Heat at Ford Could Cook Mercury

Popular with retirees, the unit could be running on empty.
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With a major cost overhaul in the works at Ford, its faltering Mercury brand might be running out of lives.

If Mercury does get the ax, it'll have plenty of company. Last December,

General Motors

(GM) - Get Report

announced plans to terminate Oldsmobile, which will be phased out by 2005. And

Chrysler

bid farewell to Plymouth in July of this year. A flood of competition from European and Asian carmakers in the past several decades has shrunk the Big Three's dominance of the U.S. market and left many brands struggling.

While

Ford

(F) - Get Report

says it's not giving up on Mercury, analysts often have speculated that it's next in line.

Identity Crisis

Analysts claim that Mercury has gradually lost product identity, and thus its market share and brand loyalty. Originally pegged as a transition between the blue-collar Ford and luxury Lincoln, which is also sold by Mercury dealers, it's since become a Ford model copycat, says Scott Hill, analyst at Sanford Bernstein.

Over the past decade, Mercury's share of the auto market has been almost cut in half, to 1.7% -- and that's despite a 250% increase in sales to car- rental agencies. Since the early '90s, brand loyalty among existing customers, measured as the number of Mercury customers whose next purchase is another Mercury vehicle, has fallen by close to two-thirds to just 11.5%, according to Hill, who uses data gathered by industry marketing research group CNW.

"The Mercury product is not different," says Scott Hill. "Every single one of them has a twin product. The question is, do we go back and invest to re-establish a distinct product identity, or do we spend our valuable finite resources on brands that already have greater acceptance and loyalty in the market? At the end of the day, it will be a slow death where funds are trickled in."

Instead, the company should cut its losses now, he said, eliminating spending on Mercury and phasing it out over the next three to four years. Ford has made inroads in the luxury market with its premier automotive group, or PAG, and some analysts think that's where the company should concentrate its spending. Wall Street estimates PAG's annual sales total about $25 billion, which is seen growing by over one-third by 2005, with margins doubling from less than 4%, if the restructuring is successful.

Falling on Hard Times

It's been a tough year for Ford. The zero percent financing war crippled industry profits; the company's cash reserves and market share are way down, and the Firestone tire issue sullied its reputation. In early December, the company warned that its fourth-quarter loss would more than triple initial expectations, reaching $900 million, or 50 cents per share, partially due to loan losses at its Ford Credit unit.

With former chief executive Jacques Nasser out and the Ford family back at the helm, the company is expected to announce a restructuring plan on Jan. 11. Analysts say it will probably entail job cuts of 15,000 to 18,000, the idling of production, or full shutdown at some plants, and cutbacks in purchasing spending. That could generate savings of up to $4 billion.

Scott Hill estimates that getting rid of the Mercury brand could save Ford an additional $324 million a year, or 18 cents a share. Ford currently spends 9 cents a share in marketing and capital costs, and would probably have to double that to turn the brand around, he says. GM spent billions overhauling Oldsmobile before it decided to let it go. Elimination of Mercury also would help with human resources and production capacity cuts, says Hill.

Tough Sell

Ford claims the unit is still profitable, though it doesn't release sales or income for individual brands. "What people forget is Mercury makes money," says Jim Trainor of Mercury's public affairs division. The reason analysts are targeting Mercury is because Ford has put so much emphasis on Lincoln over the past several years, he says. "We only have so many resources, and we identified that we wanted to work on the Lincoln product first." He notes that the company recently named a new group brand manager from the Ford family -- Elena Ford -- and a new product development person.

Trainor also claims Mercury hasn't lost brand loyalty at all, but he measures it differently than Hill. Of those customers who bought a Mercury product last year, 25.39% had already owned a Mercury product. This year, 35.11% of buyers had already owned one.

But the problem with Mercury's core following is its age profile. While the company's Grand Marquis, a full-size, rear-drive sedan, has a strong following, close to three-quarters of its buyers are retired, according to Mercury. Average customer age for other models, like the Mountaineer and Villager, is between 45 and 55. And only around 3% of the youth market has a Mercury product on their new vehicle consideration list, according to Hill's numbers.

If Ford listens to Wall Street, Mercury may be headed for its own retirement.