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Do fleet sales hurt automakers or help them?

nippononlynippononly SF Bay AreaPosts: 12,687
edited March 21 in Chevrolet
I was browsing through the Detroit News and came across this article on fleet sales:

http://www.detnews.com/apps/pbcs.dll/article?AID=/20060329/AUTO01/603290375/1148- -

Turns out that all the talk early this year of domestics gaining back lost market share was solely on the back of heavily boosted fleet sales. In fact, market share of retail sales at GM and Ford has been falling steadily, while it has held flat at Chrysler Group, the automaker that was so celebrated last year for boosting its market share so much and having such a great year.

Also turns out that more than 20% of Hyundai's overall sales mix is to fleets - here's another that has been a raging sales success story over the last few years. Perhaps that story has another side.

Toyota is listed at 7%, and the last numbers I saw (a while ago now) for Honda showed 1% or less.

For the domestics, about 2/3 of all fleet sales are of the kind generally considered to hurt profitability heavily: sales to daily rental fleets. Interestingly, Ford is better off here, as a lot of its fleet sales are Crown Vic sales to government entities, which have a higher profit margin.

Anyway, analysts seem to think that fleet sales are generally a bad thing:

"And Wall Street is starting to worry.

As the Detroit automakers' retail market shares tumble, their dependence on fleet sales grows more pronounced," said John Murphy, an analyst with Merrill Lynch in New York. "Soaring fleet sales do not bode well for earnings or residuals."

The biggest fleet sellers apparently agree, as both GM and Ford have made public announcements in the last year or so that they are trying very hard to reduce fleet sales - GM has even given a specific target this year, according to the article: 100,000 less than last year.

GM has the individual brand with the highest fleet sales by year: Pontiac, which was at 41% of total sales to fleets for 2005.

Will the domestics (and Hyundai) be able to increase their retail sales and reduce their sales to fleets? If so, how? And how long will it take them to do it? Does it even matter?

2013 Civic SI, 2009 Outback Sport 5-spd (stick)

Comments

  • socala4socala4 Posts: 2,427
    Fleet sales, when used in moderation, are not entirely bad. Fleet sales can provide a channel that allow manufacturers to sell off excess inventories, and provide a stable source of volume business that can stabilize cash flows. Also when used appropriate, it can provide a form of marketing for the nameplate if renters and fleet drivers come away with an impression positive enough to turn them into retail customers.

    In practice, the domestic makers, particularly GM, have taken it way too far, and are now achieving diminishing returns. Not only do these high volumes of cars hurt resale values, but the guaranteed source of business has encouraged GM to churn out mediocre cars with little regard for long-term owners, and to encourage poor inventory management practices.

    Fleet sales have been important to Hyundai's recent growth spurt, and they could prove to be OK in the long run IF the company reduces their dependency on them by using the fleet experience as a chance to turn renters into Hyundai buyers, and if they can avoid the rental car stigma that has harmed many of the nameplates of the American automakers. But if fleet sales become seen as an easy way to make an easy sale and to amortize fixed costs, as particularly GM has done, and if the volumes ramp up for a long time to come, then it won't be long before Hyundai finds itself as being a junior partner to the Big 2.5 in the rental car game, with all of the low margins and heavy baggage that runs with that.
  • nippononlynippononly SF Bay AreaPosts: 12,687
    that financial experts focus on lack of profits in these sales, and on poor residuals - we know poor resale is the case for the domestics these days - but I think the point you make is much more ominous for the future: that automakers dumping such large percentages of their total vehicles into fleets become less focused on making the best product that will please the widest number of individuals, and MORE focused on making the vehicle they can best cut costs on so that the zero-profit rental fleet sale can be secured at the lowest possible price and in the maximum quantity.

    It's funny - Chevy has these TV ads running right now talking about how "more people chose Chevy last year than any other brand". While it is true that Chevy was the brand with the most sales, it may NOT be true that "the most people" chose them, as a quarter of all Chevys (27% to be exact) went to fleets last year, where one fleet buyer could have chosen 50 cars at a single purchase. In fact, Chevy has the top two fleet sellers, Impala and Malibu, which beat out even the fleet king, the Taurus. Talk about deceptive advertising!

    But then, that is the plus to fleet sales - they keep the numbers up, maybe even giving you something to boast about once in a while...

    2013 Civic SI, 2009 Outback Sport 5-spd (stick)

  • socala4socala4 Posts: 2,427
    You nailed it right here:

    that automakers dumping such large percentages of their total vehicles into fleets become less focused on making the best product that will please the widest number of individuals, and MORE focused on making the vehicle they can best cut costs on so that the zero-profit rental fleet sale can be secured at the lowest possible price and in the maximum quantity.

