Is General Motors Company Wrecking Its Own Growth?

GM has cut its discounts way back. That's good. But have they cut too far?

Feb 9, 2014 at 12:30PM

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The all-new 2014 Chevrolet Silverado has been a hit with critics -- but sales were down sharply last month. Has GM priced it too high? Photo credit: General Motors.

Not long ago, General Motors (NYSE:GM) was known for its willingness to discount its prices. Many GM models had trouble competing with better-made rivals head-to-head, so GM would use "incentives" -- cash-back offers and cheap financing -- to help make their models more appealing.

It worked -- sort of. GM held on to its lead in the U.S. market. But over time, its profits eroded -- and eventually, it crashed into bankruptcy court.

GM's current leadership, from new CEO Mary Barra on down, are much more disciplined. GM's products are far more competitive than they used to be, and GM has has priced them accordingly -- with far fewer discounts. 

That strategy has helped boost GM's profits here in North America. But in recent months, GM's U.S. sales have been sluggish. Has GM set its prices too high? Motley Fool contributor John Rosevear explores the question in the accompanying short video. 

A transcript of the video follows.

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John Rosevear: Hey, Fools, it's John Rosevear. We saw earlier this week that GM's U.S. sales were way down in January. GM said in a statement on Monday that its retail sales were down 10% in January, and its fleet deliveries were down 18%.

So why did that happen? Well, GM no longer does monthly sales calls; the briefings they used to do for analysts and the media, and the press release they put out on Monday was pretty terse. In fact, they didn't give much of any explanation at all. But GM's CFO, chief financial officer, Chuck Stevens, did give some color on those results during GM's fourth-quarter earnings call on Thursday.

He said the story is simple. GM is more reliant on sales in regions like the northeast and Midwest, and less strong in places like California, and weather conditions during January that kept customers away from new car dealers hit GM harder than some of its rivals.

But there's an interesting question sort of a little deeper, past the numbers. GM's retail market share was up a little bit in 2013 on a full-year basis, but we saw GM's U.S. sales start to lag a bit toward the end of the year.

Now, GM has a big goal. They want to get their profit margins in North America up to 10%. They're around 8% right now, which is a big improvement over where they were a few years ago, but they want to get up to 10%. One big part of their strategy is to cut back on incentives, those cash-back or cheap financing deals you see advertised on TV. All automakers except for the super luxury brands use incentives to some extent, but GM was paying out too much for years to keep its sales going, because its products weren't really competitive at full price.

GM's products are a whole lot better than they were. Some, like the Chevy Impala and Cadillac CTS, are really class leaders now, and GM has been very disciplined with incentives for the most part on its new products. That has worked out OK, mostly because none of GM's competitors have moved to really cut prices and start a price war, but I wonder if there's a point where GM's sales are going down because it's being a little too firm on pricing.

To some extent, GM CEO Mary Barra would probably take that trade-off. Her predecessor, Dan Akerson, who really set up a lot of this strategy, often said that he didn't care about leading in total sales numbers; he wanted to lead in profits. But of course there's a trade-off. You can afford to give up a little bit of sales in order to preserve stronger profits, but at some point, the balance point moves. And it's going to be interesting as 2014 unfolds to see if GM's balance point moves and if they do have to ratchet up incentives, especially on pickups, with Ford's (NYSE:F) all-new F-150 on the way to market. That's something we'll be watching very closely. Thanks for listening, and Fool on. 

John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors and owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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