SANTA BARBARA, Calif. - ALG, a subsidiary of DealerTrack Holdings, Inc. expects some negative impact on residual values of Mercury vehicles due to the brand's recent termination by Ford Motor Co. The impact is anticipated to be relatively modest at 2.5 to 3 percentage points of MSRP over the next three years.
ALG has studied the residual value impact of terminations of previous brands, such as Eagle, Plymouth, Oldsmobile and Isuzu, as well as the recently terminated Pontiac and Saturn. It has found that residual values for three-year-old vehicles of these brands consistently underperform those of their parent OEMs and the industry overall for a period of one to three years after the termination announcements. The impact depends to some extent on the mix of used models on the market, and the sales strategy prior to termination. Historically, the impact on residual values averages about 5 percentage points, but is sometimes as high as 10 percentage points.
However, Mercury has some positive factors driving residuals in its favor. Mercury's low sales volume - accounting for less than 1% of the U.S. auto market - means that the supply should be absorbed quickly in the used vehicle market. ALG's Brand Value and Perceived Quality metrics for Mercury have been trending steadily upwards over the past few years, indicating stronger demand. In 2010, days' supply and incentives have been relatively low, also supporting the conclusion of strong demand prior to the termination announcement.
"Historically, the impact of brand termination on residual values averages about 5 percentage points, but due to Mercury's low volume and stronger demand indications prior to the announcement, we expect its residual values to be impacted by only 2.5 to 3 percentage points over the next 36 months, with the majority of the decline in the first 12 months," said Matt Traylen, ALG's chief economist.