Which Auto Brands Should Go?

There are too many brands and not enough buyers. Many auto-industry insiders agree weak ones should go, but it's not that easy

by Jim Henry

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Should Ford Motor (F) dump Mercury and Volvo? Jerry York, the longtime adviser to billionaire investor Kirk Kerkorian's Tracinda, which recently acquired 5.6% of Ford, seems to think so. According to Automotive News, on May 1 he said out loud what a lot of people have been quietly thinking, namely that Ford should sell its two struggling brands, Mercury and Volvo.

York isn't alone. Robert Lutz, General Motors' (GM) vice-chairman for global development, touched off a storm with Buick and Pontiac dealers in 2005, when he stated the obvious: GM has too many brands, and the company would have to consider phasing out the weaker ones if they didn't perform.

For years Detroit kept drivers and dealers happy by offering a range of marques, many of which were differentiated by little more than a grille and a badge. But those days are gone. The growing feeling is that to fix themselves, one of the first things automakers need to do is concentrate their resources on the brands that still resonate and jettison those that are underperforming.

Mercury and Volvo are so vulnerable because sales for both brands continue to struggle. Over the past five years the two brands have seen sales decline 36% and 4%, respectively. And even though GM successfully killed off its money-losing Oldsmobile division—not without plenty of caterwauling from dealers, journalists, and customers—and Chrysler ditched Plymouth, there are plenty of other candidates for sale or closure.

The problem is that it's not easy to kill off or sell a brand. There are three major obstacles: alienating customers, angering dealers, and incurring substantial costs for laying off workers and shuttering plants.

Customers Could Leave the Family

Ron Harbour, president of Troy (Mich.)-based Harbour Consulting, says what may seem like an obvious call from the outside can be a much tougher decision from the inside, especially since most dealers represent more than one brand.

"You can look at it and say [Mercury] is not cost-justifiable, but it's an unknown where those Mercury buyers would go. Some of them could go to Lincoln, but there's no guarantee they will stay within the Ford Motor family. You could be kissing goodbye a couple hundred thousand sales, and they just can't afford to do that right now," he says.

Mercury spokesman Mark Schirmer says research shows some Mercury customers wouldn't consider the Ford brand. He says about 40% of buyers for the Mercury Milan and Mariner models are new to the Ford family, up to around 60% for the Mariner hybrid model. But they are also among Ford's oldest customers: According to a 2007 study by Strategic Vision, buyers of the Mercury Mariner SUV, with a median age of 53, were the youngest Mercury buyers, vs. a median age for the industry of 52. The average age of Mercury Grand Marquis buyers is 72.

Dropping Mercury would also hurt Lincoln dealers, who are paired with Mercury. "They're having a tough enough time as it is, with two brands, without taking one away," Harbour says. Woodcliff Lake (N.J.)-based Autodata reports Mercury sales in 2007 were 168,422, down 6.9%. Lincoln sales were 131,487, up 9.1% from 2006.

Brand Repositioning

GM's story is similar, Harbour says. "GM's got far too many brands. But where do you go first? I don't know. They've really been building the GMC brand, and a lot of Pontiac dealers are aligned with GMC now. So now, would you break them apart?" he says.

Meanwhile, to shore up its weaker brands GM is reshuffling its U.S. brands into four retail channels, combining Buick-Pontiac-GMC and Cadillac-Hummer-Saab, while its strongest brands, Chevrolet and Saturn, stand alone.