Employee Discount Scheme Praised, Panned

General Motors Corp.'s bold marketing move offering employee discounts to consumers is either a stroke of genius or act of desperation.

Such wide mixed reactions surfaced at a J.D. Power and Associates International Automotive Roundtable attended by about 200 auto industry executives, dealers and suppliers in Dearborn, MI.

GM's discount program triggered a “remarkable” sales boost, says Tom Libby, senior director of the Power Information Network (PIN), a tracker of automotive retailing.

He says GM gaining 6.9 points of market share in June of this year compared with same-time 2004, “is almost unheard of.”

The auto maker sold 175,877 more units this June than last, 550,783 compared with 374,906. The average GM vehicle transaction price increased $442 despite the discounts.

That is because many buyers opted for more light trucks, which cost more than cars. Moreover, they “moved up to the most expensive trucks” such as the GMC Sierra and Chevrolet Tahoe, says Libby.

Dubbed “You pay what we pay,” the program “connected with the U.S. public because it was simple, transparent and a credible value story,” he says.

Some GM dealers complained it reduced their profit margins. Libby argues that was offset by higher volumes, increased finance and insurance business and less expensive floor-plan costs due to reduced inventories.

“Any dealer who didn't participate in the program should probably get into a new business,” says Libby.

Ford Motor Co. and the Chrysler Group followed with similar discount plans, helping to send July vehicle sales soaring to a record 1.8 million units.

GM hopes to replace its discount program with a value-pricing plan that lowers sticker prices. “If it works, it would be a major change,” says Libby. “But it's been tried before.”

Despite its impressive sales results, the GM discount scheme had shortfalls — and critics.

It failed to take sales from Japanese rivals. “Toyota owners not only didn't move to GM in droves, they stayed more with Toyota,” says Libby.

In a typical June, about 50% of Toyota owners who buy new vehicles stick with Toyota, while 10% opt for a GM vehicle. This June, 56.5% of Toyota owners buying new vehicles stayed with Toyota. Only 8.6% crossed over to GM, according to PIN research.

Libby attributes that to Toyota Motor Sales U.S.A. freshening its lineup with vehicles such as the redesigned Avalon sedan and Sienna minivan.

Although domestic vehicle quality compares with that of Japanese auto makers, public perception does not match that reality, says Chris Denove, a J.D. Power partner and research director.

“Until it does, the domestics will keep having fire sales,” he says.

Some say the discounting will steal sales from the future. Robert Farago, founder of thetruthaboutcars.com, quips, “As the Brits say, there will be tears at bedtime.”