Ford's Gamble on Luxury
Over the past decade, Ford Motor Co. (F) has grown fat on profits from its pickup trucks and sport-utility vehicles. Last year, those trucks accounted for 80% of its pretax auto earnings in North America. But now that foreign auto makers have finally found their groove with light-truck vehicles that are truly competitive, those earnings are in jeopardy. Faced with such hot-selling models as the Toyota Sequoia and the BMW X5, Ford could see its share of the light-truck market fall by as much as 10% in the next two years, by some estimates.
Now, the question is: Can Ford turn the tables on BMW, Mercedes-Benz, and Toyota Motor's Lexus division through its $12 billion investment in luxury brands? Ford CEO Jacques A. Nasser thinks his luxury-growth strategy is a winner. "No one else in the business can duplicate what we've done," he says. Through a series of acquisitions, Ford has built an impressive portfolio of luxury brands--Jaguar, Volvo, Land Rover, Aston Martin, and Lincoln--and hired an army of former BMW executives to run the combined operation. The man at the top of Ford's Premier Automotive Group is Wolfgang Reitzle, the charismatic former president of BMW, whose job as group vice-president is to build Ford's luxury brands into a profit machine as powerful as its trucks.
If Reitzle can whip Ford's luxury brands into shape, the auto maker may be sitting on a gold mine. Fueled by the stock market gains of aging baby boomers, sales of those autos have been growing faster than the rest of the market. And traditionally, wealthy car buyers are somewhat insulated in a downturn. Last year, Ford's luxury brands sold 915,000 vehicles worldwide, putting it 140,000 vehicles ahead of BMW and about 400,000 vehicles behind industry leader Mercedes-Benz. By 2005, Ford wants to sell 1.3 million luxury vehicles. The company doesn't break out financial results for its premium group, but analysts estimate that the unit had revenues of $26.5 billion last year and operating income of $1.3 billion, about 19% of Ford's total. Merrill, Lynch & Co. analyst John Casesa predicts that profit margins for the group could more than double, from 3% to 8.3%, in five years, spurring a 27% jump in Ford's overall earnings.
But Reitzle faces difficult challenges. While Ford's premium brand names are strong, all are underperforming, analysts say. Reitzle has to find a way to boost efficiency by sharing parts and factories and to broaden each marque's vehicle lineup without damaging the brands' venerable images, even as rivals step up their own offerings. And he has to act fast. "They're in a race to grow their luxury portfolio to offset the deterioration that will ultimately come in trucks," says Deutsche Banc Alex. Brown analyst Rod Lache. "I don't know if they'll win."
ECLECTIC. Reitzle certainly has an ambitious game plan. Unlike Mercedes or BMW, which are expanding their lineups under a single brand, Ford will cover the luxury segment with a portfolio of brands, each catering to a different lifestyle or type of buyer. Volvo, for instance, is positioned as a maker of safe family cars, while Jaguar connotes British elegance, and Land Rover caters to the off-road safari set. Ford argues that it doesn't have to spend money developing a Jaguar SUV, for instance, because customers can opt for a Range Rover or a Lincoln Navigator instead. Says Victor H. Doolan, executive director for the premium auto group: "We don't have to stretch our brands beyond their core values."
The key to Ford's multi-brand strategy is Reitzle's goal to eventually sell all five luxury nameplates in one dealership. The dealer-owner would operate five separate showrooms under one roof, with separate sales staffs but combined service operations and back-office functions. Doolan says the idea will work because most luxury car buyers own three or four vehicles. Ford, he says, can "fill all the needs of their garage" at a single dealership. Construction recently began near Phoenix on the first of about 10 such dealerships that are scheduled to open in the next 18 months. Those dealerships will include a quarter-mile test track so that while an owner's car is being serviced, the customer can test-drive another luxury marque.
Most dealers would jump at the chance to own a megastore selling all of Ford's luxury brands. But many are worried that investing in such a dealership, which could cost up to $25 million, would be too expensive. "Most of us are waiting to see how it will work," says Harold Kuhn, owner of Park Lincoln Mercury in Detroit. One big issue: Ford has to persuade dealers of different brands to sell their stores to other car dealers to form the consolidated luxury operations. Already, Ford has encouraged Lincoln Mercury dealers to sell their businesses to reduce the number of dealers in certain regions.
Some critics say the idea won't fly because Ford's premium lineup just can't encompass everything luxury owners want. Susan Jacobs, president of Jacobs & Associates, a Rutherford (N.J.) firm specializing in luxury-market analysis, gives this example: A Jaguar enthusiast who likes sporty cars is more likely to want the European high-performance experience of a BMW or Mercedes for his new SUV than a Lincoln Navigator or Land Rover. With rivals adding SUVs and entry-level models to their lineups, Ford can forget about stealing customers from European brands, says Jacobs. "The mistake they're making, in a very crowded market," Jacobs says, "is that you just can't manage all these boutique brands."
Reitzle believes that by carefully deciding which new models to add under each brand name, collisions between brands can be avoided. "You can only do what we're doing when you have a brand portfolio that is complementary. Our setup is unique," he says.
So are the problems. And Reitzle can't ignore each brand's particular issues as he pursues his integrated luxury strategy. Jaguar, having overcome longstanding quality problems, has perhaps the most aggressive growth plans. Its sales grew about 25% last year, to 87,000 units, with the addition of the $45,000 S-type, a sedan built on the same platform as Ford's Lincoln LS and the upcoming Ford Thunderbird. Jaguar is moving further downscale with the $30,000 X-type, a competitor to BMW's 3-series, which goes on sale this summer. And to expand its market, Jaguar is also going after younger drivers and African-American purchasers by using marketing that is geared toward them. But the low end of the luxury category is perhaps the most competitive segment, and as the economy softens, it's the one that could be subject to a price war.
FIXER-UPPER. Ford also has to find a way to make Land Rover profitable, something its previous owner, BMW, couldn't do. Land Rover isn't as bad off as Jaguar was when Ford purchased it in 1989, but company execs estimate that it will take as long as two years just to shore up the British auto maker. Long term, the plan is to share platforms with Ford's trucks to lower costs and improve quality. For now, growth will come from the addition of lower-priced models, such as the Freelander, which debuts in the U.S. later this year.
Perhaps the toughest challenge is turning around Ford's own Lincoln brand. Even though sales climbed in the late '90s with the success of the big Lincoln Navigator SUV, the brand was eclipsed by faster-growing import rivals Mercedes and Lexus. Ford execs are trying to reshape Lincoln around the theme "American luxury." This spring, the $52,500 Lincoln Blackwood, an SUV-pickup hybrid, goes on sale. And within a few years, Lincoln will add an entry-level sedan and a compact SUV. More Lincolns are also on the drawing board.
Even Volvo, the Swedish carmaker known for its boxy sedans and wagons, is beginning to introduce more stylish models, such as the new S60 sedan now on sale. Volvo is Ford's biggest luxury brand, selling 477,000 units worldwide, but the goal is to boost that figure to 600,000 within five years. More important, Volvo's growth is key to Ford's turnaround efforts in Europe, where Ford can stem losses by building Volvos in underutilized Ford factories.
Building the Premier Automotive Group into the profit machine Ford envisions will take time. "We are now on a 10-year journey," says Reitzle. With so many brands under its belt, Ford is hoping for a comfortable ride.
By Joann Muller, with David Welch, in Detroit