If you wanted a cheap set of wheels, your time has all but run out. General Motors (NYSE:GM) ended its industry-altering GM Employee Discount program today. Ford (NYSE:F) will bury its Ford Family Plan come Monday.
Summer promotions are expected in the auto sector. Inventory needs to be cleared out to make way for the fall arrival of the following year's models. Last summer, GM was generous, too, offering cash rebates as high as $5,000 to move its fleet of 2004 cars, while some GM truck and sport-utility-vehicle buyers made out with $6,000 breaks. The year before that, 0% financing was all the rage.
GM and Ford sputtered through 2005 as rising gas prices drove folks to smaller Asian imports from the likes of Toyota (NYSE:TM), Honda (NYSE:HMC), and Nissan (NASDAQ:NSANY). To get sales up and running again, the American automakers had to do something.
GM's Employee Discount pitch is seen by many as a rousing success. I think history will reveal the move as a colossal failure. The marketing resonated with car owners right away. June deliveries were up 41%, the company's strongest showing since September of 1986. It bled into July, where GM saw a 20% spike. By August, the public had already had their fill. US deliveries were off by 16%.
However, I don't think the promotion was a mistake based on how it grew stale last month. No, I think it was a failure because it was a success. Let me explain: The "employee pricing" approach was so effective because it gave the perception that consumers were getting a great insider deal. GM started. Ford followed. DaimlerChrysler's (NYSE:DCX) Chrysler tweaked the marketing with its Employee Pricing Plus approach, which offered smaller discounts but padded them with more conventional rebates.
The end result is the same in all three cases. How are these companies going to move their 2006 models? Some have already turned to offering lower prices on the 2006 models, but consumers now expect employee pricing. They were trained to forget the fluctuating cash rebates of the past. This one, they remember.
Even worse, the surge in new purchases in June and July loaded up the used car lots with trade-ins. Used car specialists like CarMax (NYSE:KMX) don't appear to be smarting at the moment, but how will they manage the glut of discarded rides? Won't that make it even harder for all of the automakers to move their newest models? Car shoppers now associate employee pricing with that new-car smell. With gas prices still pesky and interest rates rising, the ingredients are in place for a rough start to the 2006 model year.
Yes, you can be so good at something that you wind up feeling terrible the morning after.
Further Foolishness in the rearview mirror:
Longtime Fool contributor Rick Munarriz hasn't felt the urge to trade in his car for five years now, though he wonders how employees felt about the employee-pricing promotions. He does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
