GM: "Big Money Off The Table"

[Perian]

Source: Automotive News / March 21, 2005
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GM cries 'uncle' on rebates. By Jason Stein

New plan: Shrink stickers, woo jaded shoppers.

CFO John Devine: "It's a change in how we go to market."
DETROIT -- After Sept. 11, 2001, General Motors turned the nation into incentive-addicted, deal-obsessed shoppers.

But last week, GM CEO Rick Wagoner said he is "taking the big money off the table".

GM executives finally admitted that $5,000 cash bonuses - when coupled with high sticker prices - no longer have the impact on consumers that they once did.

Dogged by the cutthroat North American pricing environment it helped create, GM last week sliced its 2005 profit forecast by 80 percent. In response to its slow sales, GM said it will move to value-based pricing.

GM's new strategy means the automaker will:

# Give new products prices that are closer to anticipated transaction prices.

# Increase advertising on launch models to rebuild brand strength.

# Target incentives regionally and by specific vehicle.

"It's a change in how we go to market," says CFO John Devine. "The problem with incentives is that everyone follows very quickly, so there's not a way of creating a difference in the consumer's mind."

Devine calls GM's strategy a "modification." But it's a major departure that could influence the entire market, which largely has followed GM into the incentive wars.

After the terrorist attacks, GM's incentive strategy worked for two years. GM gained market share and inflicted financial pain on ailing domestic rivals Ford Motor Co. and the Chrysler group.

And Wagoner wasn't shy about reminding rivals of GM's success.

"It's time to stop whining and play the game," he said in February 2003, in response to competitors who bemoaned the industry's dependence on rebates.

Citing GM's higher profits and market share in 2002, Wagoner said: "What I know is that GM's strategy is working very well for us. So guess what? This year we're going to keep pushing."

But with U.S. sales down 10.0 percent in the first two months of 2005 - excluding Saab - GM will start pushing in a new direction. "We found out that, on an incremental basis, we weren't getting the bang," Wagoner says now.

Losing ground

Edmunds.com says GM's transaction prices have been well below sticker prices - and falling - for several years.

For example, the discount on a Chevrolet Impala sedan, which Edmunds defines as sticker price minus rebates and subvented loan and lease rates, has risen from 14.9 percent of sticker in 2002 to 24.3 percent of sticker this year, according to Edmunds data. But the average sticker price on the Impala increased from $23,855 to $25,148 as incentives climbed to as high as $6,106.

"Our new products, as they come to market, will be priced closer to transaction," Wagoner says. "That's how the strategy will play out."

When the Hummer H3 mid-sized SUV is introduced in the second quarter, it will be priced near $29,000, one Hummer dealer close to the program says. Early reports indicated a starting price of around $32,500.

Devine says GM is not planning to cut prices on current models. "If we do more on the positioning, it'll be on the new models," he says.

Significant shift

But there has been some price-cutting on existing models. Last month GM lowered prices on 22 mid-sized SUVs - cutting $1,430 of the price of a Chevrolet TrailBlazer, for instance - to make them more competitive, especially for Internet shoppers.

GM was missing customers who weren't considering its vehicles because GM's list prices were higher than the competition.

GM will target incentives regionally, instead of nationally, and back away from broad-based incentives by adding more standard equipment without raising prices.

Devine says GM's recent announcement that it will include OnStar and stability control on every vehicle is one example.

GM's advertising approach will also change. GM will stick with launch vehicles longer, increasing its overall advertising budget in an effort to rebuild brands.

"We tend to hit something hard for three or four months and ease off, but our competitors stay longer," Wagoner says.

Internet is a key factor

Some members of GM's dealer council say they are unaware of the change in strategy. But most are interested.

"A lot has to do with Internet searches," says Chevrolet dealer Tommy Brasher, owner of Brasher Motor Co. in Weimar, Texas. "When you look at prices, they're out of line with other automakers."

Some dealers admit value pricing could cut into the dealer discount - the difference between invoice and sticker price. But Brasher says dealers already are hurting themselves.

"Look at the transaction prices on a Suburban or Tahoe. We don't sell them for sticker. We only sell them for $500 over invoice," he says. "We cut our own discount all the time. We are the enemy."

