April was indeed the cruelest month for automakers as many consumers stayed on the sidelines in the face of stagnant home values and rising gas prices.
The timing couldn't be worse for Detroit. General Motors (GM), Ford (F), and DaimlerChrysler's (DCX) Chrysler Group are all trying to dig out of financial sinkholes. Traditionally, it's been high-profit pickup trucks and sport-utility vehicles that have pulled the Big Three out of sales tailspins. But demand for those gas-thirsty work and play vehicles is down. Overall sales fell 2.5% from a year ago, tracking at 16.3 million vehicle sales, vs. 16.7 million a year ago.
Some automakers said sales of several key passenger car models were also down, indicating that consumer confidence is slipping beyond just the expected falloff in pickup sales, which historically ebb and flow with housing sales and rates of new construction. When construction and remodeling surges, builders and contractors usually take advantage of the good times by buying new trucks. Also, the trend of households adding third vehicles, as they did at times during the last decade with help from home-equity loans, seems to be on the wane.
Payback to automakers for improving quality over the last decade also means that car and truck owners are able to hold onto their wheels longer without paying a heavy price at the repair shops.
Bye-Bye, Eye Candy
"All that home equity that was being tapped, plus the rich incentives carmakers had been offering, created a fat city atmosphere a few years ago; but that is gone," says auto industry marketing consultant Dennis Keene. "The market is contracting to the cars people have to have and cutting out a lot of the splurge and eye-candy buying decisions that helped the market before."
Taking into consideration two fewer selling days in April vs. a year ago, Ford posted a sales drop of 6%. GM sales were down 2%. Chrysler sales were up 2%, on the power of heavier incentives and sales to rental fleets to clear out storage lots of unsold vehicles that have dogged Chrysler since last year. Nissan (NSANY) Motor reported an 11% monthly sales decline.
Toyota Motor (TM), which outpaced the rest of the industry with 11% growth in the first quarter, saw sales growth slow to just under 4%. "It appeared to us that consumers were just frozen," Nissan U.S. sales chief Brad Bradshaw told Reuters. "It just seemed to us that these housing issues… along with higher gas prices seem to have frozen everybody."
Luxury Sales Resist Trend
Proving the old axiom that the wealthy buy what they want when they want no matter how mass-market consumer confidence is tracking, many luxury brands posted strong results. Mercedes-Benz sales were up 6.4%. BMW sales were up 9% based on the fewer selling days, and sales are up 5% so far this year. Land Rover sales were up 22%.
All automakers, including Toyota and Nissan, are seeing pickup and SUV sales down practically across the board. Popular SUVs and trucks likeFord F Series, , Nissan Pathfinder, Chevy Trailblazer, and Toyota Sequoia all posted double-digit declines.
Analysts expect industrywide U.S. auto sales to have dropped to an 18-month low in April, raising questions about the strength of demand for the remainder of the year. Pessimism should bring out more generous incentives, something car buyers are used to waiting for.
Eating Into Cash Hoards
Edmunds.com estimated that Chrysler led the industry in incentive spending in April at a per-vehicle average of $3,994, down from $4,237 in March. Ford was No. 2, with an average sales incentive of $3,016 per vehicle, Edmunds said. GM, which ran a month-end program offering lower-cost financing to less creditworthy borrowers, was third, at $2,768 per vehicle.
Detroit automakers have been trying to decrease profit-eating sales incentives and sales to rental car fleets to boost residual values of their models and wean consumers off the discounts. But the softening market is making that strategy expensive, as automakers have to erode their cash hoards to fund their operations—and this at a time when revenues from car sales aren't enough to cover enormous responsibilities for health-care and pension benefits for employees and retirees in addition to their routine capital needs.