May Sales Blip Shows Pickups' Steadiness

By Dale Buss June 9, 2011

Pickup May Sales Blip.jpg

Any time the Big Three’s truck marketers are tempted to pine for the good old days of "Like a Rock" and "Ram Tough," for an era when it seemed that every American really wanted to own a pick-up truck, they pull up the sales data from late May and count their blessings. When U.S. gasoline prices dipped by an average of about 20 cents over those couple of weeks, after a months-long upward climb to about $4 a gallon, General Motors, Ford and Chrysler executives noticed a pronounced rise in sales of their full-size pickup brands, softening the blow of what had opened as a really tough month. It was as if buyers were looking for any little excuse to sign for a Ram or Silverado or F Series, and the sudden downtick in gasoline prices was all they needed. The segment ran at 9 to 9.5 percent of the industry in the first half of May and gradually rose to close out the month at more than 10 percent.

“If gas prices go up, full-size-pickup sales will drop, but typically they’ll bounce back, as they did,” explained Don Johnson, GM’s U.S. vice president of sales. A stabilization in prices of used trucks during the second half of the month boosted resale values and therefore new-truck purchases, said Doug Scott, Ford’s truck-group marketing manager. Fred Diaz, chief of Chrysler’s Ram brand, noted that “the segment was struggling pretty badly, but then it started to show some lift and rebound.” And Ivan Drury, a U.S. sales analyst for Edmunds.com, noted that “trucks’ share wasn’t nearly as bad as it could have been in May, given the strengthening appeal of other segments.”

But welcome as it was, this development left three important questions: Who were these buyers? What did their behavior in late May indicate, if anything, about the short-term future of the full-size pickup? And where are segment sales headed over the longer term, at a time of volatility in fuel prices and uncertainties over the future of the economy?

060911 Large Truck Sales - AO.jpgCore Buyers
One thing still seemed sure as the Big Three and Toyota seek answers: The segment never will return to the halcyon days of the middle of the last decade, when annual sales peaked at about 2.5 million units in 2005, and pickups represented about 15 percent of the industry’s total sales. Even in 2006 and 2007, truck sales were about 2.2 million units a year, and were sailing along in 2008 as well -- until gasoline prices spiked at over $4 a gallon in the summer. That development precipitated a blood-letting in the segment, and the onset of the Great Recession provided a double whammy. Last year, U.S. pickup-truck sales were down to only 1.4 million units, comprising only about 11 percent of a depressed overall market.

The biggest culprit, of course, was the “lifestyle” customer who liked and wanted a pickup but really didn’t need one for his or her livelihood or personal interests. Higher gasoline prices three years ago frightened most of those folks out of the segment with the worst fuel economy, and the Great Recession helped keep most of them on the sidelines. The slowdown in the economy, particularly in the hard-hit construction sector, siphoned much of the previous demand from “professional” and fleet buyers.

It proved to be a sea change for the Big Three as they adjusted to the new reality of lower sales in their highest-profit segment. “We feel like we’ve been dependent on the core market for trucks since that time, and that’s our anticipation going forward as well,” Scott said. “They know there is no substitute for these vehicles in terms of their occupation or recreational needs.” Small-business buyers remain the heart of the market and now are more important than ever with the disappearance of most “air haulers” from the purchasing scene. Such buyers tend to favor heavy-duty pickups, which still account for about half of F Series sales. “But that has been a little lower than we were hoping at the beginning of the year,” Scott said. Beyond higher gas prices, “the heavy-duty truck is really a tool, and with residential construction not showing signs of recovery, that hampers a big part of the market.”

060911 Large Truck Segment Sales - AO.jpgNew Balance
Late-May results muddied this picture a little bit, in the eyes of some executives. “The rebound mainly came in the light-duty segment, not the heavy-duty segment, so there were some lifestyle buyers involved,” Diaz said. Still, Johnson said, small-business owners and other commercial buyers “were the ones driving” the uptick in sales in late May. Buyers of both types haven’t reacted as dramatically to the rise in gasoline prices this year as they did in 2008. “That says people are getting a little bit more used to volatile fuel prices, but it also says that the typical pickup buyer realizes they may have overreacted” in 2008. And Scott noted that the industry’s dwindling supply of smaller vehicles through May -- as American consumers snapped up tight supplies in reaction to higher fuel prices -- meant that “by definition, full-size pickups were going to become a bigger part of the market as you went through the month. Stocks of other vehicles were lower.”

Another factor undergirding full-size pickup demand so far this year, Scott said, is that used trucks are in short supply. In 2008, the new-truck segment suffered so severely in large part because resale values declined by more than 30 percent from the first quarter to the third quarter. “That really impinged people’s ability to afford a new truck by trading in their old one,” Scott explained. “This year, that hasn’t been so impactful because there is such a shortage of used vehicles. There has been a minor reduction in used-truck values -- more so in May than in the previous three months, but nowhere near the magnitude of what we saw in 2008.”

