When GM released its July sales results a little over a month ago, some were quite disappointed by sales of the Chevy Cruze. Specifically, Chevy’s compact sedan sold 14,954 units in July of 2012, down 39.3 percent from the 24,648 units it sold during the same time period a year ago. Then August results were released last week, and the Cruze showed a 19.1 percent year-over-year improvement, from 25,975 to 21,807 units. Nevertheless, sales of the Cruze in 2012 are still down 8.6 percent through August compared to the same time period a year ago. But does a decrease in sales volume even matter?
GM officials have expressed desire to keep prices of the compact car high rather than cutting them with profit-sapping discounts in an effort to get rid of inventory. In fact, I remember sitting through my first-ever GM media teleconference back at the end of 2009; it was when Ed Whitacre was CEO and Mark Reuss, along with Susan Docherty, were just appointed to run the show at GM North America. One of the things consistently emphasized during the call was that the New GM will closely match the supply of its vehicles to true market demand — something Old GM failed to do on a consistent basis.
What Old GM attempted to do was enjoy all the manufacturing efficiencies from its plants by not adjusting production to demand and never halting manufacturing operations in an effort to pump out cars as cheaply (efficienty) as possible. The goal was to produce first, and to sell — second. So the overproduced cars sat on dealer lots with triple-digit day-supplies, necessitating hefty discounts, rebates, and flat-out “customer cash”. Not only was profitability not in the cards… it wasn’t in the automaker’s culture.
Fast forward to the New GM, when GM Vice President of U.S. Sales Kurt McNeil told reporters during an August conference call that GM has “kept our brand-building discipline on Cruze”, a move that “is going to pay long-term dividends with Cruze resale prices.” Terms like “brand building” and “discipline” were not part of the lexicon at the Old GM. Short-term thinking was the status quo, the market was flooded with very efficiently-produced low-cost cars, and everyone — including GM and its customers — ultimately suffered.
That’s not the story today: in July, a Chevy Cruze sold for about $2,000 more than other cars in its class. The Chevy Cobalt, by comparison, sold for about $2,000 less than its competitors, predominantly thanks to constant discounting. And bad news didn’t end at low profitability from new cars at Old GM; it proliferated when it came time for the customer to trade in the vehicle.
Safeguarding resale values is a strategy that’s been successfully employed by Honda for years, if not decades. The Japanese automaker rarely, if ever, offers discounts on the Civic and sells as few units as possible to rental fleet companies. The outcome is self-evident: the highest resale values in the industry and devoted customers who know full well that their cars won’t lose the bulk of their value once driven off the lot.
When resale values of compact cars rose sharply last year due to the natural disasters in Japan, the Civic led the segment in holding on to 81 percent of its original price. The Cobalt had the worst resale value of any compact car, retaining a lousy 69 percent of its original price. Today, a year-old Cruze is worth 76 percent of its original price — the highest in the segment and far ahead of the 70 percent retained by the seemingly can-do-no-wrong Toyota Corolla, according to KBB.
Keeping the resale values high is a long-term strategy, however. Executed properly, it can result in happier customers and higher sales. The more difficult part is getting there, as it may require months and maybe even years of slower-than-desired sales and possible production suspensions, which could mean less work or fewer jobs for factory workers. For its part, GM is willing to make the short-term sacrifice for the long-term win.
“We’ve been told by management that we will incur down weeks if needed,” said Dave Green, president of the United Auto Workers Local 1714 that represents workers at Lordstown’s stamping and welding plant. GM stopped production at the facility for several weeks in 2011 as inventories of unsold Cruze models piled up on dealer lots.
The good news is that The General expects sales to improve into the latter months of 2012 throughout its entire lineup — as evidenced by August sales. And ironically, the near 40-percent drop in Cruze sales during July was due to a sharp drop in deliveries to fleets. How sharp? In July of 2011, the automaker delivered 6,400 Cruzen to rental/fleet companies; in July 2012, it sold less than 100 to those customers. In other words, retail sales of the compact car were only down 10 percent — and the seemingly negative results weren’t actually that bad, especially given the fact that they’re the foundation for the future well-being of GM and its workers as well as the greater customer satisfaction of customers.