The only way into the fast lane

American Demographics, April 1, 2004 by David J. Kiley

Byline: DAVID J. KILEY

Throw in an extra day this year for leap year, at no extra charge even, and you still won't be doing much of a favor for carmakers and their dealers desperate to torque up their sales numbers. From a macro view, the auto industry has one helluva consumer challenge. The objective is to sell 16.7 million cars in the United States in 2004, the same number that in 2003 accounted for $409 billion in new vehicles at retail. That's roughly a new vehicle sale every two seconds. Add them all up, and about 15 percent of U.S. households will have a new factory model in their driveway, the name of which, in many cases, people won't ever have heard before. What a tough business model, where relative success in the industry is based on the underlying assumption that every six and a half years, every household in America buys an item whose average price tag is upward of $25,000. Must be something magic in those potholed U.S. highways and byways.

As if that weren't challenge enough, there's the issue of competition. And not competition like in the food or pharmaceutical or even the computer or retail businesses, where two, three, maybe five or six players are duking it out for market share. For consumers, buying a car is a matter of choosing from among 300 available make and model options, derivatives of those models that add up to well over 1,000, and that's before extras like steel rims, spare cup holders, global positioning systems, sun roofs, tinted windows and choices of color enter into the decision-making equation. It's little wonder it costs almost $650 in advertising for each and every car sold - almost double what it was 10 years ago - not to mention the thousands it costs to "move the metal" in dealer incentives and 0-percent financing blowouts.

It's even less wonder that auto companies have lately been making a lot of noise about balking at the higher prices they anticipate television networks will charge them in this year's spring auction of ad inventory for the 12-month period starting this September, an annual selling spree known as "the upfront." But for a few regulatory and antitrust hurdles, you'd hardly think it strange these days if General Motors, Ford or Toyota, not Comcast, stole off in a Mouseketeers hat in the dead of night.

Back to reality, however, the good news for broadcast television networks is that - thanks to a bumper crop of new nameplates in search of a profitable share of the 45,355 new car sales expected a day - overall spending by the car companies should be up by a healthy rate for the third straight year, and for the eighth year out of nine. Bad news for this same group of players - ABC, CBS, Fox, NBC and the WB - is that their critical currency, the 30-second commercial spot, is nowhere near the value it used to be to carmakers who need to get their message out to you and me. Not that it isn't the best currency available, it just doesn't hold a candle to what it was. Higher prices and falling audience levels on broadcast networks mean that automakers will try to spend a smaller slice of their overall ad pie with them, diverting more dollars to cable and local TV, newspapers, magazines and the Internet, which they view as more in keeping with their customers' media habits.

The Rhetoric

For some automakers, the warning of lower spending is real. For others, especially the Big Three, the saber rattling is more likely to be posturing heading into negotiations. Network TV still delivers the biggest audiences in a short space of time, and that's what U.S. automakers need this year and next to launch a slew of models.

"No question network TV is getting less of our money this year," says a defiant Steve Wilhite, Nissan's advertising and marketing chief. Nissan posted a whopping 34 percent increase in ad spending last year, the biggest year-over-year gain among automakers, and cracked the top 10 among all advertisers for the first time. Wilhite recently hired a media auditor to monitor its $900 million budget. Although Nissan's actual dollars spent on network ad time may go up again this year and next because of rising ad budgets, Wilhite insists the percentage will be smaller.

Mitsubishi executives, too, say network TV will get a smaller share of ad dollars. Meanwhile, the big dogs, General Motors, Ford and Toyota say the percentages of their budgets going to network TV should be flat to declining this year into next, while cable and local station ad outlays will go up. Chrysler says its spending with networks will be up, and its percentage may be too. Hyundai says its network TV quotas will be up.

The Reality

Network sales executives, of course, understand the two trends impacting marketing decisions by automakers, but they are bidding to charge higher prices nonetheless.

First, automakers - especially General Motors, Ford and Chrysler - are under great pressure to offset increases in incentive spending. They've been turning the screws on their suppliers for three years to cut costs in order to fund rebate spending and the rising costs of health care for their employees. They have little tolerance for media companies that would like to steer clear of the cuts as companies that supply seats, fuel pumps and doorlocks pare to the bone and lay off workers.