Along the way, makers have pared production of new trucks and retained the new lower output levels, meaning good things these days both for pricing levels and incentives, and for inventories. Each of the Big Three has sworn off the wild offerings of many thousands of dollars in incentives that long held sway in the segment -- although it remains the most heavily subsidized type of automotive purchase, according to Edmunds.com. “We’re not going to use incentives to drive the segment,” Johnson said. “We’ll change the mix at the production level to meet demand.”

060911 Large Truck MS - AO.jpgSteady In Flint
Inventories, too, are in relative control, with a 48-day supply of F-150s available at the end of May, about a 60-day supply of GM’s Chevrolet Silverado and GMC Sierra models, and a 79-day supply of Rams. Johnson noted that, while GM’s truck inventories are larger than for cars, that is standard and stems from “the complexity of the product. [Truck] inventory is in reasonable shape, and we’ll look at it every month as we go forward.” Ken Czubay, Ford’s U.S. vice president of sales, recently told reporters that Ford “is on the potential for a little softness in [the pickup] market like a cheap suit.” He added: “We’re in very strong position. I wouldn’t expect to see much in the way of a crazy summer sell-down on F Series at the end of the model year.”

“Production is a lot more in line,” Drury agreed. “We aren’t seeing ridiculous incentives or a 120-day supply.” Rebecca Lindland, director of strategic review for IHS Automotive, added that, “in some ways, this even helps profitability because you’re not overbuilding. If you don’t anticipate getting back to [historical-peak] levels, or at least for some time, you can plan for that.”

That is why some in the industry expressed alarm about GM’s plans to stick with a decision announced in January to add a third shift to the company’s heavy-duty pickup-truck plant in Flint, Mich. But Johnson defended the plan despite huge uncertainties around the course of gasoline prices. “You have to look at our mix,” he said. “We have a little higher demand for crew cabs and heavy-duty trucks than we have supply right now. The Flint decision will allow us to improve our mix in that inventory to meet that demand. So in that context, it makes a lot of sense.”

Sizzling Six-Cylinders
Arguably, Ford already has proven the success of one of the other recent high-risk bets in this segment. It introduced the first-ever six-cylinder engines into the F-150 line at the end of 2010. Already, taking their cue from rising fuel prices, by April half of F-150 buyers were opting for the new six-cylinders over traditional V8s, and in May that number climbed to 55 percent. “We’re in the catbird’s seat because we had the foresight to take a successful product, in our 2009 F-150, and build in new powertrains to address the No. 1 dissatisfier of consumers about pickup trucks: fuel economy,” Scott said.

Nevertheless, Johnson pointed out that GM has the segment’s “most fuel-efficient V8 engine, which is very close to the fuel-efficiency” even of one of Ford’s six-cylinder powerplants. And for May, at least, it was Ram’s Diaz who could crow: Ram sales increased by 13 percent compared with a year earlier, while sales of both GM and Ford pickup lines fell. F Series experienced a 15-percent year-to-year drop in May, its first decline after 17 consecutive months of increases. Toyota Tundra experienced a 45-percent drop-off in May sales even though it is built in San Antonio, not Japan.

Overall, the shocks from the 2008 plunge in pickup sales helped transform the strategies of the Big Three not only for the full-size-pickup segment per se but also for their entire vehicle lineups. They resigned themselves to the permanent disappearance of a huge chunk of business in their most profitable area and, in part, adjusted by focusing on products in other parts of the market. “We’re not singularly focused on pickups as we may have been in the past,” Johnson said. “We’re able to compete in the market regardless of what the full-size pickup segment is going to be, which allows us to really match our production to demand for all of our vehicles.”

Economic Issue
Nowadays, in fact, automakers are more comfortable with lowered long-term expectations for truck sales because they are confident in a firmer floor as well as cognizant of a lower ceiling. Scott and Johnson believe that pickup-truck sales will rebound and return to about 11 percent of the market for all of 2011 – the same share as in 2010, but amid significantly higher overall sales -- as fuel prices moderate and the economic recovery continues to build, albeit slowly. “The traditional best-selling times of the year for pickups are still coming up,” Johnson noted recently. “And there’s still a lot of pent-up demand out there.”

While the construction business remains in a deep funk, Johnson said, there is offsetting strength in agricultural demand, and the availability of credit for truck purchases continues to loosen. “Despite the short-term hiccups, we think the economy is on a continuing upward trend,” Johnson said. “There remains long-term strength in the segment because we believe the economy will grow steadily and, as it does, small business will continue to come back into the market,” he said. “There is pent-up demand. We’re not saying that there will be a huge increase in segment size, but it’s going to stay at 11 percent this year, and there is a bit of an upside on it. In the absence of some dramatic new external force – including a huge increase in gas and oil prices – we see little down side.”

IHS Global Insight also foresees a slight improvement in pickup sales, to about 1.5 million units this year from last year’s 1.4 million, but through 2016 projects a peak of only 1.8 million units a year. “We still have a lot of concern about this segment, though, because we know we’re not going to see the same [high] levels of demand that we’ve seen historically,” Lindland said. “So the question is: What is the true demand?”

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