During the salad days of my college career, I had the dubious pleasure of working as a car jockey for one of the major rental car companies. My minimum wage foray into the automotive industry offered few perks– aside from its modest contributions to my then-favorite charity (the Collegiate Beer Fund) and the opportunity to study physics and engineering (handbrake turns, and engines on the wrong side of redline). Little did I know that this humble McJob would also give me unique insight into the Big 2.5's ailments.
More than a few years have passed since I surrendered the keys to my part-time fleet job. Yet when business travel puts me behind the wheel of today’s rental pods, I soon discover that the names have changed but the song remains the same.
You don’t have to be a car guy to know that rental vehicles showcase technologies that more competitive automakers refer to in the past tense. These sleds remain more committed to their “traditional values” of thrift, thrift and thrift than a coupon clipping service.
That’s because fleet operators take a less sentimental approach to car ownership than Joe and Jane Sixpack. In particular, the Hertz-Avis-Budget-National cabal demands wheels that can be acquired cheaply and delivered in large quantities. (About one of every eight new cars sold last year found its first home in a rental lot.)
Constrained by their high inventory costs and low margins, fleet operators are not particularly inclined to pay extra for innovative features. Driving intangibles– handling, ergonomic pleasure, haptic excellence, etc. — don’t translate into higher rental rates. Good enough is good enough.
But is it? With the Big 2.5 teetering at the abyss, the mainstream press has finally discovered what those inside the auto industry have long understood: much of our domestic auto production is destined for wholesale dumping, knee-capping their retail business.
How’s this for a snapshot? In 2005, the Big 2.5 commanded 81% of the 2.1 million-unit US rental car market. Sixty percent of Malibus, 55% of Impalas, 42% of G6’s, and 34% of Cobalts moved during the first half of the 2006 model year were enlisted into fleet duty, while only 13% of Camrys and Corollas, and a mere 1% of Accords and Civics, succumbed to the same fate.
Many pundits are directing their wrath towards one specific aspect of fleet sales, namely their low margins. They repeat this mantra endlessly, despite an abundance of Wall Street stalwarts (e.g. Wal-Mart) who've made low-margin enterprises into an art form. The analysts singularly fail to grasp the fact that the impulse to accommodate the fleet buyers’ product requirements poses the greater threat to a potential Detroit recovery.
In that sense, GM, FoMoCo and DCX have been unfairly accused of being out of touch with their customers’ needs. It would be more accurate to fault them for understanding their customers too well. The domestic automakers have excelled in providing their largest customers with precisely the sorts of frills-free, bargain-priced blandmobiles that the large fleet buyers require.
As Supreme Commander of the Fleet, Rick Wagoner would do well to spend some time in the trenches with the “We Try Harder” team. There he would encounter the wheezing fruits of his labors, as GM products struggle up steep inclines and slog through real-world traffic.
Perhaps he’d appreciate that epiphany that must be experienced by many a hapless rental customer (read: average middle-class retail car buyers) who departs the return lot, looking forward to jumping into their own staid but steady Camcord.
GM has committed to reducing its rental fleet in the first half of this year alone by 120k units. At a briefing on Ford's 2007 sales outlook yesterday, Ford spokesmodel George Pipas told reporters that the automaker's sales would fall 40 percent in January, driven by a 60 percent decline in sales to car rental agencies. While the new Sebring tells us that DCX hasn't kicked the habit, declining sales means it's only a matter of time before they follow suit.
But the numbers are still huge. Ford, for example, will sell 700k rental units this year (down from 900k). More to the point, simply reducing the quantity of fleet sales isn't enough. They are merely symptomatic of the disease. Rather, the cars themselves need to be fundamentally redesigned, built to precisely match the unique tastes and proclivities of American retail customers, while eschewing the low-budget design dictates of the fleets.
The Big Two Point Five must also avoid the temptation to chase what promises to be the Next Big Disaster: the peddling of Euro-market designs to US consumers who prefer sedans crafted for their tastes.
If Toyota’s and Honda’s US market success and Ford’s frequent missteps with the “world car” concept teach us anything, it’s that automakers who succeed in both the US and abroad must satisfy two very different markets. The rental fleets isn't one of them.
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Rental Companies are looking for the lowest common denominator; Consumers are looking for the highest.
Well crafted, Adrian, I enjoyed this post.
Having your cars in rental fleets isn’t the worst thing in the world. I’ve rented a handful of cars that made me change my mind about a car or car company. Unfortunately none of those were GM’s. In fact every GM I’ve ever rented has reinforced my decision to stay as far away from their dealers when car shopping as possible.
