The discounting treadmill

Posted by: David Welch on September 02

It looks like General Motors is stuck on the discount treadmill. Bloomberg reported today that GM will extend its employee pricing program for all consumers for another month. The offer was set to expire on Sept. 2. With sales in the tank, all carmakers need to goose sales somehow. But going long with come-ons like rebates, employee pricing and 0% financing is a slippery slope. It’s easy for a carmaker to rely on discounts and tough to get off them. GM complains about $1,600 a car in retiree benefits costs. But giving away more than $3,000 a vehicle in incentives is a bigger hit to the bottom line.

It can get pricey for GM. According to the company’s website, employee pricing cuts a little more than $2,100 off the sticker of a well-equipped Chevrolet Malibu LTZ for a sale price of $25,600. But then you can add in a $1,000 rebate for the Malibu and the discount climbs above $3,000. Discounts are bigger for more expensive models. A top-of-the-line, $48,000 Chevy Tahoe 4x4 sells with a $5,000 discount. Add in the $2,000 rebate and the truck sells for $41,000.

The big offers just add to GM’s marketing quandary. All of the domestic auto makers have been trying to get better pricing and cut discounts. They need to conserve cash in the near term and in the long run, convince buyers that their dealerships aren’t just bargain shops. GM and rival Ford were trying to scale back a bit on incentives and even sneaked in a few price hikes over the past couple of years. Massive production cuts helped them pull back somewhat. But a weak market and plummeting popularity for their best models—trucks and suvs—has reset the clock. It will take a long time for Detroit to prove that they can really sell cars based on their merits instead of the deal.

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Want the straight scoop on the auto industry? Detroit bureau chief David Welch and auto beat veterans David Kiley, Dexter Roberts and Ian Rowley bring daily scoop, keen observations and provocative perspective on the auto business from around the globe. Read their take on such weighty issues as Detroit’s attempt at a comeback, Toyota’s quest for dominance and the search for an efficient car.

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