Japanese car maker takes lead in segment that some rivals consider unprofitable
This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (December 28, 2017).
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Nissan Motor Co. is on track to be the first foreign auto maker to outsell Detroit's Big Three in the rental-car market on an annual basis, the result of an unconventional bet on sales to fleet customers when most rivals are focused on retail buyers.
General Motors Co. and Fiat Chrysler Automobiles NV once ruled rental lots, but in recent years have backed away from the traditionally thin-margin business because it can hurt brand image and resale values when done in excess. Most other foreign auto makers, as well as Ford Motor Co., are unwilling to fill the void.
Nissan had sold 281,167 vehicles to rental buyers through November, the most of any auto maker and 10% more than GM.
The Japanese auto maker, which aims to reach 10% U.S. market share by 2019 after it missed that target in fiscal 2017, is among the fastest-growing auto makers in the U.S. However, its momentum comes at a price as its operating margins fell sharply in recent quarters.
Company executives say the hefty sales to rental car firms make for a profitable business. But Nissan's financial picture will need to improve before critics of the strategy buy in.
Nissan's appeal to individual buyers has slipped as consumers shift to SUVs and trucks, categories where Detroit has an edge. Nissan has sweetened its incentives on cars, a move that contributed to a 42% drop in its operating profit in the six months ended Sept. 30.
Japan's auto makers typically limit rental sales. For instance, they account for less than 5% of total sales at Honda Motor Co. and Subaru Corp., according to Bobit Business Media, a trade publication that tracks the rental industry. Toyota Motor Corp. historically has contained them at roughly 8-9% of overall sales.
Nissan U.S. sales chief Judy Wheeler said the company has boosted rental sales to 18% of total deliveries, which is up from about 14% in 2015 and far higher than industry average.
While the company doesn't break out profit margins by business line, Ms. Wheeler said in an interview that rentals are "very profitable business for us" because of a strategy of selling well-equipped cars rather than stripped-down models.
Once known for sending bare-bones vehicles to Hertz Global Holdings or Avis Budget Group, Nissan has more recently started seeding lots with snazzier versions of the Altima sedan and Rogue SUV, including models with navigation screens, heated seats and advanced safety gear. Ms. Wheeler said those offerings make a better impression on people not familiar with the brand, and the tack protects resale values.
"We don't go into it saying, 'I have too many of these, what can I get rid of?'" she said. "I think of it as a way to get more customers to consider us."
Nissan sales have been higher than normal in recent months as the hurricanes in Texas and Florida created replacement demand. Nissan also is increasing sales to commercial buyers, such as contractors and delivery firms, generally a more-profitable outlet than a rental lot.
GM and Chrysler have also cut back on sales of the types of basic cars that were fine for business travelers, but tough to sell once they came out of rental service. An overabundance of Chevrolet Impala sedans flooding the used-car market, for example, could risk pinching resale values and cheapening the brand.
The company had used these lots as a dumping ground for their least-appealing cars, a tactic to pad sales and keep factories running when demand from regular buyers slowed. But in recent years, GM has become a vocal critic of the strategy.
Demand from rental-car companies has remained steady, meanwhile. About 15% of the roughly 17 million vehicles sold annually end up on rental lots, according to Bobit.
Ford, historically less reliant on rental sales, has long relied on commercial fleet buyers for profitable sales. Pickup trucks and work vans dominate the commercial market.
Fiat Chrysler killed two mainstay rental cars in 2016 -- the Dodge Dart and Chrysler 200 sedans. As a result, the company is on pace to reduce its rental deliveries this year by nearly 30%, or about 100,000 vehicles compared with 2016.
Korea's Hyundai Motor Co. and Kia Motors Co. have also leaned on rental companies to take big chunks of volume, but they have also backed away in 2017.
Nissan's Altima and Rogue, meanwhile, have emerged as two of the three highest-volume rental cars in the U.S., according to data compiled by IHS Automotive for the first 10 months of this year.
Kurt Kohler, a senior executive in charge of Enterprise Holdings, Inc.'s fleet acquisition, said the rental business doesn't have to kill auto makers' bottom lines. He said multiple car companies have increased selling higher-end models to the rental business as a way to leave an impression on renters who may later be in the market for a vehicle.
"It doesn't require expensive retail advertising, and is a guaranteed source of business," Mr. Kohler said.
Write to Mike Colias at Mike.Colias@wsj.com
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December 28, 2017 02:47 ET (07:47 GMT)