The major automakers reported their March U.S. sales numbers on Wednesday. While total sales increased a fraction of 1% last month, several major automakers posted sales declines, including market leaders General Motors (NYSE:GM) and Ford (NYSE:F).
Wall Street wasn't impressed. Ford shares declined 1.4% on Wednesday, while GM stock fell 2%. However, looking beyond the headline sales declines, the picture is much brighter.
Not quite comparable
First of all, comparing last month's auto sales to March 2014 is not an apples-to-apples comparison. Auto sales languished in January and February last year due to especially severe winter weather. This created lots of pent-up demand by March. While some parts of the U.S. -- especially Boston -- have had a bad winter this year, overall the weather was better in the first two months of 2015.
Additionally, the auto sales reporting calendar does not precisely follow calendar months. As a result, there were 25 "selling days" in March 2015, compared to 26 in March 2014. In fact, March 2015 only included four weekends based on the auto sales calendar, whereas March 2014 had five weekends. Since Saturday is the biggest sales day of the week, this represented a significant headwind for the reported sales figures.
But beyond these market-level factors, a closer look at March sales at GM and Ford reveals that both automakers performed very well last month.
Strong mix and pricing at GM
At General Motors, total deliveries were down 2% year over year in March. However, in keeping with the recent trend, there was a sharp divergence between sales of cars and sales of everything else: crossovers, SUVs, vans, and trucks.
GM's car sales declined 21% compared to March 2014, including declines of more than 50% for the Chevy Sonic and Chevy Volt, and declines of more than 30% for several other models.
By contrast, crossover sales rose 6% and combined sales of pickups, trucks, and vans increased 14% year over year. GM managed to increase sales of both its Chevy Silverado and GMC Sierra full-size pickups, despite also selling 9,000 of its midsize Chevy Colorado and GMC Canyon pickups (which weren't being built a year ago).
These mix shifts are very important because cars tend to have lower average transaction prices and profit margins than crossovers, SUVs, vans, and trucks. Indeed, through March 22, GM's average transaction prices were about $35,200: up more than $1,200 year over year.
Furthermore, strong demand for GM's offerings in these categories allowed the company to dramatically reduce its incentive spending last month. As a percentage of ATPs, GM's incentive spending declined from 10.8% in March 2014 to 9.2% last month. Meanwhile, industry-average incentive spending increased from 9.6% to 10%.
Whereas GM got into trouble before the Great Recession by relying on huge discounts to bolster sales, in the past two months it has spent less on incentives than the industry average. Favorable mix and pricing should lead to a significant improvement in GM North America's profit margin this year.
Healthy demand at Ford
Ford's U.S. deliveries declined 3.4% year over year in March. The company was also affected by the slowdown in car demand. However, its car sales declined only 11.6% year over year, compared to the 21% decline at GM.
As was the case at GM, trucks were a bright spot for Ford. While total sales of its F-Series trucks declined 4.6% year over year, this was due to continuing capacity constraints, related to the major model transition to the 2015 Ford F-150, which was only recently completed.
In fact, F-Series retail sales increased 10% year over year, as Ford prioritized the profitable retail channel for its limited inventory. Fleet sales declined significantly -- but this is mainly a timing issue. Ford should be able to capitalize on fleet demand for the new F-150 later in the year.
High demand for Ford's new trucks and vans helped drive a more than $2,000 year-over-year increase in its ATPs last month. It also grew retail sales at the expense of less-profitable fleet sales during March. Ford did increase its incentive spending modestly, though.
As availability of the 2015 F-150 improves -- the outgoing 2014 model still accounted for more than 70% of F-150 sales in March -- ATPs should continue to improve. Ford will also likely be able to dial back its incentive spending. This should boost its profitability.
Profit over volume
U.S. automakers like GM and Ford got tripped up a decade ago by focusing all of their attention on selling more vehicles rather than ensuring that those sales were profitable.
Fortunately, both companies appear to have learned their lesson. Today, they quickly react to changes in demand by cutting production of models that aren't selling well, rather than piling on massive discounts to convince consumers to buy unwanted vehicles. In the current environment, that means slashing production of cars while boosting production of larger vehicles.
Ironically, investors appear to be punishing GM and Ford for their discipline. But the automakers should instead be praised for allowing car sales to decline as demand shifts to larger vehicles, rather than going down the rabbit hole of boosting incentives to keep volume growing.