Average discounts on the GMC Sierra broke $9,000 at the beginning of July, raising investor concerns that GM was back to its old ways of trading profit for sales gains. Image source: General Motors.
Is General Motors (GM -0.05%) resorting to big discounts to move its full-size pickup trucks?
That was the concern raised by investors after Bloomberg reported that GM had more than doubled the discounts on some pickups during the first 10 days of July. It seemed to go against everything CEO Mary Barra had been saying about GM's approach to incentives and profits. In an article last weekend, I asked: What was GM thinking?
Well, on Thursday, GM's chief financial officer told us what the company had been thinking. Here's the story.
Big discounts raised big questions about GM's strategy
First, the background: Bloomberg, citing (usually very reliable) figures from J.D. Power, said that GM's incentives on the Chevrolet Silverado had jumped 76% from June levels during the first 10 days of July. In the same period, incentives on the Silverado's upscale twin, the GMC Sierra, jumped 147%. GM was paying out an average of almost $10,000 per truck on the Sierras.
That seemed high enough to eliminate most of the profit. Big incentives are part and parcel of the pickup business, but the figures from J.D. Power went way beyond "big." For comparison, Ford's(F 0.17%) average incentive payout on the F-150 during that same period was $4,497.
GM was blunt in its answer to investors' concerns
Normally, GM's incentives on its full-size pickups are in the same ballpark as Ford's, sometimes lower. Why the spike at the beginning of July? Asked about it during a briefing for reporters on Thursday morning, CFO Chuck Stevens was emphatic:
"It's not a sign that GM is coming off of our pricing discipline. Absolutely not. This was a tactic to kick off the [2016 model year] sell-down, that's all. We've been underspending the industry on average. I wouldn't read anything more into it than that."
That "pricing discipline," keeping incentives as low as possible, has been a key part of GM's strategy to boost its profitability. If GM were to back away from it, that would be a big concern for investors. But it isn't, Stevens said. He reiterated the remarks during GM's second-quarter earnings call later on Thursday morning:
"Relative to truck incentives and the incentive programs in early July, I want to just make clear: That is absolutely not a shift in our focus and discipline around incentives. That was nothing more than a tactic to kick off the model year 2016 sell-down, as we get ready to launch both the model year 2017 trucks and SUVs as well as [other new products]."
I got a little more color on the promotion from a reader who is employed at a GM dealer: GM was offering 20% off the sticker price on certain versions of 2016 Silverados and Sierras at the beginning of July. Just as Stevens said, this promotion was meant to kick-start the "sell-down" of the remaining 2016-model trucks still in dealer inventories before 2017 models arrive.
Long story short: GM is still on a profitable course
It looked for a few days like GM was getting exasperated with its inability to dent Ford's recent sales gains in pickups. GM had hit Ford hard with an aggressive ad campaign in June, only to see the Blue Oval post a nice year-over-year sales gain for the month.
It was also possible, I thought, that GM's sales executives were frustrated with the difficulty of generating sales gains in a plateaued market. That could have been an early warning sign that the U.S. new-vehicle market was weakening.
Now we know: GM insists otherwise. GM says that it was an ordinary end-of-the-model-year sale, not at all a shift away from the recent discipline around incentives that has helped drive it to impressive profit margins in North America.
Case closed? I think so. But as I said before, this is the kind of thing we'd expect to see if the market's growth stalled for a while. We'll be watching.
