Toyota Steps Up Its Luxury Game In Search For More Profits

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Recently, Toyota Motors (NYSE:TM) showcased a new Lexus LC500 at the North America International Auto Show in Detroit. [1] It was an unusual move for the Japanese auto maker whose luxury brand Lexus is not really known for such models. Toyota is known for making reliable, high-performance, well-engineered vehicles, but less so for memorable or eye-catching designs. The Lexus LC500 is a step in a new direction for the company. The vehicle shouldn’t be expected to sell a lot of models but its symbolic importance cannot be understated: the model should act as a totem for the company’s engineers and designers as the image in which a new generation of Lexus models are to be created.

The model is loaded with the latest technology like door structures made from carbon fiber frames, a low center of gravity, equal front-to-rear weight distribution, 10 speed automatic transmissions and a new version of the Toyota infotainment system. Toyota CEO Akio Toyoda himself presented the car and said that “[the car will] guide the future of [Lexus] with products that have more passion and distinction in the luxury market.” [2]

Lexus Sales

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The reason why this change is significant for shareholders is made clear by the following three data points.

1) Consider the sales made by luxury brands in the United States in the last two years. While Lexus sells fewer vehicles than German luxury car makers BMW and Mercedes-Benz, it is not that far behind. Its market share among luxury brands in the U.S. stood at 19.16% in 2015, only slightly behind BMW’s 19.24% and Mercedes-Benz’ 20.7%.

us luxury vehicle sales

2) As far as average transaction prices are concerned, Lexus’ average transaction price in December 2014 stood at $47,719 compared to BMW’s $51,916 and Mercedes-Benz’ $58,477. [3] At these average prices and full-year sales for the calendar year 2015, the three brands made $16.4 billion, $18 billion and $21.8 billion respectively.

3) Even though luxury vehicle sales made up 10.2% of the overall vehicle sales in the U.S. auto market in the year 2015, they are likely to contribute over 20% of its revenue and close to half its overall profits. This makes each incremental luxury vehicle sale more important to the valuation of a company than sales in any other segment.

Competing With The Germans

Lexus’ reliability is clearly a big draw for American consumers but it doesn’t quite have the same emotional appeal for consumers that BMW and Mercedes-Benz vehicles have. Releasing a car that is as easy on the eye and as exciting to drive as the Lexus LC500 is a big step towards changing that image and signalling to consumers that Lexus can offer the same passionate draw as German luxury auto makers. The vehicle is clear indication that Toyota is raising its investment in its luxury brand, both from an engineering point of view and strategically. If this new direction for the Lexus Brand helps it gain market share and raise transaction prices, it will help boost profitability for the brand considerably.

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Notes:
  1. The Lexus LC 500 is a big, powerful, flagship coupe — and it won’t be cheap, The Verge, January 2016 []
  2. Global Debut of All-New Lexus LC 500 at the 2016 NAIAS Signals Dawn of a New Era for Lexus, Lexus Newsroom, January 2016 []
  3. Lexus reloads for a shot at luxury title, Automotive News, February 2015 []