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INTEREST RATE HIKES PAVE WAY FOR BUYER'S MARKET CHEVY, HONDA STEER BRAND PITCHES INTO PROMO ADS

By Published on .

Ford dealer Robert Rizzo had his best January in at least 10 years. February sales at his North Providence, R.I., store were good.

March?

"Soft," said Mr. Rizzo.

Just about as fast as that, the ever-cyclical auto business shows signs of sputtering. Three years of steady growth may be feeling the braking effect of several hikes in interest rates by the Federal Reserve Board, which is trying to keep the lid on inflation.

Car marketers are likely to feel pressure to replace brand building advertising with sales promotions designed to move metal out of showrooms.

If a real slump develops, it will have other big implications for auto marketing, including an increased emphasis on leasing and shifts in media tactics.

A downturn would also be bad news for several automakers that are planning or considering to market new sport-utility vehicles to capitalize on the explosive growth in light trucks.

So far, it's not a sales flameout by any stretch. The industry sold 1,370,154 new cars and light trucks last month, a 5.3% decline from a very strong March 1994.

But automakers' production rates have been geared toward the anticipation of better times. That means an oversupply of product compared with demand, putting consumers in a position to command better bargains.

"We see heavy price competition as early as the middle of this year," said Tom Healey, partner and director-media and advertising services for J.D. Power & Associates, an Agoura Hills, Calif., market research consultancy.

If that happens, "A lot of the content of advertising will shift from the vehicle to the terms of the deal," Mr. Healey said.

Before that occurs, auto marketers are trying to at least build brand messages into promotional advertising.

"Our strategy is to remain product focused," said Jim Jandasek, manager-passenger car advertising for General Motors Corp.'s Chevrolet division. "We've got to build good brand equity for our new products."

American Honda Motor Co. last month introduced its first-ever cut-rate loan, a 2.9% deal on the mainstay Accord. A simple TV spot featured a saxophonist tooting his horn next to an Accord against a backdrop that listed the bargain interest rate. "Is there anything that we missed?" asked a voice-over in the spot from RP Alpha Group, Santa Monica, Calif., the regional ad division of Honda shop Rubin Postaer & Associates.

"We are very concerned about protecting the vitality of the image of Honda," said President-CEO Gerrold Rubin. "When we do incentives, we believe we have to be very sensitive to how they are dished up."

The strategy seemed to work in March: Honda sales overall were flat, but Accord sales soared 44% from February.

A Honda dealer said the brand's reputation will help in rougher economic times.

"Customer loyalty [and] quality of product have persevered even when [Federal Reserve Chairman Alan Greenspan's] theory of economics prevails," said Jimmy McDavid, general manager of David McDavid Honda, a big dealership in suburban Dallas.

For consumers, the Fed's rate hikes mean higher monthly car payments. And discretionary income falls because of the effects on credit card and mortgage rates, said Tim Blett, exec VP and director of the automotive division at W.B. Doner & Co., Southfield, Mich.

Most individual dealers will reduce ad spending as sales decline, but "smart dealers will step up their efforts," said Doug Dohring, chairman-CEO of the Dohring Co., a Glendale, Calif.-based auto marketing research consultancy. "Their voice is better heard because there's less clutter, and they can often negotiate better rates" for newspaper and local broadcast buys, he said.

On the national front, tactically minded automakers will likely shift some spending to spot TV to promote sales incentives, at the expense of network and national cable TV and magazines, Mr. Healey said.

The sales slowdown compounds the problem that new car prices have been rising faster than household incomes.

"Sticker shock, combined with any economic downturn, is really going to put leasing over the top" as a marketing tool, Mr. Healey said. The Power group forecasts that leasing will grow from the current 24% of the car market to 45% when a sales slump really takes hold.

Monthly payments are less expensive with leasing because the consumer isn't financing the entire vehicle, just the difference between the car's sales price and its residual value at the end of a specified term.

Mr. Healey said light-duty truck production could surpass demand this year as more marketers rush to fill consumer appetites for pickups, minivans and sport-utility vehicles. Light truck sales reached 6 million units in 1994, and Power projects a peak of 6.4 million units in 1996 before coming back to 6.3 million a year for the rest of the decade.

An oversupply of trucks would create price competition, changing the current dynamics where manufacturers use big profits on trucks to pay for car marketing.

"As long as Ford is selling F-Series pickups at a good markup, it can subsidize [rates for] Jaguar leases," Mr. Healey said.

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