How Many Rebates Can Fit In A Minivan?David Woodruff
When their fourth child arrived last summer, Cathie and Ken Zajac knew it was minivan time. Shopping at dealerships near their Philadelphia home, the Zajacs fell in love with the stylish, smooth-riding Ford Windstar. But that was before they eyeballed the $24,000 sticker. "The price knocked us over," says Ken Zajac, 35, national sales manager for a sports news service. The couple quickly retreated to used-car lots and in January plunked down $17,000 for a 1994 Dodge Grand Caravan.
The Zajacs aren't alone. For the first time in more than a decade, the torrid growth of sales for new minivans has suddenly slacked off. The reasons are varied: higher prices, competition from sexier sport-utility vehicles, and family budgets squeezed by climbing mortgage payments. The result has been bloated inventories. In late January, Chrysler Corp. and Ford Motor Co. announced rebates of as much as $1,100 on minivans. And Ford even shuttered its Windstar factory for a week. "They've hit a wall," says Salomon Brothers analyst John V. Kirnan.
BAD TIMING. Startled carmakers are staring at the prospect of squeezed profits on one of the industry's biggest moneymakers. Although minivan sales are still expected to grow slightly this year, to about 1.3 million, analysts are dialing back their previously bullish forecasts and now say manufacturers will need to keep juicing up rebates and other sales incentives to entice consumers. Indeed, Chrysler Chairman Robert J. Eaton recently conceded that the cost of such incentives--which reached a low of $410 per vehicle in the fourth quarter--would rise this year.
The slowdown couldn't hit at a worse time for the No.3 carmaker, which rakes in as much as 30% of its profits from minivans. In April, Chrysler will start selling its first brand-new minivan since creating the segment in 1983. The 1996 models, which the company spent $2.3 billion to develop, look like they'll be a hit. People waited in long lines for a chance to sit in them during their first public appearance at Detroit's annual January auto show. The minivans are roomier and more stylish than the old models and boast neat new features, such as an optional sliding rear door on the driver's side.
ROBBING PETER. But launching a vehicle into a tepid market is always a challenge. Moreover, the slump complicates the delicate process of clearing out older models to make way for the new. Just ask Ford. The company decided to continue selling its older, $18,000 Aerostar model alongside the Windstar, which starts at $20,000. But dealers say the Aerostar has been stealing some cost-conscious buyers away from the newer model.
To try to avoid a similar bind, Chrysler's marketing honchos plan to phase out 1995 vans in stages, as production of the new 1996 model ramps up. The company has already stopped building the top-end Chrysler Town & Country and loaded versions of the Caravan and Plymouth Voyager. Chrysler slapped the biggest rebates, $750 to $1,000, on those models. If all goes well, most of those Voyagers and Caravans will be sold by the time top-end versions of the new van arrive at dealerships this spring. Meanwhile, Chrysler is still assembling the lower-priced versions of the present model. Later this year, however, the company may be forced to sweeten the current $500 rebates on these vans
to make way for their replacements.
If Chrysler's transition stumbles, Ford is poised to pounce on any weakness. After the Windstar debuted, Ford gained 6 points of minivan market share in 1994, while Chrysler lost 3.5 points. And this year, the No.2 carmaker is eyeing more sales: Chrysler will build at least 65,000 fewer minivans as it shifts factories over to production of the new model. To keep the heat on, Ford matched Chrysler's giveaways with a nationwide $1,000 rebate on the Aerostar and more than doubled the Windstar's markdown, to $1,100. "We think we have the bases covered," says Keith Bins, marketing plans manager for Ford's minivans.
STICKER SHOCK. With penny-pinching consumers such as the Zajacs out there, Chrysler's biggest potential pitfall may be pricing its new van too high. The company already increased stickers over the past year by about 5%, with the base model rising a hefty $1,341, to $16,160. Company officials say entry-level prices for the 1996 models will rise only enough to offset the addition of standard antilock brakes, now a $600 option. "We aren't going to abandon that end of the market," says Richard A. Winter, general product manager for the minivan platform team. Loaded top-end versions, such as the Grand Voyager LE, which currently starts at $23,680, will increase more, he concedes.
Still, if customers dig in their heels against higher prices and the rebate game really gets nasty, Chrysler has an advantage. Because its costs are lower, Chrysler now earns an average gross profit of about $6,000 on its vans, estimates Kirnan. At Ford, it's more like $4,500 to $5,000, while General Motors Corp., which lacks a strong entry, is barely breaking even, Kirnan says. Moreover, since Chrysler's new van has 1,000 fewer parts than the one it replaces and thus is easier to build, profits could jump to an average of $7,000 per van once production is up to full steam. That means Chrysler can afford to squeeze its competitors with fat marketing incentives and still turn a nice profit.
In the next few months, Detroit's marketing moguls hope their rebates, along with dollops of marketing hokum in the traditionally strong spring selling season, will bring back the good times. So do dealers such as Alan Spitzer, whose 22 retail stores in Ohio and Florida posted a 30% drop in minivan sales in December. Nor is January looking too hot. If that kind of sluggishness persists, the auto makers may have to concede that their high-profit minivan joyride is starting to run out of gas.