Employee pricing: 5 lessons

DETROIT -- Employee pricing, the Big 3's blowout summer clearance sale, is winding down. Did it work?

It depends on how you measure it.

With automakers selling vehicles below invoice, inventories were cleared out. Marketing campaigns were simple and focused. But the Big 3 did not see lasting share gains, analysts say.

"By the time we get through October, it will be clear that employee discounts didn't provide any substantial shift in the market-share pie," says George Pipas, Ford's leading sales analyst. "We will end up about where we would have been had we been doing something else."

Five lessons learned along the way:

During the 90-day promotion, led by GM in June, Detroit's automakers achieved a massive reduction in bloated inventories.

Combined, Big 3 inventories, excluding their import brands, fell to 1.83 million units on Sept. 1, from 2.57 million on June 1.

But sales and market share of the Big 3 automakers rode a roller coaster. By the end of the promotion, depleted 2005 inventories hurt sales, and the luster wore off.

Whether it was GM's "Employee Discount for Everyone," Ford's "Family Plan" or Chrysler's "Employee Pricing Plus," the message was clear: The customer was getting a deal.

Pipas says clarity was the most positive feature. " 'You pay what we pay, not a cent more,' " Pipas quoted. "It was simple to understand, and it was compelling. People were led to believe, 'How could I possibly get a better deal than what the Big 3 are giving?' It was something different than $1,000 more clearance cash."

With the employee discount, the Big 3 in effect created no-haggle pricing. Customers found the approach compelling.

General Motors Vice Chairman Robert Lutz says the program succeeded because it was transparent: "If you give people real value and assure them that they're going to be paying the same prices as everybody else, that is probably more effective than what we had been doing, which was operating with somewhat fictitious MSRPs, then discounting very heavily off of those."

Experts say the savings for consumers may have been overstated.

"Despite heavily advertised employee discount 'deals' that lifted sales in July to the third-highest monthly level in the history of the industry, actual prices have changed relatively little over the last several months," analyst David Healey of New York-based Burnham Securitieswrote in a note to investors.

Healy says employee prices already were available in many cases to informed shoppers or aggressive negotiators. But knowing the price ahead of time gave the average buyer a sense of security, he says.

The imports were mostly unscathed by the Big 3 sales binge. Though Ford and Chrysler scrambled to match the GM program, the imports sat this one out.

The net result? For the year to date, the Big 3 (excluding import brands) are still losing share. Through August, Big 3 share was 58.2 percent, down 0.6 percent from a year ago.

During the three months of employee-discount sales, one point of market share shifted to the Big 3. When compared with the June-August period a year earlier, total Big 3 market share increased from 58.2 to 59.2 percent.

But most import brands remained strong over the 90-day discount period and even increased sales when compared with year-ago levels. "We see very little incremental business generated in Big 3 sales reports," Pipas says. "It's mostly pull-ahead from Big 3 customers."

While dealers cleared out inventory and increased volume, their profit margins took a hit.

With Big 3 automakers offering their vehicles below invoice, dealers lost part of their holdback money. Holdback typically is 2 to 3 percent of sticker price that automakers pay dealers after a vehicle is sold.

Under its employee-pricing program, GM pays dealers 5 percent of a vehicle's sticker price. That includes GM's traditional 3 percent holdback. By contrast, dealers previously were allowed a discount of 8 to 11 percent of a vehicle's sticker, including the holdback allowance. Then they negotiated with the customer to hold onto as much of that spread as possible.

Ed Williamson, a Cadillac dealer in Miami, says his average profit margin on a sale is 7 to 8 percent. His average with employee pricing, he says, was about 3.7 percent.

"It was a grand experience," Williamson said. "I'm delighted it's over."

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