June U.S. Light Vehicle Sales: Not A Bad Month For Auto Retailers

You can look at it as the glass is half empty by saying oh my goodness we've got an industry that is soft with all of the competitive pressures that we have in the industry it complicates things.

Fair assessment.

Or you can look at it as the glass is half full as well and that is for us to be able to keep around 3.0 million units retail and execute our strategy against that backdrop. I think says a lot for the discipline we have had in place since really 2005.

Source: Paul Ballew, General Motors (GM), Industry Analysis

June U.S. Light Vehicle Sales
So much for the rumor mill! As I indicated Tuesday, the financial media reports were all speculating that heavy incentives lifted U.S. light vehicle sales in the month of June. But when the numbers were all tallied, the industry ended down 3.1% to 1.45 million units (according to Ward's Automotive).

But when you dig beneath the numbers and listen to the conference calls, it still did not sound like a bad month or quarter for auto retailers. . .

And by the way, what a great month for Ford Motor Company (F). I gotta tell you. The month of June with the Power IQS (initial quality survey) ratings, and the strong showing in J.D. Powers appeal, and now the continuation of strong sales for our new products and stabilization of our share. . . people are starting to put their chin up again. And so as long as we keep working on what we need to work on, we'll be fine.

Source: George Pipas, Head of Sales Analysis, Ford Motor Company

In conclusion, the Chrysler Group had another strong month of car sales in June based on our newly launched models that generate solid customer demand especially Chrysler Sebring, Jeep Wrangler and Patriot, and the Dodge Avenger and Charger. With our new product offerings continuing their success story and gaining traction, we are optimistic about the months ahead. From an operational perspective we also proceed to deliver on our promise to reduce inventories significantly to a level that our dealers are comfortable with.

Source: Daryl Jackson, VP, US Sales, Chrysler Group

As you know, I don't like to get caught up in the sales figures. Instead, I think people putting their capital to work in the space should focus on the inventory levels. This tells us if demand came in stronger or weaker than what dealers were budgeting.

Below are the announced inventory levels for the domestic automakers and my estimate for the industry.

So I know the reports are all telling you how bad things are. I just don't see it, at least from a dealer inventory standpoint. Don't get me wrong. The industry is not a "cakewalk" by any stretch of the imagination.

But the demand for vehicles remains pretty resilient. I think Ford's Chief Economist (Ellen Hughes Cromwick) summed it up best on Tuesday's conference call:

While consumers say that they are worried about inflation, and in particular in gasoline prices and the housing situation. What they are actually doing in terms of consumer spending is another story. For example, light vehicle sales have averaged right around 16.3 to 16.4 million units since January 2006. . .

That's remarkable stability in sales despite some substantial movements in segmentation. And that's happened during a time when the Fed concluded over four percentage points of interest rate increases, and when the economy slowed to below trend. And as you know gasoline prices have oscillated for the most part above $2.50 a gallon. . .

Part of this has to do with who is in the market for these new vehicles. And as you probably know most new car buyers today have incomes above $100,000. And they tend to have lower unemployment rates. And less sensitivity to the ups and downs in the economy.

Source: Ellen Hughes Cromwick, Ford Chief Economist, July 3, 2007

I think she is right. It is pretty remarkable stability when you consider there are only about 4 - 6 new vehicles sold per 100 people every year (4 - 6% of the U.S. population). This means less than half a person out of every 100, is in the market to buy a new car on a given month.

I don't know about you, but that to me sounds like looking "for a needle in a haystack" (looking for half a person out of every 100 who wants to buy a car). I'm a little dude, so do I count as a half or whole person?

Importantly, if demand slows, now it becomes even tougher to find the needle (sorry, person). And my point therefore, as usual, is that excess capacity levels have created a remarkable (and what I have deemed somewhat unsustainable) demand for new vehicles. I have said that every other year the automakers step in with some novel incentive program, move the metal, and dealers feel better.

So what is more surprising is that the stability seems to be happening despite what appears to be price discipline being exercised by the domestic automakers.

The data that we have suggests that Big 3 incentive spending is notably lower than it was at this time a year ago. And I think that you know contrary to the splashiness of the releases that the company's issue about the clearance sales. That to this point, the clearance sales are generous, but not nearly as generous as what we were seeing over the course of last summer. So I think it still remains a very competitive pricing environment Rod, but the incentive spending to this point in the year has been quite tame.

