When Sales Sag -- Raise the Price?

When Sales Sag -- Raise the Price?

By Bill Visnic

With fuel prices rising, the dollar falling, the economy flagging and fuel prices zooming, industry sales volumes are drooping. One seemingly counterintuitive answer: raise prices.

Despite an Economics 101 guidance that would dictate the opposite, many automakers are responding to currently lousy market conditions by actually hiking sticker prices and -- taking a cue from many other sectors -- bumping fees, most notably, the ubiquitous "destination and delivery" charge.

Domestic automakers, with model lines heavy on the heavyweights no longer selling, clearly are beginning to feel the profit pinch of plummeting sales volumes, but continuing currency-exchange pressures have to be catching up with importers as well.

BMW AG announced earlier this month an across-the-board price increase that varies by model, an average example being the 535i sedan, whose base price increased June 1 by $450, from $50,175 to $50,625.

"Despite a mixed economic outlook in the U.S. market, these measures are in line with pricing trends in the automotive industry," said Tom Purves, Chairman of BMW of North America, LLC, in a statement.

A sneakier "extra" price hike is an increase in the 535i's delivery charge, from $775 to a new and not-insubstantial $850.

In fact, a random survey of destination charges finds this fee, in some cases now is flirting with four figures for some fairly mainstream models.

Data from Edmunds.com indicates destination and delivery charges ranges from a low of about $560 to an astounding $40,000. Quietly hiking the delivery charge, in fact, may be one of the more effective tactics to effectively raise prices without setting off consumers' alarm bells. "With fuel costs accelerating and the recent closure of the nation's second-largest automotive transporter, Performance Transportation Services Inc., destination charges could be on the rise for even more automakers," said Edmunds.com's Ivan Drury. 

And although BMW has hiked its delivery charge by a robust 9 percent, analysis of the Edmunds data indicates European automakers -- those presumably being most squeezed by adverse currency exchanges -- seem to be holding the line on destination-charge gouging.

While Toyota Motor Corp.'s Lexus upscale division currently charges a comparatively reasonable $765, and General Motors Corp.'s Saab unit -- with all car models imported from Europe -- is holding on at $775, GM's Cadillac division is slamming the Escalade buyer for $900 (an STS sedan is $775). Porsche Cars North America gets $860 to deliver its cars from Europe, $895 for its Cayenne SUV.

Chrysler LLC -- which despite its own precipitous volume declines announced it is raising prices by 2 percent for 2008 models -- is levying a withering $970 destination charge on the barely alive Crossfire coupe, a model also imported from Europe. Chrysler's mainstream domestically produced models have more reasonable destination fees, such as $560 for the Dodge Caliber. The new Challenger, one of the company's first '09 models, carries a $670 destination charge.

Despite a U.S. market tracking to lose some 1 million units this year -- Edmunds.com forecasts total industry sales at 15 million vs. 16,073,167 in 2007 -- some analysts believe raising prices may become a necessary evil, as in addition to all the previously mentioned negative factors, crushing raw materials costs are hitting automakers in almost all world regions.

"The current state of the economy is driving consumers to become more price sensitive," said Drury. "However, price increases that can be legitimized by the escalating cost of fuel or the skyrocketing demand for raw materials will continue to be seen."

Source: Edmunds.com

Michelle Krebs:  is Editor-in-Chief of AutoObserver.com. Follow @AutoObserver on Twitter.