Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Detroit Automakers' Dirty Little Secret

Today we're going to talk about the Detroit's dirty little secret. No, I'm not discussing some celebrity gossip headline you might see on the E! channel. I'm talking about how Ford (NYSE: F  ) , General Motors (NYSE: GM  ) and Chrysler use massive fleet sales to juice their market share figures. Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) treat fleet sales like an infectious disease and avoid them almost entirely, while Detroit's Big Three welcome them with open arms. How much does it really matter, and are fleet sales really that bad? Let's look at some details, and you can decide for yourself.

Why fleet sales are bad
Fleet sales have traditionally been frowned upon for two reasons. The first is that it adversely affects resale values. The second is that people claim it hurts the bottom line – a misconception I'll address later. The first point is valid – think of the last time you shopped for a used vehicle and found out that it was a rental or fleet vehicle. You likely cringed while thinking of all the abuse it took from drivers who had zero incentive to take care of the vehicle. In addition to that, companies buy fleet vehicles in bulk which lowers their price substantially, and that discount eventually filters down to the used vehicle lot – potentially lowering resale values.

Regarding the second point about fleet sales hurting the bottom line – I disagree. Or perhaps I disagree with how people describe the argument. Fleet sales are completely separate from retail sales and for that reason they are incremental sales. Incremental sales do nothing except add value to a company's top and bottom lines. The truth is that fleet sales hurt margins as they command a price near wholesale numbers.

That's why fleet sales catch a bad rap. Another fact to consider is how fleet sales juice a company's market share.

Fleet sales by the numbers
Since Detroit's Big Three typically welcome incremental fleet sales, do they enjoy an advantage in market share numbers? The answer is yes. Let's look at the table I made below using Wall Street Journal and Automotive Data Center numbers for YTD sales through April:

If you noticed slight discrepancies in the numbers it's because rounds the numbers where the WSJ does not. It's a simple table but it might take a couple minutes to see how I did things – so here's an overview.

Firstly you can see that Ford, GM, and Chrysler all have fleet sales that represent over 25% of their totals where Toyota's and Honda's represent only 13% and 2%, respectively. You could also note that Ford has more fleet sales than Toyota and Honda combined, two and a half times over.

Secondly, you can see the effect it has on market share. If you subtract fleet sales and only consider retail sales, Ford and GM's market share drops by about 5% each – a significant amount. Consider that with fleet sales Ford has more than a 2% market share advantage over Toyota, but without fleet sales Ford trails Toyota by 1%.

Fear not!
Take a deep breath, Ford and GM investors, all is not lost. The caveat is that while Detroit's Big Three juice their market share with fleet sales, their retail sales have also increased more than their Japanese rivals. According to the numbers, YTD retail sales through April versus the prior year shows Ford, GM, and Chrysler up 15%, 10%, and 14%, respectively. That compares favorably to Toyota and Honda which were up only 9% and 6%, respectively.

While we're at it, let's debunk the two arguments of why fleet sales are an "infectious disease". Here's why fleet sales won't hurt resale values for Ford and GM.

The complete nose dive in new vehicle sales during the recession has had a caused a decreased supply of used cars today. Combine that with an abundance of cheap financing and the result is more people are opting to buy new. That means used car values are likely to remain high, regardless of fleet sales, until this wave of new vehicle purchases hits the used vehicle market years down the road. The graph below shows the trend.

On a separate note, GM and Ford should especially notice a rise in resale value since their newer vehicles are selling extremely well due to improved quality and design. Simply put, transaction prices are up and incentives are down – helping support higher resale prices.

Regarding the second point about margin pressure, I believe Ford and GM will mitigate this overall. Both are much leaner companies. Ford CEO Alan Mulally's "One Ford" plan has already cut costs and drastically improved operating efficiencies. That helped Ford report an impressive North American margin of 11% last quarter.

Both companies can use a different strategy by producing specific vehicles for fleet sales. GM will be bringing back two mid-size trucks next year. One will be designed as a more premium truck for higher margin retail sales, while the other will be designed to cost less for fleet buyers – mitigating margin pressure.

Bottom line
Ultimately it comes down to this: Do you want the incremental sales or not? Absolutely – take the fleet sales and find ways to minimize costs. The two reasons that gave fleet sales a bad rap don't look to have any major downside for Ford and GM. I say keep on keeping on, Detroit; it's not such a bad dirty little secret after all!

What else do you need to know about Ford?
If you're concerned that Ford's turnaround has run its course, relax – there's good reason to think that the Blue Oval still has big growth opportunities ahead. We've outlined those opportunities in detail, in the Motley Fool's premium Ford research service. If you're looking for some freshly updated guidance to Ford's prospects in coming years, you've come to the right place – click here to get started now.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2433261, ~/Articles/ArticleHandler.aspx, 9/24/2016 10:08:08 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 18,261.45 -131.01 -0.71%
S&P 500 2,164.69 -12.49 -0.57%
NASD 5,305.75 -33.78 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/23/2016 4:01 PM
F $12.17 Down -0.01 -0.08%
Ford CAPS Rating: ****
GM $32.12 Down -0.27 -0.83%
General Motors CAPS Rating: ***
HMC $29.49 Down -0.70 -2.32%
Honda Motor CAPS Rating: ****
TM $117.66 Down -3.14 -2.60%
Toyota Motor CAPS Rating: ***