Kicking The Rebate HabitKathleen Kerwin
Russ Darrow has been watching new Plymouth Neons, Dodge Intrepids, and Jeep Grand Cherokees zoom out of his Milwaukee-area dealerships lately. That's good news for Darrow--and even better news for Chrysler Corp. Because for the first time in years, Darrow and other dealers are moving cars without cash-back offers or other costly marketing incentives. A year ago, Chrysler had to slap $1,000 rebates en the Plymouth Sundance to move the aging subcompact off dealer lots. Not so with the snazzy Neon that replaced it. "The hot-selling new lines don't need incentives," Darrow says.
Chrysler isn't alone. Nearly all of the auto makers--and especially the Big Three domestic manufacturers who got consumers hooked on rebates in the past recession--are seeing big payoffs as they wean buyers away from cash-back offers and leasing subsidies (chart). That's a big reason why Detroit's earnings are cruising. On July 14, Chrysler posted second-quarter net earnings of $956 million, up 40% from the previous year, on sales of $13 billion. The company's retail incentives averaged only $610 per vehicle during the period, down from $1,050 a year earlier.
When Ford Motor Co. releases quarterly earnings on July 27, Morgan Stanley & Co. analyst Scott F. Merlis is expecting $1.5 billion to $1.7 billion in profits, up from $775 million the year before. Ford has slashed its incentive costs by nearly one-half in the past year, in part by dropping rebates on nearly half of its 22-model lineup. And Merlis anticipates that General Motors Corp. will report $1.6 billion in earnings on July 28, compared with $889 million in 1993's second quarter. Analysts even expect GM's troubled North American auto operations to be back in the black.
NEW GAME IN TOWN. The Big Three's robust profits also owe a lot to cost-cutting, strong sales, and a high-octane mix of lucrative trucks and upscale, option-loaded cars that boost margins. Chrysler Chief Financial Officer Gary C. Valade figures that such sales accounted for more than $100 million of the company's year-over-year profit swing.
Still, the steady decline in incentives represents not only profit opportunity but also a marketing victory for Detroit. Domestic auto makers have been trying to break the incentive habit for several years. But consumers had learned to play the game. When a car company backed off on incentives, customers just postponed buying until the manufacturer was forced to bring back rebates.
It didn't help that Detroit was pushing a lot of outmoded cars. To move the metal, carmakers had to resort to big giveaways. "We were trying to sell the deal more than the product, quite frankly," says Chrysler's Valade. "Now, we're fortunate to be making vehicles that people want to drive and own."
The stronger economy helps a lot, too. Car companies don't have to try so hard to lure customers into the showrooms. And these days, leasing is replacing the rebate as consumers' gimmick of choice. Leases often involve marketing subsidies, too. But those subsidies are also coming down. And Ford, the most aggressive player in leasing, says its subsidies are running at about the same per-vehicle levels as its cash rebates.
Givebacks are hardly history. Chrysler slapped a $500 rebate on its popular minivans last winter to keep them competitive with Ford's new Windstar. And some hefty incentives never went away, such as the $2,000 rebate on the Chevrolet Corvette.
But for the customers flocking to Detroit's new offerings, such wheeling and dealing is beside the point. "A rebate is not the reason they're here," says Darrow. The trick will be to maintain Detroit's profit margins when sales slow down. And that means making sure customers don't get hooked on rebates all over again.