Would you believe that the best-selling luxury vehicle in the United States -- by far -- is a truck?
It's not a plush SUV from a European luxury brand, either. According to a new report from TrueCar, America's best-selling vehicle over $50,000 is Ford Motor Company's (NYSE:F) F-Series pickup.
"But," I hear you saying, "the F-150 starts at just over $25,000. And it's a pickup truck! How can it be a top-selling luxury vehicle?"
The answer is that it's the result of a strategy that Ford set in motion way back in 2001. And it's a very good thing for Ford -- and increasingly, for its Detroit rivals, too.
How Ford became the luxury-truck king
At the beginning of the 21st century, luxury trucks were all the rage. Cadillac's first Escalade -- initially just a mildly fancied-up version of General Motors' (NYSE:GM) Chevy Tahoe -- had become a big hit, and both Ford and GM were looking to extend that success to pickups.
Lincoln and Cadillac both briefly offered pickups, but the more enduring formula was found just a bit downmarket, when GM added upscale features to its workhorse to create the first GMC Sierra Denali. Not to be left behind, Ford responded with a deluxe version of its then-new SuperCrew F-150 that wore the brand of Texas' famous King Ranch.
The Lincoln and Cadillac pickups have gone the way of the Edsel, and while GM still sells plenty of Sierra Denalis, the King Ranch and other upscale variants of the F-Series dominate premium truck sales nowadays. Why? In part because the F-Series is America's best-selling truck line, and in part because Ford has become very good at putting together options packages and higher trim lines that its customers really like.
And there are plenty of customers for these trucks. TrueCar forecasts that in 2014 Ford will sell 189,776 F-Series pickups with transaction prices over $50,000 in the U.S. That's roughly a quarter of the F-Series pickups Ford will sell this year, and it's almost three times TrueCar's estimated U.S. sales for the top-selling German luxury vehicle in that price range, Mercedes-Benz's E Class sedan.
That is great news for Ford, because these plush pickups put a lot of money in the automaker's pockets.
Why plush pickups mean big bucks for Ford (and its rivals)
TrueCar estimates that sales of F-Series pickups over $50,000 this year will generate $10.8 million in revenue for Ford, or about a third of its total revenue for pickups.
But the percentage of profit generated by those luxury trucks is likely far greater than a third of Ford's total profit on the F-Series. Why? Because they don't cost all that much more to build than an ordinary truck.
At Ford, or any other automaker, per-vehicle profits are a closely guarded secret. But a base XL model of Ford's 2015 F-150 starts at $25,420, while a King Ranch model starts at $48,495 -- and it's pretty clear the plush truck doesn't cost Ford over $23,000 more to build.
That's why Ford (like other automakers) puts so much effort into creating appealing options packages across its entire product line. Base models have razor-thin profit margins, but as buyers add options, the margins grow. What's new is that full-size pickups, which were mostly bare-bones products not long ago, can now be equipped like luxury vehicles -- and priced accordingly.
Long story short: The F-Series is probably Ford's most profitable product line, and markups on deluxe pickups are a big part of that. (That's probably true for GM and Fiat Chrysler as well: Fiat Chrysler's Ram is second in TrueCar's ranking of U.S. sales of vehicles over $50,000, with 76,266 expected in 2014.)
This isn't just Ford, it's how luxury-vehicle markets work
This isn't just a Ford thing, or a pickup thing. Across the board, luxury vehicles generate more profit per sale than mainstream models, because buyers are willing and able to pay an outsize premium for what they perceive as premium vehicles.
Johan de Nysschen, president of GM's Cadillac luxury brand, recently noted that luxury vehicles industrywide account for between 10% and 12% of global new-vehicle sales, but generate roughly half the profit.
But when it comes to getting luxury-car prices (and profits) from mainstream models in the U.S., Ford is having more success than anyone else right now.
John Rosevear owns shares of Ford and General Motors. 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.
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