Bad News for Ford's and General Motors' Luxury Brands

By Markets Fool.com

Sales of luxury vehicles are, in the somewhat wise words of Randy Moss, "straight cash, homey." (Take that, everybody who didn't believe a random Randy Moss quote could be used in an investing article.) Meaning, of course, that sales of luxury vehicles are critical for automakers' success in the U.S. and globally. Luxury vehicles drive significantly higher average transaction prices, and fatter bottom-line profits.

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With that in mind, Ford Motor Company and General Motors received some bad news regarding their luxury lineups recently.

Graphic source: Edmunds.com research(link opens PDF).

Walking away
The graphic on the left, from the hardworking crew at Edmunds.com, shows what people buy after returning their luxury ride. First, the Porsche statistic should probably be ignored: If a consumer has purchased a Porsche, chances are their days of driving a non-luxury or mass-market car are over.

Now for the bad news. Four luxury brands had consumers trading in their luxury ride for a mass-market vehicle more often than not. Leading the exodus charge was Lincoln, with Ford's struggling luxury brand seeing nearly seven of every 10 consumers trade in its vehicles for a non-luxury ride.

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You could interpret that statistic in a few different ways. A harsh way would be to say that Lincolns are viewed so poorly in comparison to more successful luxury brands that people would rather save money and drive a regular Ford, or another mainstream brand's vehicle. A less harsh view would be that because Lincolns don't carry the high transaction price found with a Porsche, a consumer walking away from Lincoln in favor of a non-luxury brand isn't making as significant of a change.

Either way, the news isn't good for a luxury brand trying to reverse its sales slide.

Why it matters
Consider the profitability difference between Volkswagen's namesake brand and its Audi luxury brand. Volkswagen was responsible for more than three times the vehicle sales that its Audi brand sold last year, yet Audi generated 73% more operating profit than the Volkswagen brand.

Looking at a wider picture, luxury sales represent between 10% and 11% of auto industry sales, yet represent roughly 18% of generated new-car sales revenue, according to Edmunds. Digging even further, Ford estimates that the luxury segment's 10% to 11% of total industry sales generates roughly a third of all profits.

Consumers walking away from Lincoln and Cadillac at such a high clip is just bad business for U.S. automakers. That's especially true when you consider that luxury sales are less affected during tough economic times and don't -- or shouldn't -- directly cannibalize sales from the mainstream brand.

The upshot
Not surprisingly, Ford plans to pour $2.5 billion into its struggling luxury lineup by the end of this decade. A large portion of that will be to develop two all-new Lincoln vehicles in 2018 and 2019, bringing the lineup's vehicle count to eight. A bright spot for Lincoln in 2014 has been the debut of its all-new MKC, which has increased its segment market share from 2.6% in May to nearly 10% in October and was Lincoln's best-selling vehicle in November.

Investors are hoping Ford can draw experience from its impressive turnaround of its namesake mainstream brand and apply it to Lincoln. The MKC offers investors a glimmer of hope that it can be done, but there is clearly some work to do first.

The article Bad News for Ford's and General Motors' Luxury Brands originally appeared on Fool.com.

Daniel Miller owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.