In particular the HHR we drove for a few hundred miles last spring is probably the worst car I’ve ever driven, mostly for design reasons, though it wasn’t aging well either.
Contrasted to the Montero, Liberty, Avalon we have rented that were holding up to the abuse, and realy won us over. My wife was interested in shopping for a Liberty and Avalon after renting each.
Done right GM could really win back some lost buyers here, might be their only path to getting me behind the wheel of one.
Key insight:
“The analysts singularly fail to grasp the fact that the impulse to accommodate the fleet buyers’ product requirements poses the greater threat to a potential Detroit recovery.”
To this I would add the impact on resale values, which means that any retail purchaser of these models will take a bath. Intelligent shoppers who look at the total cost of ownership will go elsewhere.
The mother of my daughter bought a 2000 Taurus from a lot that sells nothing but 2 or 3 year old fleet vehicles bought at auction.
At 80,000 miles the motor is completely shot. So she owes $4,000 on a car worth $2,500 if it had a good motor. She has been quoted $2,500 for a new motor.
So Ford’s junk peddling is once again my problem. I understand that Ford is at least trying to mend their ways, but they and the other D1.5 have to understand that Hertz doesn’t keep these cars more than a year or so. Every one of them ends up in the hands of an individual owner.
The thinking is that they can keep the factories running by dumping this stuff on the fleet market, therefore propping up their immense cost structure. But there is a cost – in residual value and in pissed off used car buyers who may move up to be new car buyers some day.
While dropping the Taurus is painful short term, no doubt a good move. When will GM and DCX follow? And if they do, what will the selection at Hertz look like in 3 years? It might cost a little more to rent a car, but would be worth it.
The automakers finally seem to realize that the fleet sales are killing the retail sales. Not just by exposing customers to poorly equiped, outdated models, but also by killing the resale values for retail units. Customers who repeatedly take a bath at trade in time eventually will seek the cars that hold their value better.
Where will the rental companies get their cars, then? There will always be a manufacturer that needs to dump excess capacity, but the automakers are also changing the terms of sale to rental companies, demanding longer in service terms and the purchase of better equiped cars. Rental rates are going up as a result.
The funning is that in Europe cars that we hold in high regards (MB, Audi, BMW, VW) all make cars build for the rental fleet and mass sales include a special edition MB just for use as a taxi cab. So depending on your perspective I guess it is the “home company” that gets to feed the rental and other fleets.
Last week when I was in San Fransisco, I had the oppertunity to select from a number of different rental cars and I settled on a G6 due to some of the informatio that I was reading about the changes in GM. Well boy was I dissppointed, and I am sure that I will never cross paths with a GM dealer when it comes to car shopping. One thing that freaked me out was that in the morning when I would start the car, the dash would go out and come back in metric.
Instead of percentages I would like numbers.
If 55% of Impallas were "destined" to the rental fleet and GM sold 100,000, that is 55,000 Impallas, but if the Camry sells 250,000 Camrys and 13% have the unfortunate place of going to a rental lot, that is 32,500, not that big of a difference.
The problem is you guys base everything on percentage, when most of the time the percentage is a huge difference, but the actual numbers arent. So sales numbers would be great please. Also where do you get this data from? I am just curious. Honda, on the other hand is the best at not selling to rental fleets, and I praise them for that.
>>Key insight: “The analysts singularly fail to grasp the fact that the impulse to accommodate the fleet buyers’ product requirements poses the greater threat to a potential Detroit recovery.” >>
Coming from one of those "analysts" I would tell you that this is one of the most common themes out of the analysts in the last 3-4 years. I understand the actual financial ramifications of the stupid fleet decisions made over the last 5-10 years, rather than relying on the media/pundits for implications.
Anyone notice that Ford is going to sell 200K fewer fleet vehicles (almost all daily rental) this year or that GM is saying they will be 100K lower in daily rent (still way too much though)? Or maybe that Hertz in their IPO basically told the world that the rental world is changing (i.e. longer holding periods, paying higher rental prices at retail because of more expensive vehicles)? Or maybe know how many daily rent vehicles Toyota sells annually (its a hell of a lot more than you think, and in this regard only Honda is pure as they refuse to sell to daily rent, if you get a Honda, the rental agency bought it from a dealer or via auction)? I
Ritacco: The funning is that in Europe cars that we hold in high regards (MB, Audi, BMW, VW) all make cars build for the rental fleet and mass sales include a special edition MB just for use as a taxi cab.
