrelated, but the one most directly affecting profitability is incentives. The cost of subsidized financing an effective pickup-selling tool costs automakers little at the moment because of historically low interest rates, yet still costs thousands. For customers not tempted by a subsidized-financing deal like zero-percent financing, the automakers also must offer the option of thousands of dollars in cash incentives. Pickup incentives always are expected to turn upward for at least one month in the fall, typically September or October, when what has been known as Truck Month kicks off, marking a barrage of incentive programs each automaker lays on, mostly in the attempt to clear inventories of vehicles from the outgoing model year. But now sales executives have taken a shine to the term Truck Season reflecting the fact that the lavish incentive programs now start earlier and finish later, stretching well beyond the confines of a single month. The extension of the big-incentive programs to a season seems a vivid indicator that larger incentives, offered for a longer time, now are required to keep full-size pickups moving.
In reporting September sales earlier this week, Ford and GM executives downplayed the notion that full-size pickup incentives are rising, pointing mostly to the fact total industry incentive spending may have been down slightly in September. Sales for Fords F-Series pickups were up 14.7 percent compared with last September; GMs Chevy Silverado was up 35.8 percent and Chryslers Ram sales boomed by 45 percent. Erich Merkle, U.S. sales analyst at Ford, said, Year-over-year, were seeing some solid advances, and suggested in a call with the media that Septembers big increases in truck sales could reflect the high age of the in-use pickup fleet and still-unreleased pent-up demand from years of delayed purchasing due to the 2008-09 recession. But Merkle also did insinuate that certain merchandising efforts helped Fords overall September sales.
Whatever the case, it is difficult not to correlate Septembers engorged pickup sales figures to inflated incentives. According to Edmunds.com data, the TCI for Fords F-Series was $4,265 a hefty spike from the F-Series $3,083 incentive in April. For the Chevrolet Silverado 1500, April TCI was $3,182 and the figure was a ripping $4,747 last month. For Chryslers Ram 1500, the incentives bulge went from $4,084 in April to $4,877 in September. Despite the domestic makers talk of ongoing efforts to align production with demand, Septembers sizeable incentives figures on full-size pickup are similar to spending at the same time last year.
In a reversal of recent consumer orientation toward small cars, market share for full-size pickups improved from 10 percent in April to 12.3 percent in August. Don Johnson, General Motors Co. vice president of U.S. sales operations, told reporters this week some of the full-size pickups outsized September sales performance could be attributed to stabilizing gasoline prices and stability in consumer confidence. But it appears the market share perhaps profitable, perhaps not was bought largely with increased incentives. Johnson insisted GM has no plans to go out and put more money on the hood, of full-size pickups, but as truck season moves into October, if the stock market continues to gyrate and pickups continue to sit longer on dealer lots, it will be a test of automakers resolve to limit their money-on-the-hood urges.