    That is exactly what has happened. When your major customer is a fleet buyer, the goal becomes to build a cheap car, so that the profit isn't lost. When viewed strictly on the numbers, as the Big 2.5 have tended to do, there's no point for the automaker to make the car better for a buyer who isn't going to pay anything extra for that improvement. It also breeds sloppier management, because the fleet buyers assure you of a large number of sales, no matter what happens.

    I pointed out on another thread that if you eliminated the fleet sales, Toyota sold just about as many passenger cars in the US as did GM, it's the trucks/vans/ SUV's and fleet sales that gave GM the edge. The largest gap between GM and Toyota is revenue -- the average wholesale selling price of GM vehicles is about $5,000 less than it is for Toyota. If GM could simply command the same wholesale prices as does Toyota, most of GM's cash flow problems would be solved.
  • nippononlynippononly SF Bay AreaPosts: 12,687
    it's sad - when the Neon went away, it's no surprise what jumped in to replace it on the top ten in fleet sales - the Cobalt. Now here's a car that GM made a very decent effort on, with average or better results. But people weren't ready for a good smaller car from GM, and it was mostly ignored by retail buyers, and now with the huge fleet sales, it will be the Cavalier all over again five years from now.

    As for the Toyota/GM sales race in the U.S., well, if you took away all the fleet sales, GM would still sell 50% more vehicles than Toyota. But if you then took away the Silverado/Sierra and the Tundra, GM would only just barely be ahead. So lots of rental specials and one big pick-up are all that stands between Toyota and number one in sales in the U.S.!! :-P

    2013 Civic SI, 2009 Outback Sport 5-spd (stick)

  • mirthmirth Posts: 1,212
    The Detroit News had a good article on this yesterday, with lots of good stats:

    http://www.detnews.com/apps/pbcs.dll/article?AID=/20060329/AUTO01/603290375/1148- /AUTO01

    One interesting thing I hadn't considered - a lot of Ford fleet sales are for the F-150 to construction-type companies rather than to the rentals (although the Taurus is still a rental regular). I imagine those types of fleet sales are slightly more popular than the rental fleets.
  • jlawrence01jlawrence01 Posts: 1,828
    it's sad - when the Neon went away, it's no surprise what jumped in to replace it on the top ten in fleet sales - the Cobalt

    1) GM is NOT discounting the Cobalts to fleets as much as they did the Cavalier. That is why you see a lot of the non-rental fleets moving more toward the Hyundai Elantra and the Ford Focus. There is almost a $1500-2000 price disadvantage on the Cobalt on some of the quotes that I have seen.

    2) On the rental side, the same thing is going on. Avis has pretty much replaced the Cavalier with the Focus (and Hertz the Focus with the Elantra, the Classic and the Carolla). In the rental situations that I have been in (only about 1x per month recently), I have seen few Cobalts in rental fleets at this point.

    3) I have also seen a lot of agencies "upgrading" compact drivers into Ford Taurus which continue to be quite prevalent in rental fleets. (In fact, they are also prominently featured n the 2007 Ford Fleet Guide.)
  • socala4socala4 Posts: 2,427
    1) GM is NOT discounting the Cobalts to fleets as much as they did the Cavalier. That is why you see a lot of the non-rental fleets moving more toward the Hyundai Elantra and the Ford Focus. There is almost a $1500-2000 price disadvantage on the Cobalt on some of the quotes that I have seen.

    2) On the rental side, the same thing is going on. Avis has pretty much replaced the Cavalier with the Focus (and Hertz the Focus with the Elantra, the Classic and the Carolla). In the rental situations that I have been in (only about 1x per month recently), I have seen few Cobalts in rental fleets at this point.


    I have some doubts about this. For one, Cobalt sales in February fell about 19% from January levels. January was a big month for fleet sales, and the slide between January and February corresponds with those of other nameplates that are also highly dependent on fleets, which tells me that the fleet sales are likely still important: Article

    For another, looking at Fleet-Central.com, I see that Cobalts include a $1500 fleet incentive, which is actually $500 higher than the Focus. The acquisition cost of the Cobalt is about $1200 less than the Focus: Fleet Table

    It has become pretty clear that the Wall Street analysts have clued in on the severity of the fleet sales problem, so GM is quite vocal about its alleged desire to reduce its dependency on them. An excerpt from the above article makes it clear that GM certainly wants to give this impression:

    Paul Ballew, GM's executive director of market and industry analysis, said GM was pleased with its performance because it relied less heavily on incentives and fleet sales than in the past. Ballew said GM's incentive spending was down $1,000 per vehicle from last February, while sales to corporate and government fleets fell to 25 percent of overall sales, down from 30 percent a year ago.

    Ballew said GM expects to lose some U.S. market share as it pulls back on fleet sales, particularly to rental car agencies. But he said the change is necessary because fleet sales are less profitable and can hurt resale values by flooding the market with used vehicles.