Once upon a time, there was a company here in the US which did that – built a car just for use as a taxi cab. This afternoon you'll learn all about it.
Fleet sales themselves (which include more than just rental agencies) aren’t necessarily all bad, but I do agree with this article (which is great, btw) that Detroit is relying far too much on sales to rental agencies, which are probably the least valuable type of sales. No doubt this is a result of their need to keep the lines going no matter what.
This brings up a problem which is at its worst in North America: overcapacity in the car industry. Everywhere I ever look at dealers or used car lots, they are gorged with “gently used” (yeah right) ’03’s, ’04’s, ’05’s and now ’06’s. Where do these cars come from? Aside from rental returns (which I’m sure most of them are), the only reason people return cars after that short of time is that it was somehow made worthwhile to buy a new car for a brief ownership, it was repossessed, or the car was plain awful – none of these are positive in any way for an industry, other than causing more metal to move, worsening residuals, the environment and inventory levels.
Even as plants are being closed, they aren’t being closed fast enough, in the desperate belief that this new Saturn/Sebring/Edge will turn things around and that excess capacity will be used soon.
Karesh has hit the real problem, it;s with fleet sales. The cars don't cost the mfg's when they sell them, it's when they hiit the auctions a year later. This glut of late model mostly American vanilla models on the market destroys the new retail sale in several ways.
First the new car dealer has to justify why his 2007 is worth 1.5 times the price of a 2006. Second there are too many 1 year old cars entering the used market and being marketed by used dealers.
Formally you had to go to a fraqnchise dealer to get a one or two year car in good condition. The chrysler sebring convertible is the prime example. They cost about 25K retail but a one year old hertz retiree goes for about 16K. If you bought the new one from the chrysler store you are doomed from the get go.
The dealers and facories try and make some of this up with huge new car discounts but this just further erodes the sticker price and used values. No one finally believes any retail price for an American car. When this is solved, and only then, will American brand cars have any resale value.
The following cars I will never consider in a million years, thanks to experiences with rentals:
Chevy Malibu (multiple rentals)
Ford Escape
Dodge Stratus (and variants; multiple rentals)
The following cars I WOULD consider based on rental experiences:
Vauxhall/Opel Corsa (UK)
Ford Galaxy/VW Touaran (UK)
VW Polo (Croatia)
Seat Cordoba (Spain)
IMO, the problem is uniquely American. All of my experiences renting overseas have resulted in cars that were not totally offensive and were appropriate and competent for their environments, at no greater relative cost than the US experience. Applying this idea to the US, you would expect fleets to be full of highway cruisers, but most of my experiences have been miserable on long highway cruises (for which I usually rent instead of using my car).
One other point: The only manufacturer I see apparently using rental fleets to get the word out? Hyundai.
The occasional Sonata stands out as a real shining star among fleets. I’ve only had the chance to ride in one, but it was fundamentally different from the norm. If I could request it by name, I would.
Instead of percentages I would like numbers.
From: http://autos.msn.com/advice/article.aspx?contentid=4023925
“Here are the top ten bestsellers in America for 2006, based on data published by Automotive News.”
1. Ford F-Series 796,039
2. Chevrolet Silverado 636,069
3. Toyota Camry 448,445 (13% = 58,297.85)
4. Dodge Ram 364,177
5. Honda Accord 354,441 (1% = 3,544.41)
6. Honda Civic 316,638 (1% = 3,166.38)
7. Chevrolet Impala 289,868 (55% = 159,427.4)
8. Toyota Corolla 272,327 (13% = 35,402.51)
9. Nissan Altima 232,457
10. Chevrolet Cobalt 211,449 (34% = 71,892.66)
“Source: Automotive News Data Center”
Wonder what adding the word “retail” to “top ten bestsellers” would do to some of these numbers? The math:
Total Impala sales: 289,868, with retail = 130,621.
Total Camery sales: 448,445, with retail = 390,148.
I’ve gotta say: I’m amazed at the number of pickup trucks sold here in the States. Pretty impressive U.S. truck sales.
I think that this most certainly gives companies such as Mr. Shelburg’s China Motor Company (AZ) an “in” to sell Great Wall and Gonow SUVs and Brilliance cars to fleets, or CHAMCO’s (NJ) as yet unbranded SUVs to fleets. I also understand CMC (China Motor Company – the Taiwanese manufacturer of Mitsubishi cars, 19% owned by Mitsu) is interested in selling cars in the US – a facelifted 2.4 liter Galant Grunder (um, they might want to change the name for the US) would be great rental car fodder. (Isn’t that an oxymoron?)
