Ford Motor (NYSE:F) and cross-town rival General Motors (NYSE:GM) have recently set their sights on regaining ground in the ultra-competitive luxury market. Ford's Lincoln brand was the best selling luxury brand in America as recently as the 1990s, selling as many as 230,000 vehicles a year. By contrast, Lincoln managed to sell just 82,150 cars, crossovers, and SUVs last year. GM's Cadillac brand has fared somewhat better, but Cadillac still only managed to sell 149,782 vehicles in 2012. By contrast, luxury leader BMW sold 281,460 vehicles in the U.S. in 2012, and Mercedes-Benz was not far behind with 274,134 vehicles sold.
Having a strong luxury brand is incredibly helpful in today's auto industry, because luxury vehicles tend to produce higher profit margins. Moreover, as my colleague Daniel Miller recently wrote, Ford needs to have a solid luxury offering so that existing customers stay within the Ford "family" as they become wealthier. As Daniel wrote earlier this week, Ford's management had hinted last week that Lincoln sales were finally improving. Lincoln's April sales results, released on Wednesday, showed that the brand's first new model, the Lincoln MKZ, is finally available to customers and selling well. If the MKZ can maintain its April sales pace and Lincoln can score similar success with some of its upcoming vehicle launches, it will give Ford a big boost.
Lincoln's comeback plan
In late 2012, Ford relaunched Lincoln under its original name: "The Lincoln Motor Company". Ford rolled out new ad campaigns designed to re-energize the brand. Some of these highlighted its first new product, the redesigned 2013 Lincoln MKZ, which began arriving in dealer showrooms in late December. The new MKZ is a sleek midsize car, and its signature feature is a large retractable glass roof. While the MKZ is built on the same platform as the Ford Fusion, the company did a good job of giving it a distinctive look.
Ford executives also highlighted plans to introduce a redesigned MKS full-size sedan and MKT crossover in 2013, followed by other new models. However, the Lincoln brand's momentum was quickly put to the test. Ford had suffered some quality control problems in 2012, and was determined to avoid tarnishing the Lincoln brand with recalls. Accordingly, executives decided to implement heightened quality control checks for the MKZ. Unfortunately, the plant in Mexico that builds the MKZ fell behind on the quality checks, forcing Lincoln to ship many of the cars to the Flat Rock Assembly Plant in Michigan for quality inspection.
This process dramatically slowed the distribution of the MKZ, upsetting customers who had pre-ordered the vehicle and leading to a disappointing Q1 performance for Lincoln. Total Lincoln brand sales were down nearly 24% in Q1, as the company was only able to sell 3,758 MKZs, compared to more than 7,000 MKZs sold in Q1 2012. This drop of nearly 50% was clearly a disappointment for a new model that was supposed to revitalize the Lincoln brand.
April shows major progress
However, Ford seems to have addressed the supply constraints, as MKZ sales shot up in April to 4,012: more than double the prior-year sales total and more than Lincoln had sold in the whole first quarter. This was also a faster sales pace than Cadillac achieved for any of its models in April. Lincoln still needs to show that this sales pace is reproducible, but the brand's April performance suggests that there is plenty of demand for the new Lincoln MKZ. If some of Lincoln's other new models become equally successful, it will return the Lincoln Motor Company to a sustainable competitive position within the luxury segment.
To be sure, Lincoln will remain a small contributor to revenue and profit for Ford. For example, Ford has recently been selling 55,000-60,000 of its high-margin F-Series trucks each month. While the luxury segment also provides good margins, even market leader BMW has averaged fewer than 25,000 vehicle sales per month. Lincoln is likely to remain well behind BMW and Mercedes for the foreseeable future even in a best-case scenario. Nevertheless, building Lincoln into a source of high margin sales will help diversify Ford's profit generation. Today, F-Series sales produce as much as 90% of Ford's global profit. New initiatives like the Lincoln relaunch and growth investments in Asia will create a more stable and profitable Ford in the future.
Motley Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.