    "Quite simply, we need to back off on rental," Ballew said. "It's very consistent with the overall restructuring plan in North America."


    I have my doubts that this rhetorical change is going to translate into significant changes. And given the extremely poor reliability remarks given by Consumer Reports, I have my doubts that any aspirations for high retail unit sales for Cobalts are going to be achievable -- as the word gets out, I would bet that whatever retail sales they have are going to suffer.
  • socala4socala4 Posts: 2,427
    That's a very good article, thanks for that. It seems to confirm my suspicions in #8:

    -The Cobalt was ranked 9th in fleet sales in the US (I presume based upon the chart that this is for the period of October 2005-January 2006).

    -Of GM cars, it was ranked 5th in fleet sales, after the Impala, Malibu, Grand Prix, and G6.

    -GM fleet sales during October 2005-January 2006 actually comprised a higher percentage of its total sales than for the same period one year prior, increasing from 26% to 31%.

    It makes you wonder whether GM spokespeople are just going to tell us what we want to hear, while doing the same old thing. Time will tell.
  • nippononlynippononly SF Bay AreaPosts: 12,687
    in case you hadn't noticed, the Focus and the Elantra do not appear in the list of top ten fleet models. Only the Cobalt does. And I do not mean to say that Cobalt is Cavalier II today. But GM will undoubtedly see that it has not been profitable in boosting retail sales, and will let it run on too long as a result, while increasing fleet sales on it every year, so that in five years it WILL be Cavalier II.

    And the article mirth linked is exactly the same one I linked in the first post, I believe! :-P

    It's funny that nobody ever mentions that Hyundai has fleet sales almost as high as the domestics. Sonata alfready has a $2000 cash rebate, I believe, and it was only redesigned six months ago. Meanwhile, some huge percentage of them, like 1/3, are going to fleets as they fail to sell to retail customers. Isn't it Hyundai's lead fleet model?

    2013 Civic SI, 2009 Outback Sport 5-spd (stick)

  • socala4socala4 Posts: 2,427
    in case you hadn't noticed, the Focus and the Elantra do not appear in the list of top ten fleet models. Only the Cobalt does.

    Good observation. Ford is doing with the Taurus what I would recommend that GM do with either Buick or Pontiac (my personal choice would be Buick) -- use a single badge as a dumping ground for all of its outdated technology and tired designs, and preserve the other badges strictly for retail sales. (In other words, absolutely no more Chevy's going to the fleets, period, with virtually all of the generic fleet boxes being sold exclusively as Buicks and only to fleets. The only non-Buick cars that should go to the fleets should be to introduce small numbers of hot new cars with the goal of exposing them to a wider retail audience that ends up liking them and spreading the gospel to potential retail customers.)

    I could see the Cobalt eventually moving toward The Cavalier Zone. I'd even go further, and argue that it may already be happening, but that GM is trying to give us a different impression for as long as possible, in the hopes of making the analysts believe that GM has improved its chances in the retail market, and to facilitate approval of a bankruptcy turnaround plan.

    As for Hyundai, the fleet sales are an important part of its US sales, but the company's overall impact on the fleet market is pretty small. (To put things in perspective, Hyundai-Kia's sales YTD 2006 comprised about 4% of the total US car/ light-truck market, about one-half of Honda's, less than one-third of Toyota's, and less than one-fifth of GM's.) Last I checked, about 81% of the US rental car market fleet came from the Big 3, leaving a rather small chunk of the market to all of the other automakers combined.

    Accordingly, I doubt that the Hyundai nameplates have come anywhere close to earning the rental car stigma affecting several of the domestic nameplates, and Hyundai can still use these fleet sales to its benefit IF it keeps up product quality, and if it leaves renters and fleet drivers with positive impressions of its product that will contribute to more retail sales. But if it becomes a long-term strategy for gaining large proportions of its sales, then yes, it would be making a serious mistake.
  • rockyleerockylee Posts: 14,011
    socala4,

    Well GM is going to reduce it's fleet sales I read somewhere not to long back.

    BTW-I do appreciate your stance on not blaming the UAW for everything. People like my father was really sadden yesterday. He was the first hourly person at his plant to find out his plant was closing in the next 2 years. :cry:
    I did tear up a bit yesterday by the awful news. It was hard for me to absorb and accept. Especially since his plant has always made lots of money. My pops has pics of me in my uniform at his workstation and all of them told my father, tell your son to stay in Texas, so he can support your 2 grandchildren. His dream of working for General Motors or Delphi is finished and to stay there.

    They aren't just co-workers, but are like a family to him. My dad is one of the lucky ones who will get to see retirement. The rest will have to start over in a job market where good paying wages are scarce. I've in the last 6 years have had many friends and family members lose jobs to either cutbacks or plant closings. I told dad to move here and get a job at one of the oil refineries if he felt it was going to be too tough on pension alone.
    It's truely is sad.