Let’s face it, it’s a huge market, but it is also a huge drain on the resale value of cars going through the rental fleets (and hence, the manufacturers). Hmmm, the Japanese are totally NOT stupid and limit the % of vehicles going through rental fleets (apparently, especially Honda – smart). This clearly limits the number (%) of used cars having “gone through the rental car grinder” and keeps resale value high. It isn’t “just numbers” – it truly is % of the used vehicles of a particular make out there which either harms or helps resale value in this regard.
Back in the 1920’s America, in fact, a car manufacturer called Ambassador (nothing to do with the later American Motors) manufactured a ‘drive yourself’ car in 1924. The car became the Hertz in 1925, and to quote “The New Illustrated Encyclopedia of Automobiles” by David Burgess Wise, “Hertz – 1925-1927. The Hertz was the first car made purely for rental and was the ancestor of today’s Hertz rental car system. Under Yellow Cab aegis, it first appeared in 1925 as a successor to the Ambassador D-1 and survived in both open and closed models until late 1927. It featured Continental six-cylinder engines, disc-wheels, Buick-shaped radiator and 114-inch wheelbase.”
So it was an “assembled” car which could be repaired easily by any dealer familiar with the various “common” components.
Most Chinese cars seem to use common (Mitsubishi) components, especially those from the PRC. Interestingly, earlier Hyundai (and earlier Malaysian Proton) cars used Mitsubishi technology, and in fact, quite of lot of Mitsubishi tech gets into Chrysler products (even currently dispite the nasty divorce of Mitsu and DCX)
Maybe this provides both an “out” for the Big 2.5 and allows them to eschew the money-losing (and catastrophic for resale value) rental car market.
Looking at it in the best light, it may also provide super-inexpensive used Chinese vehicles at incredible prices for the great unwashed masses of buyers who can’t afford nice stuff new, or used, and essentially just look at the monthly payments (you know, like the huge masses of people who currently buy “returned fleet” Chevy Malibu sedans).
Or, would the Chinese importers say “no way” so as to not totally ruin their own vehicle’s resale value?
Wow, the rental car companies might actually have to start paying a near retail price for GOOD cars. What a novel idea.
In fact, if they play their cards right and buy vehicles from all manufacturers, instead of huge numbers of one type in bulk, they would probably be doing themselves a favor by helping to raise the resale value of all of their fleet, thus coming out no worse than they are now.
Glenn S, thanks, I am amazed at how few Honda sells, that is amazing.
To clarify, are fleet sales constant through out the year? Imonti stated those percentages for the first half of 2006, which i would say verifies your numbers, but I also know they all sell a ton of cars the fleet at the end of the year for the sales numbers.
Once again thanks for the numbers.
The only time I’ve gotten out of a rental car made by a American company that I didn’t totally hate, the car in question was a Pontiac Aztec. And that was probably because my expectations were so low to begin with.
Detroit sends so many cars to rental fleets that the fleets can turn them over in
less than 30k miles or so. I haven’t seen stats on the average time in service for a rental car, but it is a rare exception to get a car at Hertz with 30k or more miles on the odometer. As the story pointed out, this high turnover amounts to massive depreciation for the model.
so, we’re left with:
1) poorly appointed cars everyone hates
2) high turnover and deprecation
add to that:
3) excess capacity for the carmakers which lead them to make so many cars
4) Union employees that cost $$ who can’t be fired
I have an idea! Let’s have Detroit make fewer, better cars, and shift Union employees to the Big 2.5-owned rental companies. Put the unionites to work doing fleet maintenance, so that the rental companies can keep their cars longer and will cause less depreciation when turned over. And because they’re nicer cars, the average renter won’t always step out the Malibu saying, “Yuck, get me back to my Camry!”
To clarify, are fleet sales constant through out the year?
I’ll defer to others on that question.
(I’m not all that familiar with the car biz.)
One flaw in “my” numbers is that the article speaks to 2005 percentages, and my post speaks to 2006 numbers. But if the overall average sales and wholesales remain somewhat constant, then the numbers I posted are still in the ballpark.
[Edit:] Here are the top 10 in sales numbers for 2005.
I’ll leave math of fleet sales vs. total numbers to others.
