'Discount' ploy could bite Detroit

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The Big 3's "employee-discount" play is a simple but effective marketing idea that resonates with consumers, resulting in the most sizzling summer of sales Detroit has seen in years. But if the campaigns escalate into a war, profits will be a big casualty.

Good news: Right now the incentives don't cost automakers that much more than the worn-out promos they replaced (see "Price of Promotions," right), and are clearly more appealing to consumers-witness the 41% uptick in June sales at first-adopter GM. Its incentives were "flat to up slightly" vs. May, but since the automaker trimmed lease expenses and got dealers to take a lower price this campaign adds up as a smart promotion.

Bad news: These are incentives by another name, so the domestics remain addicted to promotions, and consumers may decide employee cost is the new opening price point.

There is an opportunity here also. The Big 3 could adopt a one-price approach as a permanent strategy-consumers like it, and this month's Big 3 sale will be the best test of no-haggle pricing the auto industry has ever seen. But, if each of the automakers continues to try to gain an edge there will be carnage.

Automakers could blow the deal by escalating a price war and devaluing what consumers think a car is worth-a replay of what happened when high-cost airlines moved to low-fare value pricing in the `90s, said Frank Luby, partner in global pricing consultancy Simon-Kucher & Partners. Added Debra Patek, partner in marketing and pricing firm ThinkVine: "The threat of a price war, coupled with heightened discount expectations by consumers, may create bigger problems down the road."


Dealers already see some profit erosion, according to Automotive News. Under the new program, GM is paying dealers 5% of a vehicle's sticker price, including GM's traditional 3% holdback. In the past they received 8% to 11% of sticker price, including the holdback allowance, and then negotiated with the customer to hold onto as much of that as possible. Dealers are guaranteed a reasonable profit on modestly priced models under the program, but are losing some of the profit they made on pricier vehicles.

One Florida dealer told Automotive News that his gross has shrunk as much as $1,000 for every Cadillac SRX, from $3,078 to $2,124 on average. A Hummer dealer in California reported gross profits declining $1,500 per vehicle.

Still, GM could be on the path to redefining how Americans buy cars. Its flawless execution last month of a category-defining marketing promotion gives it the momentum to fix the way Detroit sells cars, and it now plans to evolve the summer discount promotions into a long-term value-pricing strategy starting this fall. If GM is successful, others could be forced to follow it in adopting a permanent low-price strategy.

That's a big if, given GM's muddled record. It is good at promotions. "Keep America Rolling" worked after 9/11-until rivals rolled over GM. But there's no denying the stunning one-month success of its "GM Employee Discount for Everyone" promotion, which rocketed June U.S. unit sales 41% to the highest level since 1986.

GM extended the promotion through July with ads from Interpublic Group of Cos.' McCann Erickson Worldwide. Ford Motor Co., which in early June nixed the idea of quickly copying GM's play and then saw market share plunge, responded last week with the "Ford Family Plan," backed by ads from WPP Group's JWT. DaimlerChrysler's Chrysler Group then unveiled its "Employee Pricing Plus," with $75 million July campaign from Omnicom Group's BBDO Worldwide starring Lee Iacocca (see story, this page).

A replay is a good bet in August; after two months of insider-price promotions, domestic makes will have to communicate good deals to coax consumers into remaining `05 closeouts.

That takes care of '05 models. Then what? How to end this?

"I feel like George Bush in talking about `what's the exit strategy,"' said Paul Ballew, GM executive director-market and industry analysis. He insists GM's promotion will "bridge" into a value-pricing strategy rolling out this fall with `06 models. "This program is very consistent with where we are transitioning."

contributing: jason stein, automotive news

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