Ford’s Sales Gains Come at a Price – Wall Street Journal
Ford Motor Co.
hit a rare milestone in March. Long the No. 2 seller in the U.S. market, the Dearborn, Mich., company topped General Motors Co.
in monthly sales—one of the few times it has done that in recent history.
The win, however, came at a price.
Nearly 40% of vehicles sold were delivered to fleet buyers such as rental-car agencies or businesses in deals typically seen as less profitable than those from retail stores.
Dealers, meanwhile, reported a 5% decline in retail sales.
Ford’s March performance mirrors the auto maker’s first-quarter results and reflects a trend in the U.S. auto industry that shows fears of a slowdown.
Light-vehicle sales for the industry continued increasing in the first quarter, but retail growth of less than 1% fell to its slowest rate since deep declines in 2009, according to J.D. Power.
Retail light-vehicle sales rose 3.7% in the first three months of 2015, laying the foundation for record sales last year.
In an effort to keep modestly ahead of that pace this year, auto makers have dramatically boosted sales incentives and relied on a practice known as punching sales, according to some dealers.
In these instances, a dealer moves a car from the new lot to the demonstration pool and counts the car as sold even though it hasn’t been put in the hands of a consumer.
Retail demand is closely watched because it reflects sentiment among actual individual car buyers. The unexpectedly rapid cool down contributes to wider skepticism about the willingness of American households to spend and concerns that economic growth is sputtering.
Some analysts expect retail sales to bounce back during the summer amid low gasoline prices, cheap loans and attractive deals. If they are wrong, expectations for the record sales pace to continue “will be at risk,” Barclays
auto analyst Brian Johnson said.
A potential downturn raises questions about production.
Strong production levels—which determine a car company’s revenue bookings—are in jeopardy, and many analysts say auto makers are faced with a tough choice: keep dumping more cars in fleets or pour on sales incentives which erodes profit margins.
“It’s natural to move a little extra volume into fleet to keep the inventory situation under control,” Dan Galves, a Credit Suisse
auto analyst, said. “But the industry has to be careful about waiting too long to cut production.”
Ford’s sales chief Mark LaNeve said high fleet sales are a product of timing decisions and those numbers will level off, ending the year at about the same level as in 2015.
The company increased dealership stock this year after being caught short last year with too little inventory ahead of the early summer selling season, he said.
Even with hefty fleet sales, Ford carries by far the most inventory in the industry. GM’s inventory has shrunk amid product changeovers, and the company has backed off fleet sales. That could have Ford outselling GM in months to come.
Ford is carrying 23% more inventory on dealer lots as of March 31 compared with last year, according to WardsAuto.com, or 19% of the industry’s entire stock (compared with 15.6% market share).
While Jeep SUVs and Ram trucks help fuel the performance, the company has partially relied on deep discounts and fleet sales to string together 72 consecutive months of sales gains.
“No one is ready to pull the fire alarm just yet but there are a lot of little things we need to keep in mind,” said Thomas King, vice president of J.D. Power’s Power Information Network, which provides automotive analytics. Mr. King was speaking to the entire industry’s trend.
For instance, the industry’s sales incentives, such as discounts or subsidized loan or lease rates, increased 14% in March compared with the prior year to an average of $3,100 a vehicle, according to Autodata. As the rate of price increases slow, the percentage of incentives as a portion of the sales price crept up to 9.1%, up more than half-a-percentage point from March 2015, Barclays estimates.
“We were definitely giving much more away in terms of incentives than we did last year to close the deals,” said Don Metzner, president of Armory Automotive Group, which sells Chrysler products in Albany, N.Y. “I think we will continue to see that through the end of the year. “
Diminished used-car prices, prompted by a flood of pre-owned inventory hitting the market, could further pressure new-car prices, J.D. Power’s Mr. King said.