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Marketing costs skyrocket

Expensive programs account for surge

An expensive component
Distribution costs average 25% of sticker price. Since 1983,every component of distribution cost, except marketing, has declined as a share of sticker price. Distribution costs as percentage of sticker
  1983 2001
Marketing, incentives 8.90% 12.10%
Dealer margin 12.8 7.4
Transportation, PDI* 3.9 3
Field personnel 3 2.5
Total distribution costs 28.6 25
* Preparation, delivery and inspection Source: A.T. Kearney; Booz Allen & Hamilton

Zero percent financing jump-started new-vehicle sales after the Sept. 11 terrorist attacks, but it also is boosting marketing costs.

On a $20,000 vehicle, a 60-month, 0 percent loan could cost an automaker as much as $2,800, depending on how much interest the automaker paid when it borrowed the money.

As a result, marketing costs will equal about 16 percent of Ford's North American automotive revenue in the third quarter, according to Ford Motor Co. treasurer Lloyd Hansen. The company had anticipated only 14.5 percent.

Expensive programs such as 0 percent financing also are a prime reason that marketing costs account for a growing share of total distribution expenditures, which automakers are trying to pare.

For most of the past decade, automakers have shaved manufacturing and supplier costs. And distribution costs, which include all expenditures after a vehicle leaves the factory, have declined as a share of sticker price since 1983, according to a study by A.T. Kearney.

But marketing, the key component, now accounts for nearly half of distribution costs. Since 1983, all other distribution costs have declined as a percentage of sticker price.

Although distribution costs average 25 percent of sticker price, imported vehicles that arrive by ship have a higher transportation component.

For example, Toyota's distribution costs are about 40 percent of sticker price, said Jim Press, COO of Toyota Motors Sales U.S.A. Inc.

Programs such as 0 percent financing, to which makers such as Toyota must respond in order to remain competitive, threaten to drive their distribution costs even higher.

"It won't be long before (the percentage) is 50, unless those of us in the distribution channel can begin to have the same kinds of cost savings (in marketing) in what we do with manufacturing," he said.

No relief in sight

In its first study on distribution spending, J.D. Power and Associates this year estimated that the U.S. automotive industry spent $125 billion on distribution in 2000. That included $40 billion on incentives and $14 billion on other marketing costs, including advertising.

"Marketing costs are probably running close to half of (overall) distribution costs," compared with 31 percent in 1983, said A.T. Kearney analyst Jim Mateyka, referring to a 1983 Booz Allen & Hamilton study, noted as one of the most recent in-depth studies on distribution costs before the J.D. Power study.

Automakers' measured media costs alone rose by double-digit figures each year for most of the mid- to late 1990s, hitting a record $8.36 billion in 1999 and remaining flat last year.

The need to respond with marketing programs such as 0 percent financing also thwarts some efforts to use price reductions as the only competitive strategy. For example, the Chrysler group scaled back prices of its 2002 models in hopes of appealing to comparison shoppers. And Toyota Division priced its all-new 2002 Camry about $1,500 lower despite more content, which Press said was possible because of reduced production costs.

"We're determined to cut these media costs like production costs," Press said. "And the media folks who don't want to help us won't get our business."

Domestic vs. imports

Domestic automakers' distribution costs, averaging 25 percent of sticker, tend to be lower than the imports' costs because of lower transportation expenditures, Mateyka said.

But that doesn't mean the domestics have a competitive edge over imports because the domestics are spending much more money than the imports on incentives, Mateyka acknowledged.

But as import makers find more of a need to jump into expensive programs, coupled with their higher physical distribution costs, the situation is getting critical.

"Physical distribution costs are astronomical, with ancillary marketing and incentive costs on top of that," said Bob Cosmai, vice president of national sales for Hyundai Motor America.

Cosmai wouldn't say how much his overall distribution costs are, but he said marketing, media and incentive costs make up the largest chunk in total dollars.

"Every year it goes up 8 percent to 10 percent," he said. "With an emerging brand like Hyundai, we could spend a lot more than that."

Meanwhile, industry leader General Motors, which spends more than any other automaker on marketing and incentives, may stir the waters even more.

GM, which started the 0 percent program, causing several other automakers to follow, expects the marketing war to grow hotter if the economy deteriorates.

Says Paul Ballew, general director, global market and industry analysis for GM: "On marketing expenses - the industry is not going to see any backing down."

Staff Reporters Jim Henry contributed to this report

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