DBRS Comments on Ford’s Announcement to Terminate Mercury Brand

DBRS notes that Ford Motor Company (Ford or the Company) announced today that it will terminate its Mercury brand, indicating that production of such-branded vehicles will conclude in the fourth quarter of this year. Concurrently, the Company also indicated that it will increase product development at its Lincoln brand, with seven all-new or significantly-refreshed products planned in the next four years, including a new entry in the C-segment, currently not represented by Lincoln.

DBRS notes that today’s announcement is not unexpected and considers it to be modestly positive to Ford’s business profile. The termination of Mercury follows Ford’s previous divestitures of Aston Martin and Jaguar Land Rover as well as the agreed sale of Volvo to Chinese automaker Geely; as such, it remains consistent with the Company’s strategy of focusing on its core global Ford brand.

The Company’s sales and market share have exhibited a strong positive trend for several consecutive months. The significant sales momentum is attributable to numerous factors. Firstly, several recent product launches have been well received in the marketplace. Additionally, in various recent vehicle quality surveys, the Company’s rankings have been consistently higher. DBRS also notes that Ford likely benefited from increased consumer goodwill as a result of it being the only Detroit Three manufacturer to avoid bankruptcy proceedings last year,

However, DBRS notes that the largest beneficiary of the Company’s rebound has by far been the core Ford brand, which has represented 90% of the Company’s unit sales (excluding Volvo) through the first five months of 2010, (relative to 5% for Mercury). Additionally, DBRS also observes that unit sales of the Ford brand are up 34% year-over-year, significantly outpacing the U.S. industry growth rate, whereas Mercury’s sales have only increased by 12%, thus underperforming vis-à-vis the industry. It is likely that many former Mercury customers migrated toward the Ford brand through the Company’s recent sales momentum, and this is expected to persist until the eventual termination of the Mercury brand. As such, DBRS does not believe that today’s announcement will materially adversely impact the Company’s sales and market share momentum, even in the short-run.

DBRS also notes that Ford’s recent stronger financial performance enables it to readily absorb the costs associated with the dissolution of Mercury. With respect to the dealership body, there is no stand-alone Mercury dealer in North America, although today’s announcement may likely serve to moderately expedite Ford’s plans to further trim its dealer network, particularly in high-population urban areas.

Today’s announcement should also help the Lincoln brand. While Lincoln’s recent sales performance has also significantly lagged that of Ford, DBRS notes that this is not inconsistent with other luxury brands as this segment proved more vulnerable to the sharp industry declines in 2008 and 2009 vis-à-vis prior downturns. Going forward, sales in the luxury segment should strengthen in line with improving economic conditions, with Lincoln further benefitting from the planned increase in new model introductions.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Automotive, which can be found on our website under Methodologies.

This is a Corporate (Autos & Auto Parts) rating.