Improved Management of Fleets Business Bodes Well For GM’s Profitability

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General Motors

For a number of years, the over dependence of General Motors (NYSE:GM) on fleet sales has been seen as a key problem. Fleet sales involve bulk sales of cars and trucks to corporate customers, governments, and rental-car firms. GM has long seen them as a way to keep factories running at full speed. But this strategy has meant a compromise on profits, as fleet sales tend to be a low-margin business. Sometimes, with less-competitive or dated models, fleet sales represented a huge percentage of total production – production that wasn’t making much money for the automaker.

All fleet sales are not bad. If done correctly, commercial and government sales are a solid, profitable, steady business. However, rental cars tend to problematic. The reasons behind this are two-fold. First, the rental companies demand and get deep discounts. Second, rental-car companies sell off their vehicles after a few short years, flooding used-car wholesale auctions with thousands of similar cars, which depresses the retail value of those relatively new models, complicating the automakers’ leasing businesses and making it harder to get premium prices for those cars at retail when they’re new. However, recently GM has started to turn around its fleet businesses.

We have a $40 price estimate for General Motors, which is about 25% higher than the current market price.

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There are two main ways in which GM has improved the management of its fleets business.

1) Model re-brands: A key point about the fleets business is that, if done right, selling cars to rental fleets can serve the purpose of good marketing, exposing people who might not otherwise be interested to try your brand. GM is now beginning to realize this as the re-branding of its flagship sedan Chevrolet Impala shows. The Chevy Impala was previously only known as a successful fleet vehicle but a redesigned version of the car became the first domestically manufactured car in over two decades to win Consumer Reports’ top ranking for a large sedan. [1] This should make the car much more popular with retail buyers.

The company expects as much and has made bold predictions for the model on the business side of things. Management at GM believes that 70% of the model’s future sales will come from retail buyers, a segment of buyers who have shown a willingness to pay much higher prices for cars in the past. Thus, if sales pan out as the company expects them to, the redesigned model should contribute a great deal more to the bottom line than its previous versions, which although successful as fleet vehicles, only sold to retail customers about 30% of the time.

Additionally, another model seems to be performing well for General Motors. The 2015 model version of the Chevrolet Cruze was named 2014’s car of the year by Automotive Fleet and Business Fleet Magazines. Sales of the Cruze are up by more than 40% on a year-to-date basis. [2] GM has also been charging higher prices for this version, as the model offers better connectivity, through an Onstar 4g LTE and a standard built-in Wi-Fi hotspot.

2) Price Management: When vehicles are retired from rental fleets, they are sold on the used car market in auctions. The price that a car company fetches for these vehicles depends quite a lot on their supply. An oversupplied market means that the average transaction price for a retired-from-rental-fleet model is usually quite low. Due to poor management of its fleet business, GM did not do very well in this area.

However, in November, the number of GM vehicles available at auctions was as low as 70 compared to about 800 in October. [3] By temporarily cutting sales of these retired fleet vehicles GM will be able to restrict the supply of these vehicles into the used car market. If the company had not done so, consumers would have been able to buy these cars from dealerships which bought these cars cheaply at these auctions.

This also means that the downward pressure that lower prices for used cars put on new car sales will be averted. This is important for GM, especially as sales generally pick up during the holidays. Consequently, GM should be able to squeeze out higher revenue on these vehicles, while also keeping demand higher for the newer models. Management decisions like these might be one reason why the company has managed to increase average recorded transaction prices for its vehicles for 26 consecutive months.

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Notes:
  1. 2014 Chevrolet Impala is Consumer Reports’ highest-scoring sedan, Consumer Reports, July 2013 []
  2. Chevrolet Cruze Named 2014 Fleet Car of the Year, gm.com, November 2014 []
  3. Where are the GM program vehicles?, Automotive News, December 2014 []