Ford's top-of-the-line F-150 Limited is a very well-equipped truck, and a very profitable product for Ford. Photo credit: Ford Motor Co.
Good news for Ford (NYSE: F ) , and for General Motors (NYSE: GM ) and Chrysler as well: Pickup sales have been up sharply in recent months.
Sales of Ford's F-Series line, the F-150 and its Super Duty siblings, were up 31% in May – a huge jump that far outpaced the overall market's gains. What's more, F-Series buyers have been opting for more expensive pickups.
What's driving those trends? And what do they mean for Ford's bottom line?
A perfect economic storm for pickups – in a good way
There are a couple of things driving this big jump in pickup sales. One is what auto executives call "pent-up demand". The average age of a pickup in the US is around 11 years old right now. That's older than the historical norm, and it suggests that a lot of people and businesses have been waiting to buy – likely because the economy has been tight.
Another factor is the economy – specifically, that a couple of parts of the economy that are correlated with pickup sales have been picking up steam. Ford sales analyst Erich Merkle says that increases in new-home construction and oil-field services have both driven demand for Ford's pickups.
Both are likely to continue to drive demand for some time. And that's a very good thing for Ford's profits.
Pickups are the fuel that powers Ford's engine
Ford divides its business into several geographical regions, and the one that has carried the business lately is North America. Sales, margins, and profits in North America have all been great for Ford. And pickups have a lot to do with that: Morgan Stanley analyst Adam Jonas said late last year that F-Series sales might account for as much as 90% of Ford's global profits.
There are two reasons why the F-Series is such a big contributor for Ford. First, these pickups sell in really big numbers. Ford sold over 70,000 F-Series pickups in May alone. For comparison, Ford sold 29,553 Fusions in May – and the Fusion is a hot seller. But the F-Series has been America's best-selling vehicle for over 30 years, and a very big part of Ford's business the whole time.
Second, full-sized pickups like the F-Series are very profitable products, with high margins. And those margins may be getting higher. Ford has been working hard to lower its reliance on incentives, which cut into profits.
Ford has also been working to increase average transaction prices by adding features and options packages that make buyers want to spend more. That strategy has been especially apparent on the F-Series, where Ford has introduced more upscale packages in recent years. And it's paying off with much-improved profit margins for Ford in North America.
Trends are moving in Ford's direction
Consider this: Ford's F-150 starts at $23,955 – but in top-of-the-line, limited trim, like the red truck shown above, the price tag is well north of $50,000. A lot of that difference is profit for Ford.
Analysts at Edmunds say that transaction prices for full-sized pickups have risen by 29% since 2005, while overall transaction prices for the industry as a whole have risen about 13%. A lot of that has to do with those extra options packages, a strategy that has been picked up (so to speak) by GM and Chrysler as well.
A Ford official was quoted by Automotive News recently as saying 30% of F-150 retail sales and more than half of Super Duty sales are "high series" versions like the Limited and King Ranch editions. Ford's strategy of encouraging buyers to pay more for more features appears to be working out well.
That success has been a big contributor to Ford's recent profits – and the trends favoring pickup sales should help Ford post more good numbers in coming quarters.
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