Ford tries to revive Mercury

February 14, 2003; Bill Koenig writing for Bloomberg reported that William Clay Ford Jr. disagrees with analysts who say Ford Motor Co. should scrap the Mercury brand, which his grandfather started in 1939.

"Mercury is part our plans going forward and we're looking to strengthen Mercury, not weaken it," the company's chief executive officer said last year during an investor presentation by the world's second-biggest automaker.

Bill Ford's plan to revive Mercury, which sells what are essentially Ford-brand vehicles with trendier seats and styling, may require too much attention for a unit accounting for just 7.7 percent of total sales last year, analysts said. Mercury sales have dropped three straight years and 40 percent since 1995.

"It's a waste of time," said Sanford Bernstein analyst Scott Hill, who rates the stock "outperform" and said he doesn't own it. "What if they spent the same resources and energy at Volvo or some of their other brands?"

At this week's Chicago auto show, Ford Motor introduced Mercury models including the Monterey, a minivan based on Ford Motor's Freestar, and Montego, a sedan that will be built starting in 2004 at a plant that will assemble the new Ford Five Hundred car.

Not Unique

Ford Motor decided last year to do away with efforts by Mercury to develop its own vehicles. Mercury Cougar, the brand's first original design in three decades, was discontinued in 2002 after four years.

"All of the Mercury products will be built off Ford platforms," Chris Theodore, Ford Motor's head of North American product development, said in an interview. "We're going to grow the business back, then get it the point it can support" models it doesn't share with another division.

Bill Ford says Mercury is central to his goal of generating $7 billion in pretax profit by 2005 after net losses the past two years totaling $6.43 billion. Since deposing Jacques Nasser as CEO in 2001, he has vowed to eliminate 35,000 jobs by 2005 and bolster sales with new models such as the Freestar.

Stocks and Bonds

Ford Motor shares have dropped 44 percent in the past year, more than North American peers, and investors require higher yields to hold the company's bonds than they do debt securities sold by General Motors Corp. and DaimlerChrysler AG.

Ford Motor 10-year notes yield 7.79 percent, compared with 7.1 percent for a comparable General Motors security and 5.7 percent for DaimlerChrysler AG. In the past year, shares of General Motors, the world's biggest automaker, have fallen 34 percent, while the U.S. stock of No. 5 DaimlerChrysler has declined 25 percent.

The first Mercury, the Mercury 8 with a 95-horsepower V-8 engine, rolled off the production line at the behest of Edsel Ford, who wanted autos that offered more features than Ford-brand vehicles but less than Lincoln luxury cars. Today, dealers sell Mercury and Lincolns under the same roof, largely because neither brand is big enough to support a single dealer.

Mercury sales peaked in 1978 at 579,498 vehicles, representing 3.8 percent of the U.S. market. Last year, Ford Motor sold 263,200 Mercury vehicles accounting for 1.5 percent of the U.S. market, according to Ford Motor. In 2002 alone, Mercury sales fell 16 percent, compared with a 9.3 percent drop for Ford. Lincoln sales fell 5.6 percent.

Similarities

The similarities between Mercury and Ford are evident in a comparison of the Ford Taurus and the Mercury Sable, which differ mainly in name. The top-of-the-line Sable sells for $24,560, $190 more than the most expensive Taurus.

David Cole, head of the Ann Arbor, Michigan-based Center for Automotive Research, said Mercury and Lincoln have many of the same problems as General Motors' Cadillac brand, which appeals to older buyers.

"Many of their traditional customers are gone, they're dead," Cole said. Mercury "got totally lost" when Ford acquired European luxury brands such as Volvo and Land Rover.

Hill, the Sanford Bernstein analyst, estimates that Ford could save $250 million a year in marketing and capital costs by shutting Mercury, and invest the money to expand sales of Volvo, Land Rover and Jaguar in the U.S.

The real reason Ford Motor may be keeping Mercury is that the 660 dealers that sell Mercury and Lincoln autos under the same roof aren't viable selling just Lincoln autos. That's especially important for the Dearborn, Michigan-based company, which is trying to mend relations with dealers after a series of missteps.

'Not Enough Vehicles'

"There's not enough vehicles to sustain us right now," said David Barth, owner of Kumpf Lincoln Mercury in Englewood, Colorado. "The new Mercury models being introduced may help. We need them here now."

Ford could pacify some dealers by offering them franchises for Volvo, Jaguar or Land Rover, Hill said.

George Magliano, director of auto-industry research at Global Insight, said giving Mercury a chance to come back is important enough to avoid angering dealers.

"If you dump it, the dealers are going to scream," Magliano said. "It's a gamble they have to take."

Sanford Bernstein's Hill said Ford is only delaying what he believes will be Mercury's eventual shutdown.

"That strategy isn't a product strategy, it's a distribution strategy. You have to confront it sooner or later. Do it now, while the company is in restructuring mode