From: http://www.edmunds.com/reviews/list/top10/115851/article.html
1. Ford F-Series — 901,463
2. Chevrolet Silverado — 705,891
3. Toyota Camry — 433,703
4. Dodge Ram — 400,453
5. Honda Accord — 369,293
6. Honda Civic — 308,415
7. Nissan Altima — 255,371
8. Chevrolet Impala — 246,481
9. Chevrolet Malibu — 245,861
10. Chevrolet TrailBlazer — 244,150
How’s this for a snapshot? In 2005, the Big 2.5 commanded 81% of the 2.1 million-unit US rental car market. Sixty percent of Malibus, 55% of Impalas, 42% of G6’s, and 34% of Cobalts moved during the first half of the 2006 model year were enlisted into fleet duty, while only 13% of Camrys and Corollas, and a mere 1% of Accords and Civics, succumbed to the same fate.
So she owes $4,000 on a car worth $2,500 if it had a good motor. She has been quoted $2,500 for a new motor.
Of course, it could be do to a few too many trips on the wrong side of the redline on cold mornings (see first paragraph).
Where will the rental companies get their cars, then?
China
——–
The rental car business has always been a double edged sword. It is the low laying fruit of sales…price it low enough and it will sell. And I guess if you have tremendous fixed costs (plants) and variable costs that aren’t (labour) as long as the rental car sale covers the cost of materials with a modest profit, it does make sense. But, when you look at intangibles it dilutes the brand in the long run. The worst thing that GM did to the Pontiac G6 was to almost immediately after launch turn it into a rental car staple. And I agree that it clobbers resale value. All the Ford dealers around here have ex-rental Tauruses on their lots, on emodel year old and with as little as 12,000km, going for 10,000 below list.
There can be some benefit to rental cars, i.e., it gives people a chance to test drive a car they might them go on to buy. (My first drives of a 300 and a Camry were both in rentals, and in both cases it increased the likelihood I’d buy one). But rental sales need to be done in small doses and the car has to impress, even if it doesn’t blow anyone away.
I have always wondered why the domestics don’t just create models that only sell to rental fleets and not in retail.
Wouldn’t this be a more effective use of rebadging?
Who are filling in the sales that GM/Ford are giving up? I assume Chrysler and Hyundai.
I have always wondered why the domestics don’t just create models that only sell to rental fleets and not in retail.
Wouldn’t this be a more effective use of rebadging?
Good point. Sort of a modern day Checker Marathon. I know that several of the big banks combined their cheque processing operations into one big, shared facility that shared the overhead between three companies, substantially decreased the cost for each company. How about one big plant churning out nothing but four door sedans destined exclusively for rental car companies and fleet sales. Use a new brand (preferably free from the UAW). Or resurrect an old brand. (Probably what GM should have done instead of pouring money into sinkhole Saturn.) The cost sharing arrangement is not as complex as one might think.
When I visited Japan, just about every taxi was a Toyota “Crown.” And I didn’t see any Toyota Crowns that wasn’t a taxi. I think Ford was going to do something like that with the Taurus when it moved on to the Fusion and 500.
Also (and I’m just guessing here), perhaps the rental car business bigger in the US compared to other countries?
I guess someone needs to make these cheapo cars to the satisfy the rental market but maybe they should make special models that serve that market only. If the 2.5 went upmarket we would have to pay what the Europeans pay for rentals and that would not be good either.
Fortunately DCX is an expert at all things cheap and undesirable and the new Sebring and Avenger should feed rental demands for a while yet.
Simple fix.
Make every rental car a Hertz Shelby Mustang.
Even the used models are fetching big money.
Great article, Adrian. I’m actually really interested in hearing more from real-world analysts such as GroovDog.
I also wonder how much of this is symptomatic of something deeper. I may have a more informed opinon after Frank’s article “this afternoon.”
SkiD666 and kph, I was thinking the same thing.
It was my understanding that the Taurus plant in Atlanta was the most efficient of any car plant int he country, taking only 19 hours per car. With little money invested in design or production, couldn’t Ford have sold cheap Taurii to ONLY a rental company? They could have made a little money on that, or even if they just broke even, that would be a lot of workers out of the jobs bank.
Plus, there would be no hit in the retail sales of the Taurus, because there would be no retail sales. Hell, they could have even changed the name of the car to the Hertz Bull if they didn’t want anyone to associate it with a Ford.
I have always wondered why the domestics don’t just create models that only sell to rental fleets and not in retail.
