Will Ford and Chrysler Group Experience the Same Success as GM with Employee Pricing?

Will Employee Pricing Programs become Annual Events to Clear Bulging Inventory?

With General Motors Corp.s U.S. division having experienced a 47 percent increase in sales during its June "Employee-Discount-For-All" promotion, and the other two of the Big 3 introducing similar programs of their own at the start of July, Fords being the "Family Plan" and Chrysler Group offering "Employee Pricing Plus", what is the overall effect?

According to the Power Information Network, a division of J.D. Power and Associates that analyses data on sales of new and used vehicles from more than 6,200 auto dealers, this latest incentive program is working just as well for Ford Motor Co. and Chrysler Group as it did for GM. This, of course, makes a great deal of sense, being that the majority of buyers taking part in GMs employee pricing program were merely trading up from their GM vehicle to a new one. While selling a higher percentage of new vehicles to customers that would most likely purchase the same vehicle for a higher price at a later time might negatively affect future sales and profits, the "bird in the hand is better than two in the bush" philosophy might reduce the Big 3s attrition rate to import manufacturers, at least over the short term.

But the short term might be all GM, Ford and Chrysler Group needs to get their messages out about improved quality to future buyers, and give time to bring more exciting designs that offer greater performance with improved fuel economy and lowered emissions to market.

But no matter what the future outcome, during the first 15 days of sales the Big 3 have accumulated a total of 62.4 percent of all retail new-vehicle sales, said the Power Information Network report. That equals an increase of 2.6 percent within the first two weeks of July, and reports from dealers that showroom traffic has increased.

Whats the percentage split of sales among the Big 3? GM remains a strong number one with more than a third higher sales, at 30.3 percent, than its next closest competitor, Ford, which managed 19.6 percent of U.S. new vehicle sales. Chrysler Group increased its stake to 12.5 percent.

What might be more important to Detroit is that, according to Power, Tokyo has lost market share during this same period, showing that there may be some gain on the imports after all. But the domestics shouldnt get excited too quickly, as the report adds that sales for Toyota Motor Sales U.S.A. Inc., American Honda Motor Co. and Nissan North America are still increasing.

"The domestic programs are expanding the overall market," commented Tom Libby, Senior Director of Industry Analysis at Power Information Network. "But the Japanese are not selling any fewer vehicles than in the past; in fact, they are selling more vehicles than in both June and last July."

And the real burn of such employee pricing marketing efforts is, while GM, Ford and Chrysler Group might be gaining market share and delivering more cars, trucks and SUVs, profits are in jeopardy. Asian manufacturers,despite all the excitement at domestic dealerships, are still selling profit making products with fewer incentives, at an ever increasing rate. Profits mean more research and development into new technologies, more money for quality programs, plus more capital to pull from when designing future models.

Case in point, even after GMs stellar June sales it still posted a second-quarter loss of $1.19 billion in its North American automotive operations.

On a positive note, though, the employee discount programs are reducing inventories of 2005 model year vehicles at a critical time for the domestic automakers, prior to the majority of 2006 models becoming available.

Will such programs be regular yearly events in the future? It is entirely possible that automakers with bloated inventories will choose similar programs to thin down stock each and every year, but if done routinely many buyers will quickly learn only to buy new vehicles in summer months. While it has always been advantageous for consumers to purchase last years model just before or after a new one is introduced, if still available, the price differences havent been as considerable prior to the latest employee pricing schemes, and therefore havent influenced buying patterns en masse. This could change if implemented annually.

Another negative effect to incentive programs offering such dramatic discounts is that loyal customers who may have purchased vehicles the month prior, and paid thousands more to do so, may not only feel ripped off by the automaker theyve been loyal to, but may also see the resale value of their new car plummet overnight. After all, its extremely difficult and expensive to inure a customer to any brand, and by offering something significantly better to one customer that wasnt offered to another, only because the first buyer happened to step into the dealership a day before the second buyer, is a recipe for discontent. No one likes paying too much.

Obviously the Big 3 feel such tactics are worth the risks, and over the short term they may be right.