GM lowering prices
DETROIT — After Sept. 11, 2001, General Motors turned the nation into incentive-addicted, deal-obsessed shoppers.
But in mid-March, GM CEO Rick Wagoner said he is taking the big money off the table.
GM executives finally admitted that $5,000 cash bonuses — when coupled with high sticker prices — no longer have the impact on consumers that they once did.
Dogged by the cutthroat North American pricing environment it helped create, GM has sliced its 2005 profit forecast by 80 percent. In response to its slow sales, GM said it will move to value-based pricing.
GM's new strategy means the automaker will give new products prices that are closer to anticipated transaction prices, increase advertising on launch models to rebuild brand strength, and target incentives regionally and by specific vehicle.
"It's a change in how we go to market," CFO John Devine said. "The problem with incentives is that everyone follows very quickly, so there's not a way of creating a difference in the consumer's mind."
Devine calls GM's strategy a "modification." But it's a major departure that could influence the entire market, which largely has followed GM into the incentive wars.
After the terrorist attacks, GM's incentive strategy worked for two years. GM gained market share and inflicted financial pain on ailing domestic rivals Ford Motor Co. and the Chrysler group.
And Wagoner wasn't shy about reminding rivals of GM's success.
"It's time to stop whining and play the game," he said in February 2003, in response to competitors who bemoaned the industry's dependence on rebates.
Citing GM's higher profits and market share in 2002, Wagoner said: "What I know is that GM's strategy is working very well for us. So guess what? This year we're going to keep pushing." But with U.S. sales down 10 percent in the first two months of 2005 — excluding Saab — GM will start pushing in a new direction. "We found out that, on an incremental basis, we weren't getting the bang," Wagoner says now.
Now, Wagoner says, as new products come to market they will be priced closer to transaction. "That's how the strategy will play out," he said.
When the Hummer H3 mid-sized SUV is introduced in the second quarter, it will be priced near $29,000, one Hummer dealer close to the program says. Early reports indicated a starting price of around $32,500.
Devine says GM is not planning to cut prices on current models. "If we do more on the positioning, it'll be on the new models," he said.
But there has been some price-cutting on existing models. In February GM lowered prices on 22 mid-sized SUVs — cutting $1,430 off the price of a Chevrolet TrailBlazer, for instance — to make them more competitive, especially for internet shoppers.
GM was missing customers who weren't considering its vehicles because GM's list prices were higher than the competition.
GM will target incentives regionally instead of nationally and back away from broad-based incentives by adding more standard equipment without raising prices.
Devine says GM's recent announcement that it will include OnStar and stability control on every vehicle is one example.
GM's advertising approach will also change. GM will stick with launch vehicles longer, increasing its overall advertising budget in an effort to rebuild brands.
"We tend to hit something hard for three or four months and ease off, but our competitors stay longer," Wagoner said.
Some members of GM's dealer council say they are unaware of the change in strategy. But most are interested.
"A lot has to do with internet searches," says Chevrolet dealer Tommy Brasher, owner of Brasher Motor Co. in Weimar, Texas. "When you look at prices, they're out of line with other automakers."
Some dealers admit value pricing could cut into the dealer discount — the difference between invoice and sticker price. But Brasher says dealers already are hurting themselves. "Look at the transaction prices on a Suburban or Tahoe. We don't sell them for sticker. We only sell them for $500 over invoice," he said. "We cut our own discount all the time. We are the enemy."
There could be other land mines with value pricing. Some analysts are concerned that consumers have become too hooked on incentives to let go. If GM is forced to offer incentives in addition to lower prices, the results could be painful.
"List-price cuts are a less tantalizing carrot to dangle in front of consumers than incentive offerings," wrote Himanshu Patel, an analyst with New York-based J.P. Morgan Securities, in a research report.
If GM sticks to the strategy of lower prices and lower rebates, it could hurt sales of new vehicles, such as the full-sized trucks that start coming out next year, Patel adds: "A 'value-based' pricing approach on the T-900 (full-sized trucks) could lead to lower-than-expected volumes, at least initially."
Wagoner says the transition will be gradual.
Says Wagoner: "I do think it's going to take a while to see the impact fully on the retail side."
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