I have always wondered this to, keep a plant going instead of paying the employee to sit in jobs bank, and the technology is old and you do not need to update it all the time, like the Crown Vic/Grand Marquis. Those ahvent changed in a long time.
I think Ford was going to do something like that with the Taurus when it moved on to the Fusion and 500.
Very true, I think Ford sold 170k to rentals, GM did this with the older Malibu they called it the Classic, and the Grand Am, kept the Lansing Car Assembly plant goign until most of the employees could move to Grand River Assembly or Delta Twship.
Didnt cost them anything, I am sure they made some money on it and they were not hurting a current cars resale price.
“In that sense, GM, FoMoCo and DCX have been unfairly accused of being out of touch with their customers’ needs. It would be more accurate to fault them for understanding their customers too well. The domestic automakers have excelled in providing their largest customers with precisely the sorts of frills-free, bargain-priced blandmobiles that the large fleet buyers require.”
Brilliant
Frank Williams
Checker Marathon anyone?
Plus, there would be no hit in the retail sales of the Taurus, because there would be no retail sales. Hell, they could have even changed the name of the car to the Hertz Bull if they didn’t want anyone to associate it with a Ford.
I mentioned that before too. Keep the plant running, keep your sales numbers up and sell a fleet-only Taurus in white or black with zero options for $14,999. I doubt there is a business case for it, a closed plant and employee buyouts probably make more sense in the long term.
I remember reading a Newsweek article in 1996, about the new Taurus. Rental car companies hated it. It had so much “stuff” for people to break (soft touch vinyls, that flip-up center console thingy, etc) and it was expensive. I’m guessing Ford wasn’t discounting that new bodystyle very much in the beginning. But they caved, and made the “Taurus G” especially for bargain hunters/fleet buyers.
Now, as Detroit cuts capacity, its just a matter of figuring out what other car makers are feeling the pinch enough to cater to this market.
I think rental cars are GM’s best hope right now. This is the only way for them to get a large amount of people to “test-drive” one of their bread’n'butter vehicles. This is a great opportunity to show off your advancements, putting yourself back on the map for many, many people. And, god forbid, make a buck or two in the process.
In other words, this is the cheapest advertisement you can get. Almost like having a huge test-drive fleet, for next to nothing.
Naturally, it works both ways; if you make bad cars, people who rent them will remember the awful experience next time they shop. Way to make a dent in your sales chart.
If GM would have a good, solid product, they could easily sell it to rental companies at a loss – and cash in on the sales they’ll generate a few years later, on all models – and not just the rental ones. A great demonstration of foresight it would be.
But, wait – GM? Foresight? Blasphemy!
wgmleslie: Frank Williams Checker Marathon anyone?
Your wish is my command.
Wow, Frank’s got some kinda magic! I can’t wait for Friday! :-)
Some good feedback so far, thanks to everyone for the replies.
As far as fleet data goes, the most comprehensive industry online source for fleet data, at least of which I am aware, is fleet-central.com. If you want to see both unit sales and percentages to fleets, that’s a good place to begin. (Don’t expect to find too many specifics in GM’s press releases, which provide carefully crafted factoids that neglect to reveal the big picture.)
The comments about the other negative implications of fleet sales, such as low residuals and low margins, are undoubtedly correct. This commentary is intended to emphasis another implication that may not be so obvious, namely that the product itself is also effected by fleet sales because they comprise such a large percentage of the total volume that it inevitably affects design and features, given that the powers that be in Detroit are not willing to invest more money into cars that they know will be wholesaled.
It goes back to the beancounters mantra — don’t spend a lot on something that is going to be sold at a discount. That’s an ethos that Detroit finds hard to shake, even if doing it on the cheap comes at the expense of your brand equity.
It is true that about 1/8th of Camrys and Corollas are sold to fleets. But unlike the Big 2.5, Toyota has done this without hurting residuals or the quality of the brand. The key reason for this is addressed in the editorial — Toyota does not use the low margins from the fleet sales as an excuse to compromise on quality, features or design. Instead, the design focus remains targeted on the retail customer who will pay a premium and who will more than make up for the lower returns on the fleet sales.
The analysts, who understand earnings better than engines, often fail to realize that fleet sales are ultimately a symptom of the problem. The disease goes back to product, product and product. The cheap disposable commodity that gives the Impala appeal to the cost-conscious fleet operator is the very same feature that will propel the average retail buyer running to the Honda or Toyota dealer to buy a Camcord, instead.