    Rocky
  • rockyleerockylee Posts: 14,011
    How are the fleet totals looking so far this year, if you don't mind me asking ?

    Rocky
  • carguy58carguy58 Posts: 2,303
    and their fleet sales.

    GM:

    First off Pontiac is selling 41% to rental fleets. That is a huge number. I think the reason why they are selling to so many rentals is because the 04 Grand Prix was just a warmover of the 97-03 model exterior style wise. I don;t think its a huge step up from the 97-03 model either in most aspects. Sure the interior is better in the 04 than the 97-03 but still in my opinion the interior needed more upgrading in terms of materials.

    The G6 has been poorly received by the buying public.

    Chevy:

    The Malibu is a styling disaster. The current model does not even look as good as the 97-03 either. The interior is better in it but the style on the outside is a big big drawback.

    Impala: This is another model that is not clicking with the automotive buying public. The current one looks better than the generation it replaces but isn't doing well at retail.

    Chrsyler:

    No wonder why the PT and the Cavravan are in the top 10 in fleet sales they are old from being new from the 2001 model year. The 01 Caravan was just a warmover from the 95-00 model. The Stratus is also in the top 10 in fleets sales. One of the huge drawback is the interior in the Stratus. In my opinion the car has too many cheap plastics. The 01-06 Sebring never had the popularity as the 95-00 model either. I think the reason for the 01 Caravan warmover and the 01 Sebring/stratus was because of Chrysler was just in transition from merging with Mercedes in the 99 model year.

    Ford:

    The Focus is old old old. The Focus needs a replacement now. The Tarus ok yeah once Ford dumps axes it their fleet sales will go down as a result but Ford will lose some market share by giving up the Tarus in their line-up because they won't have it to sell to fleets anymore.

    Hyundai:

    The Sonata the styling is a huge drawback because it looks like a Honda Accord that came out foir the 03 model year. This is why people aren't buying the Sonata. If Hyundai is going to continue to make models that mmic Honda and Toyota styling their fleet sales will increase. People who buy Hyundai do not want a Hyundai to look like a Honda or Toyota or else they would be buying a Honda or Toyota. I would have thought Hyundai would have looked at mid 90's Mazda and Nissan as evidence trying to be Honda or Toyota will land you nowhere but for some reason Hyundai is making the same mistakes that Nissan and Mazda did circa 1995.

    In conclusion I think Chrysler is the favorite right now to cut fleets sales of these 4 brands if they come up with an 07 Sebring thats alot better than the generation it replaces. I think the Caravan will be all new for 08 so Chrysler can cut fleet sakes right away because their rental fleets special cars will be newer in a fewer years. The PT will I think be a warm-over of the current model unfortunately though.

    Another glaring statistic is Mitsubishi used to sell alot to rental fleets a few years ago where the fleet sales were alot of their business. They have cut alot fleets sales from where they were a few years ago.

    In my opinion fleets sales are good if a brand can keep them to a normal level but if you sell to much to fleets the buying public's perception of that particluar brand goes down.
  • socala4socala4 Posts: 2,427
    This article serves as a decent update:

    Analyst sees cloud in higher auto fleet sales

    General Motors Corp., Ford Motor Co. and DaimlerChrysler all were more dependent than usual on selling vehicles to commercial fleet operators during the first quarter, which isn't good news, auto industry analysts said Friday.

    Fleet sales typically carry lower profit margins than retail sales, so the higher amount of transactions with fleet operators could squeeze the automakers' overall profit margins, analyst John Murphy of Merrill Lynch & Co. wrote in a report for investors.

    Detroit's fleet sales reached 33.3 percent of overall sales during the three months ended March 31, well above the first-quarter average of 26 percent during the past five years, Murphy wrote.

    The results were skewed by a heavier-than-usual buying spree in January by car rental companies seeking to update their fleets, said analyst David Healy of Burnham Securities Inc. He noted that GM has said it will try to reduce its sales to rental agencies, where the profit margin is typically lower than sales to governments or corporate customers for their fleets.

    GM's fleet sales in January were up 36 percent from a year earlier, but were down 11 percent in February on the same basis and down 5 percent in March, GM spokeswoman Deb Silverman said. The January fleet sales accounted for 38 percent of the company's total sales that month, a higher than usual proportion, she said.

    U.S. automakers have been losing market share to Asian rivals in recent months, and that trend continued in the first quarter this year, the analysts reported this week. Murphy projected that GM's sales will decline 6 percent in April from a year ago to a current market share of 24.2 percent, Ford's will decline 5 percent to a market share of 17.7 percent, and DaimlerChrysler's will fall 2 percent to a market share of 14.7 percent.


    Dayton Daily News
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