Sales of Ford's Mercury brand vehicles have been on the decline since the automaker announced in June that it would discontinue the brand in the fourth quarter of this year, according to ALG's Residual Value Report.

Many consumers have turned to Ford-branded products, which have demonstrated strength in both sales and perceived quality over the past few years. With an improved lineup and strong product growth, Ford cannibalized many previous Mercury customers. Currently, Mercury only accounts for approximately 0.8 percent of the U.S. automotive market share, with the majority of Mercury sales going to fleet customers.

The chart below displays average retention trends for brands that have met their demise. ALG analyzed these brands and the impact of the announcement of their dissolution on retention values.

Current macroeconomic indicators are significantly more unfavorable for Mercury, with total industry sales in the 10- to 11-million range. On the positive side, Mercury is currently selling fewer than 90,000 annual units, which is less than both Plymouth and Oldsmobile prior to their phase out.

In ALG's next report, it will include a 2.5-3pt negative adjustment to the residual outlook for the overall Mercury brand consistent with the historic declines seen in other retired brands, but taking account of the positive factor of low volume.

Used Brand Value and Forecast

The chart above displays ALG's used statistical brand value and forecast for Mercury, Pontiac, and Saturn relative to the industry. ALG's used statistical brand value measures the inherent value held within a nameplate by isolating the impact of the brand alone on actual resale prices; it does this by holding equipment, mileage, performance, and various other metrics constant.

Both Pontiac and Saturn showed declines in brand value since the announcement of their closures, with each brand declining approximately 1.6 percent and 1.3 percent, respectively, since 2009.

While Mercury's used brand value had been on an upswing since 2008, minimal differences between competing Ford models with similar equipment and styling, coupled with unexplained price discrepancies, resulted in sales figures and demand that have declined swiftly over the last few years. Currently, Mercury's used brand value is approximately 12 percent below the industry average, and ALG has forecasted it to decline an additional 5.5 percentage points by 2013.

ALG regards brand value as a significant driver of residual values; hence, this forecasted decline is a significant factor in determining the 2.5-3pts of forecasted deflation that will be applied to the brand over the 36-month term.