I think the policy is still in place, that honda doesn’t sell to fleets like hertz. The reason 1% of their cars end up there is that individual dealers have sold them to the fleets, not the factory at a wholesale level. Now the dealer is in the loop to get the sale even for these fleet sales. When it comes to having strong dealer networks the Japanese know how to support them. ie.large stores, large territories, little competition with the factory with fleet sales. All of this ends up with a happy model end every year where a mild cloeseout sale unloads the previous years merchandise well before the calendar year ends. No excess floor planning for the dealers,no overproduction for the factory. No sunken resale values because of blowout discounts on the last years stuff. When GM FORD &^ Chrysler get to this point they will have a future.
Spot ON,
I clearly remember hating a new low mileage Malibu, and couldn’t wait to get my 10 year old 150,00 mile Maxima out of the shop. I wouldn’t have traded the two cars straight up, without a lot of cash setting on the hood of the Malibu, and even then I wouldn’t have kept it. A Monte Carlo was ok, I just kept thinking that it was a coupe made for fat people. In contrast, Hyundai, Kia and even VW have all made favorable impressions through the rental counter. It is the best advertising, and has always been a reccommended practice to rent a car before you purchase.
We've heard the problem with fleets a million times. What is the solution? For the Big 3 to sell no cars to fleets? Then what? You have an additional 2.1 million cars on dealer's lots. What good would that do?
The Japanese would take the fleet market entirely, increasing their sales, profits, and market share. Then the Big 3 would have to reduce production by what 50%? sending millions of workers to job banks.
How about a reasoned solution, a realistic solution?
chaz_233: We’ve heard the problem with fleets a million times. What is the solution? For the Big 3 to sell no cars to fleets?
I do believe that I offered a solution: Build a better car.
Let’s put this another way — the average Camry buyer is unaffected by Toyota’s fleet sales, because the car remains a solid, reliable, comfortable runner with strong residuals. Toyota can make significant profits and sell to fleets because the cars remain appealing to the retail market.
Cars such as the Malibu miss the mark by a wide margin because the needs and wants of the retail customer are largely ignored, which gives GM no choice but to dump them on Avis’ and National’s doorsteps — who else would possibly want one? Given that cars such as the Malibu were designed with the needs of rental operators in mind, it’s not surprising that those of us who actually have to live with the cars for many years, day in and day out, and who then have to bear the brunt of the resale value, might come away with a different impression. Toyota may sell to fleets, but the attention to design makes it clear that those fleets aren’t their primary customers.
From Cowbell:
With little money invested in design or production, couldn’t Ford have sold cheap Taurii to ONLY a rental company? They could have made a little money on that, or even if they just broke even, that would be a lot of workers out of the jobs bank.
That is, in fact, precisely what Ford did with the Taurus for the 2007 model year. They were produced, but only fleet customers could buy them.
Similarly, in the mid-1990s, decided to sell its N-body cars, particularly the Olds Acheiva, only to fleets.
I think the message this sends to the retail customers is that GM or Ford don’t have enough confidence in the quality of their new cars to sell them at the dealer. That doesn’t seem to be the way to reverse a quality-deficit perception.
Just a quick observation. I went to http://www.fleet-central.com to check out the site and the first thing I notice is a fleet sales banner ad for a for Ford’s, make it or break it, Edge.
Michael Karesh: February 1st, 2007 at 8:45 am Key insight: “The analysts singularly fail to grasp the fact that the impulse to accommodate the fleet buyers’ product requirements poses the greater threat to a potential Detroit recovery.” To this I would add the impact on resale values, which means that any retail purchaser of these models will take a bath. Intelligent shoppers who look at the total cost of ownership will go elsewhere.
No, intelligent shoppers will know which cars go into fleets and get a screaming deal on their new car. My wife loves her loaded 05 Malibu Maxx, and we were out the door with taxes and everything for about 10K under sticker.
Even if we were dumb enough sell the car at 3 years or 75K (what kind of morons sell at that age and takes the max. depreciation hit anyway?), we will do better on cost of ownership than a CamCord. We will also have a more useful car (we love the Maxx's versatility, power and always low to mid-30's mileage)!
By no means scientific, but these are my impressions of the past few cars I rented for at 1 week each:
Grand Prix – $32k msrp for this? Are you serious? No thanks.
GMC Envoy – Roomy. Noisy. Pretty. Gas pig. No thanks.
Chrysler Sebring convertible – Is there really a spine on this thing? And could the plastics get any cheaper?
