Ford is gearing up to launch all-new Super Duty pickups this fall. But tight supplies of the old ones may be limiting its sales gains in the meantime. Image source: Ford Motor Company.

Ford Motor Company (NYSE:F) said that its U.S. sales fell 2.8% in July, as gains in commercial and government fleet sales weren't enough to offset a 6% drop in retail sales. 

Under the hood: The key points from Ford's report

Here are the high (and low) points from Ford's July sales report:

  • F-Series sales dropped 1% from a year ago to a still-strong 65,657 units. Supply may have been a factor: Ford has wound down production of its Super Duty pickups as it prepares to launch all-new versions later this year, and supplies of certain variants may be tightening. 
  • Ford-brand SUVs showed a surprising decline, down 5.3% as a group. Sales of the Edge rose 4.9%, but the Explorer and Escape both posted double-digit declines. The Escape will get a revamp for the 2017 model year; that may help boost results as the year goes on.
  • Ford-brand cars continued to slip, victims of an industrywide shift in buyer preferences toward SUVs and trucks. Sales of the group were down 10%, with only the Mustang (up 12.8%) and the police version of the Taurus (up 5.8%) showing gains.
  • Transit vans continued to shine. Sales of the commercial vans rose 41.2% from a year ago. Ford noted that the Transit is not only America's best-selling commercial van, it also outsells all minivans. 
  • Lincoln sales dropped 4.6% when fleet was taken into account. But Lincoln's retail sales rose 2% on good results for the overhauled MKZ sedan (up 12.3%) and MKX crossover SUV (up 5.4%). It's worth noting that Lincoln lacks a big sedan at the moment: The last examples of the outgoing MKS are being sold off in anticipation of the arrival of the all-new Continental in the fall.
  • Fleet sales were a mixed bag. Ford's sales to rental-car fleets jumped early in the year, but were down 7% in July from a year ago. But its more lucrative sales to commercial fleets (up 12%) and government fleets (up 16%) helped offset the drop. Overall, fleet sales made up 26% of Ford's total U.S. sales in July. 

The story: A plateauing market and aggressive discounting by a key rival

Ford's U.S. sales chief, Mark LaNeve, said that "aggressive [incentive] spending by a couple of key competitors" hurt Ford's sales efforts in the first 10 days or so of July. After that, LaNeve said, Ford's sales pace stabilized and began to rise, hitting what he described as a strong pace in the last week of July.

LaNeve didn't name the "competitors," but it was clear from context that he was talking mostly about General Motors (NYSE:GM). GM began July with an extremely aggressive "sales event," offering a 20% discount from sticker prices on a wide range of models -- including some of its full-size pickups. 

GM's big discounting event was somewhat surprising. LaNeve noted that the U.S. new-vehicle market has had five years of very strong growth from the deep lows it hit in the wake of the 2008-2009 economic crisis. It now appears to be leveling off: Sales are still very strong, but with this cycle's significant growth likely past, "the major players will protect their market share," he said. 

How will Ford respond? With a combination of production adjustments and a "disciplined but competitive" approach to incentives. It's a difficult balance: Ford has to balance the desire to protect its market share with the pressure to continue to deliver good profit margins. Ratcheting up incentives will boost sales, but hurt margins.

How Ford is responding to a flat market

The plateauing market is a recent shift, but we've already been able to see some signs as to how Ford will find that balance. 

Ford's overall incentives were up from a year ago, but estimates from TrueCar suggest that Ford's per-vehicle spending on incentives fell about 1.3% from June to July, to $3,632 per vehicle. That's significantly lower than both GM and Fiat Chrysler Automobiles (NYSE:FCAU), which spent $4,338 and $3,996 in July, respectively, per TrueCar's estimates. 

On the other side of the equation, Ford said that its inventories fell in July to about 641,000 vehicles, or 74 days' supply at the end of the month, from about 724,000 vehicles (or 78 days' supply) at the end of June. That suggests that Ford is already adjusting its production output, or "matching capacity to demand" as its executives often say. 

Long story short: GM's aggressive discounts at the beginning of the month took Ford (as well as the industry and GM's investors) by surprise. But once GM's sales event ended, Ford was able to recover and find some sales momentum -- momentum that it hopes to carry into August.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.