Thursday, June 9, 2005

Liz Orozco / The Detroit News A poster advertises the employee discount being offered to all consumers at Jefferson Chevrolet in Detroit. The promotion is an attempt to help the automaker pull out of a months-long sales slump.

GM deal nets sales, but draws criticism

Automaker hopes costly program will pay off as more customers take employee discount.

By Brett Clanton and Ed Garsten / The Detroit News

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General Motors Corp.'s latest promotion that extends employee discounts to all consumers appears to be getting off to a good start and could help the automaker pull out of a months-long sales slump.

But big costs associated with the program that runs through July 5 and the payback that could follow in July and August if customers move up vehicle purchases could negate benefits from the promotion, analysts and dealers say.

Some dealers complain that by advertising a rock-bottom employee-discount price, the GM program cuts into their ability to turn a profit because it gives them less room to negotiate with customers.

"I have heard a lot of grumbling from a lot of dealers who are not particularly happy with the program," said Peter Welch, president of the California Motor Car Dealers Association in Sacramento. "They're not happy that the manufacturer is, in effect, fixing their prices."

With its U.S. sales down 7 percent this year, GM is counting on the program to draw more showroom traffic. A research report released Wednesday by Deutsche Bank analyst Rod Lache suggests that early results of the promotion are positive.

"Based upon conversations with GM dealers, it appears that June is shaping up to be a very strong month, with some dealers reporting 20 percent-plus increases on a year-over-year basis," Lache said in a note to investors.

That would represent a sharp turnaround for GM, which has seen its market share dip in recent years.

GM is suffering the effects of weaker demand for large SUVs such as the Chevy Suburban and tepid interest in new models such as the Buick Terraza minivan.

At the very least, the employee discount program, which expires on July 5, should give GM a short-term boost in sales, said Jesse Toprak, industry analyst with Edmunds.com, a carbuying advice Web site in Santa Monica, Calif.

"This promotion makes many GM models more attractive propositions for many cross-brand shoppers and it is likely to generate interest from consumers who would otherwise be unlikely to consider a GM vehicle," Toprak said. "The natural results of all these factors should be increased sales volume for GM in June."

But those sales will come at a price. Edmunds estimates that the employee discount program will cost GM $437 million in lost revenue and advertising to promote the program.

GM spokeswoman Deborah Silverman declined to disclose how much GM is spending on the promotion but said it is commensurate with other nationwide promotions is has offered in the recent past.

Silverman said response to the employee discount program has been good.

"What we're hearing from dealers is that the reaction is very positive and that the traffic flow has been increased."

Several GM dealers said the promotion is indeed attracting buyers.

"We're seeing it. That's what they're responding to," said Fred Wink, general sales manager at Bill Wink Chevrolet in Dearborn. "It's going to be a strong month."

"We've been very, very busy with phone calls and more floor traffic and e-mails," said Frank Ursamarso Sr., a Pontiac-GMC dealer in Wilmington, Del., who estimates he is selling about two extra vehicles a day due to the promotion. "They've hit a communication language that is resonating with the public."

Some GM dealers say the employee discount promotion is just the flavor of the month in the automaker's parade of discount programs in recent months.

"They do something different every month, so it's difficult to say" if the promotion is having an impact on sales, said Dale Wotring, sales manager at Knapp Motors Inc, a Buick, Chevrolet and Pontiac store in Blissfield.

Under the program, GM is lowering sticker prices by 3 to 4 percent below invoice on all vehicles except the Chevrolet Corvette, and compensating dealers with a profit margin of 5 percent of the manufacturer's suggested retail price, according to Deutsche Bank's Lache.

Some GM dealers say the employee discount limits their ability to negotiate with customers, which can reduce margins on sales.

"You're not going to lose money selling cars with it," said Tracy Peters, sales manager at Steakley Chevrolet in Dallas, Texas. "You're just not going to make a whole lot."

The Florida Automobile Dealers Association raised concerns that dealer fees were not included on employee-discount prices posted on new cars.

Customers such as Edward Kuty also have criticized the program for being more of a marketing pitch than a better deal for car buyers. The 63-year-old Allen Park resident, who started to lease a Cadillac SRX this month, walked away from the deal when he learned that incentives on the vehicle were actually better last month than they are with the new discount in June.

"That leaves me shopping over at Ford, where they have a $6,000 rebate on the Lincoln LS," he said.

Ford Motor Co. and DaimlerChrysler AG's Chrysler Group sent letters to their dealers this month stressing the competitiveness of their incentives.

"While there is no question the plan is generating "buzz" in the marketplace, I question the flexibility and sustainability of the plan," Darryl Hazel, president of Ford division, told dealers in a note Tuesday.

"The GM program ... has stirred up the market and will certainly bring additional traffic into their dealers' showrooms," Maury B. Mingle, a staff specialist in Chrysler's Denver business center, told dealers in an e-mail last Friday. "It is also a tremendous opportunity for DCX dealers because . . . you maintain flexibility which will give you the competitive advantage you need to close deals and capture incremental business brought into the market by GM's advertising."

GM's market share has slipped to 25.4 percent this year from 27 percent a year ago. With losses mounting in North America, GM this week said it will close plants and cut 25,000 factory jobs by 2008.

Robert Lutz, GM's vice chairman of product development, in an interview on Wednesday tempered expectations the automaker will recover market share -- it once controlled half of the U.S. auto market -- even if it has a few small victories in coming months.

"I don't know why or how we perhaps nourished the expectation that it's our manifest destiny to get back to 50 percent share," he said, "because I just don't see that happening, frankly. "

You can reach Brett Clanton at (313) 222-2612 or bclanton@ detnews.com.