Taurus – serviceable enough at it’s realistic price point
Sonata – very impressed, quite tossable
Lucerne – nice drive, quality interior….I’m not in love with the “Buick” look…perhaps if they redesign towards the Enclave….
Dodge Caravan – serviceable enough at it’s realistic price point
Of course, the above vehicles were in different wear stages of their life…..
My question is that if the 2.5 starting withdrawing from the fleet market, and assuming that the rental companies will still need a certain number of new cars, who is going to fill this void – Hyundai, Suzuki, Toyota?
Now if this is the case does it automatically lead to lower residual values for these makes? Not necessarily – if (and only if) the cars are desirable to people who wish to buy them (new or from fleet resellers)
I think this post fails to cut to the heart of the matter regarding the connection between fleet sales and residual value. Low margin does not nor ever needs to automatically equate to shoddy and undesirable vehicles. As has been mentioned above, a real winner entering the rental market can potentially lead to dealer visits, and in the very least it will crowd the roads around airports and tourist areas with shiney new wheels. Free exposure! Well not exactly free considering the low margins, but you see my point.
I see two options. Sell only good models to fleets with mid-grade options or sell cars specifically designed for fleet use. Just like the Sebring and Avenger are platform mates make a revised skin (not entirely new) with a new name on it that is only sold to fleets. So either use fleets to improve your image of cars you want to sell in retail or make custom versions exclusively for fleets so you maintain your image and your buyers residual value.
Yup – wife rented a Chevy Colbalt from Enterprise and why GM would let such a piece of junk out to multiple drivers is beyond me. Wind up windows, tinny radio, felt like sheet metal had been replaced with foil. She came away with even LESS respect for GM than before.
Then we got a rental Matrix XR from Hertz. Same price as the Colbalt, but this was a vehicle that we could nearly see owning if we wanted such a car.
Frankly car makers ought to not even let rental fleets have stripper cheap cars – it just makes the renters hate them, and kills any possibility of sales of similar models.
Penaloza “I went to http://www.fleet-central.com to check out the site and the first thing I notice is a fleet sales banner ad for a for Ford’s, make it or break it, Edge. ”
Honestly, if I hadn’t gone to check myself I would have thought you were joking. Unfreakingbelievable. How in the hell could that possibly make sense? Anyone?
One thing to remember:
Fleet sales don’t necesarrily kill retail value. DISCOUNTING fleet sales does…
A rental car company turns over its fleet quickly, at ~25-50k miles and only a year or less, because of how Uncle Sam writes the tax laws. If you hold onto a car for buisness, you take the pittance of depreciation. But if you sell it after less than a year, you can write off the whole depreciated value at once as an expense.
Thus one thing which the rental car company really cares about is how much can their used-car-sales arm get in the end vs paying at the start, as that is the REAL cost of the rental car to them.
Thus you see plenty of rental camrys, not because Toyota discounts them much, but because they depreciate slowly so that it isn’t a big loss when they sell em. GM has to discount the Malibu a lot more because it depreciates like a stone from retail, and a car rental company doesn’t want to pay for the depreciation.
Thus I don’t buy that discount fleet sales cause depreciation, but that the discounts are necessary because of depreciation.
Has anyone every tried to drive a Japanese car off of a rental lot? Pointing out that 35k Camry’s went to rental lots is no big deal. I’ve tried to get that camry at the rental lot, and it costs as much as a cadillac – usually much, much more expensive than the larger taurus. So, I suspect Toyota is making a lot more on it’s retail sales to rental fleets than the big 2.5 and those higher rental costs reflect that.
I do agree that it seems reasonable for the big3 to prop up their cost structure with sales of bargain basement cars to the rental fleets – I don’t understand, though, why they would dilute their core brand names by doing this. Why not just have a rental/fleet brand. Everyone drives a rental now and then, and unless you’re at the high end, it usually just turns you off to the brand.
wstansfi: Yeah, I have. I’d rather drive a Fusion than a Camry in a hot second. And between the Malibu and the Camry its actually a toss-up. The Camry is automotive Valium, stupifyingly boring, and I’ve been given them twice as my “generic Midsized” rental. Still better than an FG@#)$( Taurus however.
Also, the Mazda3 used to (for a while at least) be readily available at Enterprise, I’ve seen civics alot, had rental corrolas, etc etc etc.
The Hertz quote for a San Diego trip
“Accent or similar”
“Corolla or similar”
“Taurus or similar”…
Me, I decided to take a cheaper than the corrola rental: Mustang Convertible (hey, its winter).