How Fiat Chrysler ‘got smart on pricing’ – USA TODAY
When Fiat Chrysler Automobiles reported second quarter earnings CEO Sergio Marchionne said the company more than doubled operating profit in North America because “we got smart on pricing.”
For years, FCA’s crosstown rivals have had profit margins in North America that were two or three times higher. But as Marchionne well knows, profit margins are about more than just bragging rights.
For an automaker, lower profit margins can cool off Wall Street investors and lead to lower stock prices and also smaller profit sharing checks for hourly workers.
But analysts this year say brisk sales of specific models, including the Ram 1500 Laramie Limited and its Dodge Challenger and Charger Hellcats, along with a steady increase in Jeep sales have boost average transaction prices for FCA. The automaker also has cut back on less-profitable fleet sales, kept incentives under control and cut dealer discounts.
During the second quarter, Fiat Chrysler earned a pretax profit of $1.4 billion (1.3 billion euros) in North America. That’s more than double the $650 million (595 million euros) it earned during the same period a year ago.
Marchionne delivered on profit margin, too, during the second quarter. The company’s profit margin was 7.7% — up from 4.9% last year.
That’s still a far cry from the Ford’s 11.1% or GM’s 10% profit margin, but it was enough to impress Wall Street and drove the company’s stock price to $16.23 per share at mid-day Friday its highest price since late April.
‘Sergio 1, the Doubters 0’
The improvement came little more than six months after Marchionne promised Wall Street the company would improve its financial performance.
“Heading into these second quarter results, we expected another modest NAFTA result, a tiny profit in Europe and massive Latin American losses. We expected cash burn. We thought Q2 would prove FCA couldn’t reach its 2015 targets,” Bernstein Research analyst Max Warburton said in a research note. “The score today: Sergio 1, the Doubters 0.”
For years, whenever Marchionne was pressed to explain narrower profit margins than rivals he would point out that FCA is the smallest of the Detroit Three and sells fewer vehicles, absorbing the full costs of doing business but with less revenue.
FCA also was in far worse financial shape as it emerged from the recession in 2009 than either GM or Ford. It’s vehicle lineup was depleted and factories behind the times. That forced the automaker to spend more money on research and development and to invest more in upgrading plants just to compete with rivals.
Marchionne completed the corporate integration of Fiat and Chrysler last fall into a single automaker and listed its stock on the New York Stock Exchange. Marchionne said investors can now more easily compare the financial performance of the Detroit Three side-by-side.
When it came to profit margins, the comparisons were ugly.
“We get it,” Marchionne told Wall Street analysts in January. “So, we’ll come back to you. Give us the time.”
What’s behind the improvement?
The company is continuing to sell more Jeep SUVs and Ram pickups, said Eric Lyman, vice president of industry insights for True Car.
That helps drive the company’s average transaction prices higher because, on average, Jeep and Ram models sell for higher prices than Chrysler, Dodge and Fiat.
“Those two brands make up to 59% of their sales in the U.S. and that is up from 54% last year,” Lyman said. “So they are selling a richer mix of more profitable vehicles,”
FCA also is keeping its incentives under control. Lyman said the automaker’s incentives have crept up about 1.8% this year, but final sales prices have increased more.
In July, the average transaction price of the Dodge brand was $30,381, an 8.8% increase compared with $27,911 a year ago, according to car shopping site Edmunds.com. The average transaction price of the Ram brand was $42,991 in July, a 4.5% increase. Those gains outpaced the industry’s 1.1% pricing increase during the same period.
Hellcats, Ram pickups to the rescue
Jessica Caldwell said the introduction of the SRT Hellcat versions of the Dodge Challenger and Charger have helped to boost the Dodge brand.
The Challenger and Charger SRT Hellcat are powered by a supercharged 6.2-liter Hemi V8 that puts out 707 horsepower and 650 pound-feet of torque. The cars sell for about $60,000, or about twice the entry level price of a regular Challenger or Charger.
Despite those lofty prices the Hellcat versions have been so popular the automaker sold out of its 2015 models and has decided to double production for its 2016 models.
When it comes to Ram, Caldwell said, customers are buying pickups with more features and options, which is driving the average transaction prices higher.
FCA CFO Richard Palmer said earlier this year that Ford and GM have higher revenues per unit on pickup trucks because they sell more pickups at the higher end of their truck lineups and are more successful at selling pickups loaded with high priced options.
The automaker could push the average price of Ram trucks higher with the new Ram Rebel, a sporty model that starts at $42,790, and the super luxury Ram Limited that starts at $50,675.
Dealer discounts, leasing and inventory
In April, the automaker cut dealer discounts on wholesale pricing.
Dealers now pay 1 percent more for the Chrysler, Dodge, Jeep and Ram vehicles they sell, or about $200 more on a vehicle with a $20,000 invoice. That reduced the spread between the price dealers pay and the sticker price.
Fiat Chrysler CFO Richard Palmer said earlier this year that the company also is working to reduce the percentage of vehicles that dealers lease in some segments.
He said the automaker is trying to reduce vehicles it sends to rental fleets and increase the number to commercial customers. Automakers typically get higher prices on fleet sales to companies than to daily rental companies, such as Avis and Hertz.
The company said 20% of the 682,000 cars and trucks it sold between April and June went to fleet buyers, a 1% decrease. It did not provide a figure for daily rental fleet sales.
Shot at improvement
Lyman said the relaunch Alfa Romeo in the U.S. could further increase the company’s average transaction price. Premium and luxury automakers earn higher profit margins because their cars are sold at higher prices.
Fiat Chrysler began selling the Alfa Romeo 4c in small numbers in the U.S. at the end of last year. Next year, the company plans to begin selling the Alfa Romeo Giulia in the U.S.. It’s the first of eight new models the automaker plans to introduce by 2018.
The automaker’s goal is to boost Alfa Romeo’s global sales to more than 400,000 by 2018. North America is expected to account for about 150,000 of those sales. Most analysts say that’s an ambitious goal because Alfa Romeo sold just 74,000 globally in 2013.
“If they don’t manage that right and get out of the starting gates, it could be a big stumble that they cannot recover from,” Lyman said.
Brent Snavely: 313-222-6512 or email@example.com. Follow him on Twitter @BrentSnavely.
Fiat Chrysler transaction prices by brand in July compared with last July
Ram: $42,991, up 4.5%
Jeep: $32,718, up 0.4%
Dodge: $30,381, up 8.8%
Chrysler: $29,585, down 5.8%
Fiat: $23,089, up 2.9%
Industry average: $32,562, up 1.1%