Are Slipping Sales a Problem for Ford?

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Are Ford's (NYS: F) sales heading down?

We'll know more when Ford and the other automakers release their totals for August later this week, but early signs for the industry as a whole are, at best, muddled. On the one hand, the usually on-target industry analysts at Edmunds are projecting that August's sales rate will be roughly on par with July's decidedly weak pace, suggesting that consumers are at least treading water for the moment.

In a somewhat different corner is Citi analyst Itay Michaeli, who in a note on Monday predicted a significant drop in overall sales in August -- but said that the bulk of the decline would be due to falling fleet sales. Michaeli expects August's retail sales rate to be similar to July's.

That wouldn't be the worst possible news for the automakers -- fleet sales tend to have lower margins than retail sales. But buried in Edmunds' projections was this eyebrow-raiser: While most of the automakers are expected to post small gains, Ford appears headed for a mild decline.

Time for shareholders to worry? Not necessarily.

A surprising "problem" for Ford
Edmunds is predicting that Ford's sales will decline 0.5% from July's levels, despite continuing supply problems for key competitors Toyota (NYS: TM) and Honda (NYS: HMC) , and that the Blue Oval will lose half a point of market share. Intriguingly, though, Ford's problem doesn't appear to be due to a drop in consumer interest in the automaker's most popular offerings.

Instead, Ford's problem may be one of supply -- but not for the same reason as its Japanese counterparts. Supplies of Ford's hottest new products -- the small Fiesta, compact Focus, and Explorer SUV -- are extremely tight, as demand appears to have outstripped the automaker's production plan. Ford recently said that the Focus is "turning" -- industry slang for the average amount of time a car spends on a dealer's lot before being sold; 30 to 45 days is considered healthy -- in just 11 days.

(I can attest to the supply problem: My wife just bought a 2012 Focus. She called over 50 different Ford dealers in the Northeast, trying to find a car with what seemed like a simple combination of options (hatchback, manual transmission, SYNC). After three days of hunting, she finally found one -- in Baltimore. We live in Massachusetts. Yes, she flew down, bought it, and drove it home. But I digress.)

Short supplies are probably costing the Blue Oval some sales -- not everyone is willing to hop a plane to buy a new car. But the good news for Ford is that the cars they're selling are loaded.

Small cars with big options
Options are where automakers make the big bucks. Leather seats, sunroofs, "infotainment" systems, high performance engines, and the like have big margins and add significantly to per-vehicle profits. Thanks to demand for popular options -- particularly Ford's acclaimed SYNC system -- the company's margins have been great in recent quarters.

SYNC, a complex "infotainment" system that Ford developed jointly with Sony (NYS: SNE) and Microsoft (NAS: MSFT) , has been a huge, profitable success. About three-quarters of Fiestas (Ford's entry-level car, remember) and Focuses are sold with SYNC and a premium stereo system, options that provide hundreds in profits per sale.

Even options like heated seats, which not long ago were found only in cars like Cadillacs and BMWs, are proving popular on cars like the Fiesta and Focus (including my spouse's new ride). The availability of options like heated seats in an "econobox" (and the fact that nearly half of Fiestas are sold with them) is part of a larger trend toward adding premium features to lower-end cars, a trend that other makers like General Motors (NYS: GM) and Hyundai (OTC: HYMTF) are emulating.

The thinking has been that people who are downsizing for fuel-economy reasons might be willing to pay extra for a more deluxe experience in their new smaller cars, and that thinking has turned out to be spot-on. Ford's focus (so to speak) on interior comfort features and execution has proven to be a huge advantage -- the company says that a consumer who test-drives a Focus is more than 70% likely to buy one.

So should shareholders worry?
Yes and no. On the one hand, it's a great sign that an American automaker is seeing overwhelming demand for its small cars -- that's all but unprecedented, historically, and a big reminder of just how far Ford and Detroit have come in the last few years. And with incentives low and demand for options high, Ford's making plenty of money on those sales.

When I spoke with Ford CEO Alan Mulally a while back, he talked at some length about "right-sizing production" -- of eliminating overcapacity by matching production to demand. As a shareholder, I don't want to see Ford make big investments to add capacity that might not be needed when the market shifts (as it inevitably will) a year or three from now. That would be an expensive mistake.

But at the same time, I do want to see the company make the most of its hit products. It will be worth watching to see how quickly (or even whether) Ford increases production of its latest hits to meet demand.

At the time this article was published

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