Why 2015 Could Be A Bumper Year For Honda’s Luxury Car Brand Acura

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U.S. Sales of Acura, the luxury car brand of Japanese auto maker Honda Motors (NYSE:HMC), experienced a sharp spike towards the end of 2014. As oil prices have crashed, consumers in the U.S. have found themselves in possession of more cash and decided to splurge on more expensive cars. The U.S. luxury car market is the biggest in the world and this uptick in Acura sales bodes well for Honda, which had been doing all it could to improve the sales of its flagging luxury car brand. Luxury car brands contribute nearly 20% in revenues and 33% in profits, despite only totaling 10% in sales in the worldwide car market. As a result, it is highly important for a company’s profitability to run a successful and competitive luxury car brand.

We have a $41 price estimate for Honda Motors, which is about 20% above the current market price.

Rising Acura Sales

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Honda had a year of two halves in the United States and Acura’s sales in the first and second half of the year were not only representative of the company’s performance but also its main cause. In the first half of the year, falling Acura sales contributed to the 1% drop in the company’s sales, but by the end of the year, Acura had helped the company post one of its best ever years in terms of sales in the U.S. [1] Honda had been struggling to shift many volumes of Acura in the first half of the year but that changed when the company launched the Acura TLX in August. [2] The TLX sold just over 19,000 units through the end of December, a figure higher than the full-year units sold by the brand’s second highest selling model, the ILX. [2] Acura sales improved by 1.5% on a year-over-year basis and the brand recorded its most successful year since 2007. [2]

Acura’s Importance To Honda

Auto makers treat their luxury brands very seriously indeed because they fetch much higher margins than normal cars. Honda is no different in this regard. Each Acura model brings the Japanese auto maker $15,000 more than an average Honda car. The luxury brand accounted for about 11% of the company’s total sales and an even higher percentage of the profits owing to its higher margin. The brand’s recent success is attributable to its careful market positioning.  SUVs, the fastest growing auto segment in the U.S. auto market, were responsible for roughly two-thirds of the sales made by the brand in 2014. MDX, Acura’s best selling SUV for 2014, was responsible for nearly 40% of the brand’s sales alone. In fact, 2014 was the best year ever for MDX, selling more than 65,000 units, a 27% increase compared to its 2013 sales figure. [2] The RDX also had a bumper year, selling around 45,000 units, representing 27% of the brand’s total sales. [2]

In the first month of 2015, the same trend continued. The Acura division posted its best January results since 2007 on the back of record sales of the MDX and RDX, and strong showing by the TLX. MDX sales were up by 3.3% in January, RDX sales climbed by 28%, while TLX bested the combined sales of its two predecessors by 28%. [3] The same trend continued in February, with the MDX and RDX combined sales increasing by 12.5% on a year-over-year basis. [4]

2015 Outlook

In 2015, the U.S. luxury car market is expected to grow by around 10%. Gas prices are low, interest rates are low, and consumer confidence is at a seven year high. All these factors should contribute to increasing sales of luxury vehicles and Acura is in a good position to cash in on these trends. The brand is set for more car launches. The company introduced the 2016 NSX super-sportscar at the North America International Auto Show and the car will go on sale late in 2015. The 2016 ILX, Acura’s entry level sedan, will go on the market in the first half of 2015. Entry level luxury cars are some of the hottest selling cars in the segment and new car launches are known to be sales drivers. These factors combined with the strong momentums of RDX, MDX, and TLX could make 2015 a record year for Acura sales.

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Notes:
  1. Honda Division Breaks Annual Auto Sales Record as Honda and Acura Brands Set Numerous New Sales Marks, Honda.com, January 2015 []
  2. Ref: 1 [] [] [] [] []
  3. Acura USA January 2015 Sales Report, acuraconnected.com, February 2015 []
  4. Diverse Lineup of Light Trucks and Sub-Compacts Leads American Honda February 2015 Sales Increase, honda.com, March 2015 []