There could be other land mines with value pricing. Some analysts are concerned that consumers have become too hooked on incentives to let go. If GM is forced to offer incentives in addition to lower prices, the results could be painful.

"List-price cuts are a less tantalizing carrot to dangle in front of consumers than incentive offerings," wrote Himanshu Patel, an analyst with New York-based J.P. Morgan Securities, in a research report last week.

If GM sticks to the strategy of lower prices and lower rebates, it could hurt sales of new vehicles, such as the full-sized trucks that start coming out next year, Patel adds: "A 'value-based' pricing approach on the T-900 (full-sized trucks) could lead to lower-than-expected volumes, at least initially."

Wagoner says the transition will be gradual.

Says Wagoner: "I do think it's going to take a while to see the impact fully on the retail side."

[Perian]

Bring sticker prices closer to transaction pricing?

Good God, we're on to something at last!!!

[zeobandit]

'Bout time GM did this.

[slaughter58]

Ha...This guy is brilliant. Have the prices listed closer to what they actually sell for. Wow. Someone in accounting, maybe their title is "Sr. Vice President of Rebate Activities" is definitely gonna lose their job.

[Askani]

If they would only bring down the G6 price... That's the one car overpriced that could be a huge sales success...

[LAMRONH]

I mirror what you guys say.
Golly gee whillakers, wonder if he had help figgerin' this from Jethro Bodine, who graddyy-ated 3rd grade.
As slaughter58 points out, some heads will roll. So it's rock and roll time, folks.
NEXT: FREE medical care? What does the UAW, and GM, think, this is the Peoples Republic of France or something? Get real! Employees better kick in on med insurance, and better drop the welfare system of sitting on their arses collecting 95% for doing nothing. 1965, 1975???...sorry folks, it's 2005 and if you don't want one of GW Bush's & JF Kerry's illegal buddies from south of the border doing your job for two bucks a day you better get the hell back to work!

[goblue]

THANK GOD! GM finally gets it! Value is perceived at the MSRP level, not at the transaction price. Chevrolet will finally become a value alternative to Toyota - right from the start, not in just certain markets. This should really help perceived resale as well.

[MTRANS]

Sounds great. Now if they can whip the UAW into line, there might be some light at the end of the tunnel.

[BigAls87Z28]

Step in the right direction. Take that extra money off the hood, and put it back into the cars.

[b4z]

Should have been done a long time ago.
They are missing out on a whole group of buyers.
GM has become the discount car maker.
Look at what Chryselr did with the 300. @23,995. Value all over the place.
While the STS came out at $40,995, it has already been raised $300.

[corey76]

I've been saying this since the incentives started, 0% is fine, but the rebates were stupid. Especially in the internet age, people use the internet to buy cars now, they've been doing it for 5 years or more. Even on GM's websites they use AIG comparisons that show GM's MSRP is higher than comparable cars, when in reality the actual cost of the GM is less. STUPID!

[mjd1001]

I agree about wishing they would lower the sticker price on the G6. I have seen close to fully loaded Honda Accord Coupes with a 240 horsepower engine and 5 speed automatic, leather and Navigation with a lower sticker price than some $28,000+ MSRP G6 sedans with the 4 speed auto and 200hp engine.

[ness5575]

i think this is a great move. why do it gradually though. how bout the april incentives being a 20% price decrease on all models - that is permanent.

for example - a silverado 1500 crew cab that lists for about $40k
I would expect to get at least 10% off of that price when i go to negotiate with the dealer = $36k.
rebates are $3500 = $32.5k

or

$40k - 20% = $32k.

its all the same in the end, but could actually provide sticker shock in a good way!

[dindak]

Excellent idea. Low stickers or MSRPs listed and in magazines will being people in. Big discount sales make GM brands look cheap.

Amazing GM didn't adopt these ideas 1-2 years ago instead of going on with the same 0-60 + + + deals.

[b4z]

I think GM was on such a incentive roll that buyers actually waited to see if tey were going to get better.
3 days after I got 7K off my GTO, Pontiac threw another $1500 at it.

Also. because of the contracts they signed with the UAW GM elected to continue to build vehicles instead of laying people off.
Paying people 90% of their salary for not working is crazy.