Last month, Ford Motors (NYSE:F) announced its second quarter numbers which highlighted the strength of its North American and Chinese operations. Although Ford has done tremendously well to overhaul its operations in recent years, reviving its Lincoln brand still remains a challenge. Lincoln cars account for just 3% of Ford’s total unit sales. But luxury brands are an important component of an automaker’s operations due to their fatter margins.
Like a number of other luxury brands, Lincoln faces image issues and doesn’t appeal to the younger generation. One would normally associate Lincoln with a granddad’s luxury car. The new millionaires, younger and more educated, prefer sportier and swankier cars, something that the brand does not convey. Hence, the new models will be sleeker and sportier as evidenced by the new MKZ sedan. Three more will follow suit by 2016. 
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Associating With Sophistication
Besides introducing new models, Ford is training its Lincoln dealers to go upscale. Recently, the company selected 60 of its Lincoln salespeople learn more about the likes and dislikes of intended buyers. Knowing about stuff like art museums or gourmet food is all part of the package. 
In Canada, there are no separate Lincoln dealerships and the cars are sold along with the Ford brand, thus undermining its exclusivity. Therefore, the company has started offering $100 dinner vouchers to prospective buyers as part of the overall feel-good factor that the automaker intends to provide.
Furthermore, Lincoln showrooms will also be pumped with a jasmine smelling scent, making customers feel that they have entered the lobby of a five star hotel. All of these are part of the company’s efforts to reposition the Lincoln brand and better connect with the tastes of the younger millionaires.
The U.S. automotive market has performed impressively in the last few years with sales up 13% in 2012 and 8% in the first half of 2013. With the sales figures now approaching pre-recession levels, the growth rates will naturally slow down. Therefore, the automakers are paying attention to their luxury brands since the margins associated with such vehicles are heftier compared to mainstream cars. GM has already had some initial success with the Cadillac after the introduction of the new ATS and XTS last year. The refreshed CTS and Escalade will follow shortly. Sales are up 33% through July in the U.S. GM is on a mission to double the Cadillac sales in 3-4 years beginning 2012.
Similarly, Honda is pouring in $1 billion to reinvigorate its Acura brand after it lost favor with the American public. The automaker already launched the refreshed versions of the RDX and the MDX this year. Sales are up 7.4% through July, although the growth has slowed down lately. 
It is important for Lincoln to regain its popularity in the U.S. since Ford also plans to launch the luxury vehicle in China by 2015. With competition in the Chinese luxury car market intense, customers will not be too keen to buy a car that does not stand for luxury in its home country, and so we believe that resuscitating the American operations will help its Chinese operations as well.
Lincoln’s annual sales stood at 98,000 units in 2012, and they haven’t really picked up in 2013. If Ford is able to able to double the sales in the next few years (which is not all that unlikely given its relatively small base), it could add ~$5 billion to annual sales assuming an average sticker price of $50,000 per vehicle. Furthermore, an operating margin of about 15% would yield about $700 million in income before taxes, which is more than a tenth of total operating income from the automobile division in 2012. And this does not even include the potential earnings from China. So there really is a big incentive for Ford to revive its Lincoln brand.
We have a $17 price estimate for Ford, which is about 5% above the current market price.Notes:
- Ford’s Lincoln Channels Lauren With Black Label Features, August 15, 2013, bloomberg.com [↩]
- After years of decline, Ford’s Lincoln brand introducing dealers to new type of luxury buyer, August 18, 2013, thespec.com [↩]
- Acura USA July 2013 Sales Results, August 1, 2013, acuraconnected.com [↩]