GM bleeds as incentives undermine brand value

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While GM pinches pennies on its $3.5 billion media-buying account, it's giving away $17 billion in incentives-undermining its brand-building efforts.

General Motors Corp. last week announced a stunning $850 million first-quarter loss. It blamed a tough pricing environment, lower production and vehicle sales and a higher mix of car sales, which don't generate as much profit as its pickups and sport utilities. But observers said its poor performance owes as much to weak marketing strategy and management.

Sorely needing cost cuts, GM is reviewing its media-buying account, and Chairman-CEO Richard Wagoner said the company will move more dollars into regional dealer group advertising as part of its turnaround effort. But the bigger problem is its dependence on incentives, which damage its simultaneous efforts to build brand equity for its marques.

Last year alone, GM heaped $17 billion in incentives on auto buyers, according to research from Edmunds.com done exclusively for Advertising Age. And consumers are trained to expect them. In an analysts' call last week Chairman-CEO Richard Wagoner took on this issue, promising a "brand-value focus"-or to price its vehicles closer to what they actually sell for in the showroom, which is exactly what some marketing experts say it needs. But on the same call, John Devine, vice chairman-chief financial officer, said the automaker is boosting incentives.

CAN'T DECIDE

This apparent contradiction is indicative of the problem for GM, which cannot decide whether to raise profit or gain share. As a result, it ends up seeming incapable of both.

Not only does net income in North America continue its plunge, from $1.2 billion last year from the record $4.5 billion in 1999-but the automaker is hemorrhaging share. GM, which in 1980 commanded 44.5% of the domestic auto market, held a 24.9% share as of February, according to Automotive News. Since 2000 alone, the company's market share dropped 3.1 percentage points.

GM has consistently had the industry's highest incentives in recent years, advertising the deals via a series of splashy, national multi-brand advertising since Sept. 11, 2001 with its "Keep America Rolling" blitz. The current multi-brand campaign is a "March Madness" sale, created by Interpublic Group of Cos.' McCann Erickson, Birmingham , Mich.

The "March Madness" is indeed that, said Jim Sanfilippo, exec VP of consultant Omnicom Group's AMCI. GM is committing "the mortal sin of auto advertising" by putting multiple brands on sale in the same commercial, he said. After spending "billions to differentiate its brands," said Mr. Sanfilippo, "How could it possibly allow that to be eviscerated in a $300,000 commercial? GM's brands have lost their boundaries."

Susan Jacobs, president of consultant Jacobs & Associates, predicted GM's market share would continue to slide, "fighting it with incentives all the way down." The carmaker's dependence on incentives, she said, masked its real problems-unrealistic predictions on product volume, overproduction and unrealistic product pricing. The solution, she added, is to either cut production or prices. "GM is overproducing because it is overestimating its strength in the marketplace," she said. GM did cut production in the first quarter of 2005 by 12%, which some argue isn't enough.

Other observers fault GM's lack of competitive product-it's self-described "gotta-have" new products, Buick LaCrosse and the Pontiac G6 have been panned for staid styling-along with tepid marketing that has relied on stunts and a focus on price, rather than on establishing the cars' differentiated positions.

Part of the problem with ensuring that brand-building ad work isn't eviscerated by ad work promoting knockdowns and incentives could relate to an absence of a powerful marketing authority or any marketing continuity within the organization. Executives are rotated in and out of the marketing department from sales and finance. And, in the past few months, GM has lost two professional marketers hired from outside the organization. Christopher "C.J." Fraleigh, general marketing manager of Buick, Pontiac-GMC decamped for Sara Lee Corp., while Roger Adams, executive director of corporate advertising and marketing, split for Home Depot. The strongest voice for marketing in the organization now seems to be the well-respected Mark LaNeve, promoted March 1 to VP-vehicle sales, service and marketing in North America.

Despite GM's problems, Mr. Wagoner is forging ahead with a planned first-quarter 2006 launch of its next-generation full-size pickups and SUVs-its bread-and-butter moneymakers, which are now older models than competitors and all hurt by rising gas prices. But two people who have seen the new models are skeptical, calling them "boxy" and "a yawner," a description a GM spokesman took issue with.

Meanwhile GM, which has some of the industry's highest costs, including billions of dollars spent annually on health-care coverage, pensions and organized labor, has fast-tracked its 2006 plan and instead will cut white-collar U.S. staff by 10% this year with early retirement packages, according to an insider. That would translate to a 20% cut since 2005 had already been earmarked for its on 10% target. A spokesman said the targets aren't correct, noting GM continues "to align its work force with its business needs."

Mr. Sanfilippo said GM will fail if it keeps doing business the same way. "The best-case scenario is that this crisis will GM," he said. "I just hope it's the right kind of change."

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