As rental sales drop, so do retail sales
December 10, 2007 - 12:01 am ET
For the first nine months of this year, Ford Motor Co. cut fleet sales 17.3 percent compared with the same period a year earlier. General Motors' fleet sales dropped 5.7 percent, and Chrysler LLC reduced fleet sales 3.6 percent.
But the Detroit 3's retail sales fell 7.4 percent in that same period. So the Detroit 3 continue to rely on corporate customers such as Wal-Mart, and government customers such as the U.S. Postal Service.
Through September, fleet sales accounted for 31 percent of Ford's sales, down 1 percentage point from a year earlier. Chrysler's fleet sales were 30 percent of total sales, and GM's were 27 percent — both virtually unchanged from a year ago.
By contrast, major Japanese automakers remain less reliant on fleet customers, although they are picking up some of the sales given up by Detroit. Through September, fleet customers accounted for about 11 percent of Nissan's total sales, 9 percent of Toyota's and 3 percent of Honda's.
Meanwhile, Hyundai and Kia are more aggressively stepping up fleet sales even as the Detroit 3 cut back.
The fleet sales data are Automotive News estimates derived from a comparison of overall sales to retail registration data obtained from R.L. Polk & Co. in suburban Detroit. Fleet sales are defined as transactions in which a buyer purchases 10 or more vehicles at a time.
"GM and Ford made announcements last summer vocally declaring they were going to be more disciplined," said Polk analyst Lonnie Miller. "But I don't know if the numbers are panning out that way. Selling to rentals and large fleets is like an annuity. It's hard to walk away from it sometimes."
Jesse Toprak, an analyst for Edmunds.com, says 20 percent fleet sales would be a good target for the Detroit 3. But reaching such a target will be difficult.
"It's a tough strategy to try to figure out," Toprak says. "On the one hand, you want to keep some market share. On the other hand, cuts to fleets and rental — especially unprofitable fleets — are crucial to the health of these companies."
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Ford sales analyst George Pipas says his company has delivered on its pledge to reduce unprofitable sales to rental fleets, but the company will continue to cultivate corporate fleet customers — a profitable market segment.
GM is pursuing a similar strategy, says Rob Minton, the company's communications manager for fleet and commercial operations. Last year, GM sold about 700,000 units to daily rental fleets. This year the company will deliver on its pledge to cut that number up to 15 percent, Minton says.
But GM is not going to abandon sales to rental fleets, he says. To improve profit margins, GM is adding profitable options such as sunroofs, heated leather seats and alloy wheels.
"Vehicles that we put into daily rental fleets are now comparably equipped to what you would find if you walked into a dealer showroom," Minton says. "Content is much more robust than it would have been a couple of years ago."
Chrysler remains heavily dependent on sales to daily rental fleets, although spokeswoman Beverly Thacker says the company will work to trim unprofitable sales to rental fleets. "Our focus will continue to remain on selling vehicles profitably and to increase residual values for our customers," Thacker says.
As always, Honda has refrained from marketing vehicles to fleet customers. But Kia and Hyundai have picked up some of the fleet sales that the Detroit 3 have left on the table.
And now Toyota and Nissan are stepping up. For the first nine months of this year, Toyota Motor Sales U.S.A. Inc. sold an estimated 176,000 vehicles to fleet customers, up 31.3 percent from a year ago. Nissan's fleet sales totaled 92,000 units, up 67.2 percent.
But Toyota's and Nissan's retail sales are rising, too, and fleet sales still account for a relatively small share of the companies' overall sales. Fleet customers will generate more than 10 percent of total Toyota sales, says spokesman John McCandless.
"In the rental market, we don't plan to grow that business at all because it has potential to take away from residual value," McCandless says. "But with Ford and GM cutting back on fleet business, that does give us a little opportunity."
This year, the Detroit 3 cut production rather than flood the daily rental fleets with vehicles. But the real test could come next year, if the U.S. market lurches into a recession.
Will automakers cut production to match demand, or will they boost fleet sales as a safety valve? Says Polk's Miller: "If you overproduce, those vehicles have to go somewhere."