Source: George Pipas

Now maybe the "resiliency" therefore is coming at the expense of dealers themselves "incentivizing the market." But dealers should price from cost, so that would be really strange.

Instead, it suggests that maybe the significant employee buyout plans that took place over the last year at GM and Ford are finally giving the automakers the flexibility to lower production and stick with the (price discipline) strategy.

Could it be that they can take inventories down without stimulating the market?

I don't know. If so, maybe dealers (accustomed to growth) are stimulating the market at the expense of profits. I think we'll get a better idea when the large public dealers report. But for right now, it sure looks like the dealers had a good quarter.

Going forward, I think the wildcard seems to be the Asian automakers (like Toyota), particularly in truck category. For example. . .

In fairness, we had a pretty tough competitive environment in a couple of the key truck categories, especially in full size pickups. Where we're seeing incentive spending from our competitors at levels that to be honest have surprised us to date. And really what we saw in the month of June was beyond what we could have forecasted just a couple months ago. We certainly weren't anticipating for instance that Toyota would go to 0% for 60 on a brand new truck. And that has thrown a bit of a curve ball and that is affecting our results in the month of June.

Source: Paul Ballew, GM Industry and Analysis

So the question becomes, do the domestic automakers "step it up?" From what I gleaned, for GM, I think the answer is maybe. . .

We don't have to match dollar for dollar. And we've proven that, and we showed that really in the second quarter overall and in the calendar year to date. But we do have to make sure that competitors don't get so far out in front of us that they just rob the business to the extent that we saw in the month of June. . .

So we're evaluating what we do and how we play our hand going forward. We're not in the business of having to match dollar for dollar. But it's a challenge. We have an industry right now that is subdued, probably the best way to describe it. And the truck category certainly are weaker than the car category. So you are seeing people result in some pricing levers. I can't say that it's a surprise to us. We're just being organized and systematic in the way we want to attack it. Having the best truck gives us a little more degree and freedom than others. Having said that, it is not a category for the faint of heart these days.

Source: Paul Ballew

But I have to say, I am hearing comments out of Ford Motor Company that I have not heard in the 7 or so years I have been listening to their sales conference calls. . .

So the fact that we're maintaining pretty steady growth I think on a year over year basis, Fusion, Malan and MKZ are all up. But we wouldn't expect those to go onward and upward from here on out. Because we have no plans to employ greater capacity for those product lines. Part of the strategy and the Way Forward plan from the get go is to strengthen our residual values on a competitive basis. And the worst thing that we could do is tune up the capacity beyond the level of demand, get ahead of ourselves, and then have to discount. Or go back to the daily rental channel to offload excess vehicles.

Source: George Pipas, Head of Sales Analysis

Public Dealer Metrics
Only time will tell if the domestic automakers are truly able to maintain a price discipline. But whether the industry has its usual comeback this summer (that seems to happen every other year) or whether the industry is more difficult than the inventory data would suggest, wiping out a lot of marginal dealerships, the most productive dealers are likely to thrive.

So today I thought I would just close out by sharing with you a few productivity metrics I have developed that analyzes the large public dealer companies between 2000 and 2006.

It also stands as further detail and a clarification to a statement I made last week in my note about America's Car-Mart's (CRMT) results. In my note, I said that it looks to me that used units per store have been on the decline at public dealerships. That statement is not entirely true, and really more applies to used units per employee (versus per store).

In any case, you should keep in mind every company has a slightly different way they treat costs. When you combine different accounting treatments with varying geographies and product/service compositions (brands, new/used ratios, etc). I would be very careful with trying to compare one company's productivity versus another.

Instead, I would encourage you to focus on the change (improvement or deterioration) one company was able to demonstrate versus another. Even with this approach there are risks.

Keep in mind accounting treatment and even business strategies have a way of changing over the course of six years. The best example of a changed strategy/portfolio is Penske Automotive Group (PAG), which has dramatically changed its mix of stores (to smaller stores) with its entry into the United Kingdom. So naturally you should expect to see fewer sales per store. And of course on the accounting front, you need to remember the problems with discontinued operations where "history has changed."

But it is the best we have to go by.

Have a great weekend.