Toyota’s Lexus Strategy Seems To Be Paying Off

by Trefis Team
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Competition in luxury vehicle sales is growing intensely as an increasingly larger percentage of profits for the auto industry is coming from luxury vehicle sales. In terms of units sold, luxury vehicles only contribute about 10% to the overall car market, but they bring in 20% of the revenues and nearly half the profits. Because these brands are regularly punching above their weight in profit generation, car companies have extra incentives to increase offerings and lifetime customer values.

Japanese auto maker Toyota Motors (NYSE:TM) is the leader of the auto industry, according to unit sales. The company is also the market leader when it comes to profitability. It has a stellar reputation for engineering of its cars and its business model is more successful than that of all the other companies in the market segment. As a result of these factors, the company has held the position of market leader by volume for six years in a row now. However, its luxury brand, Lexus, while reasonably successful in the United States, lags behind the three big German luxury brands and has failed to make much of an impression in Europe and China.

Gaining Lost Ground

However, it wasn’t always so. The U.S. is the biggest market for luxury cars in the world and one of Toyota’s biggest regional markets. Lexus has always been popular with American consumers and sales of the luxury car brand peaked at just over 329,000 units in 2007. The brand led the U.S. luxury car market for 11 years straight before being knocked off its perch by Mercedes-Benz and BMW in 2011 after a Tsunami and an earthquake hit production in Japan.

Now, however, it seems that Toyota is regaining its grip. Lexus reported 29,671 units sold for the Month of May, implying a 14.5% improvement over the same month in the previous calendar year. [1] For the first five months of the year, Lexus sales came in just short of 133,000 units, a 16.2% year-over-year increase. [2] Interestingly, most of the increase was driven by the close to 33% uptick in sales of trucks from the luxury car brand. [2] Since pick-up trucks command higher prices, such a rapid increase in sales will increase their presence in the overall sales mix for the brand and could help the company post significantly higher profits this year.

Setting Itself Apart

The last part is important and needs to be elaborated upon. Due to the high profitability of luxury cars, most auto companies have pursued a strategy of producing a cheaper entry-level vehicle in order to gain sales from consumers who want to purchase luxury vehicles but aren’t quite prepared to pay luxury vehicle prices. Mercedes started this trend in 2013 with the introduction of the CLA, a luxury car that could be bought for close to $30,000. Volkswagen followed the trend with the introduction of the Audi A3 last year. [3] Both these cars brought new buyers to these companies and allowed them to grow their unit sales without having to poach them off other car companies.

Toyota decided not to follow suit and did not introduce a luxury car below the $30,000 mark. The Japanese car company was concerned that by lowering the unit price it would dilute the value of the brand. But as it turns out, Lexus is attracting the same customers without having to reduce its prices. Through May, Lexus’ second highest selling car has been the Lexus NX, with just over 16,500 unit sales to its name so far this year. [2] The car has given Toyota something it had previously been lacking: a presence in the compact SUV/crossover segment, the hottest car segment in the U.S. car market. Moreover, its fresh look, attractive pricing (close to $35,000) and smaller size (compared to the Lexus RX) have made the car attractive to younger buyers and helped drive sales for the model. The overall result has been a much needed shot in the arm for the company’s luxury car brand in the world’s biggest luxury car market.

See our complete analysis for Toyota Motors here

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Notes:
  1. Lexus May 2015 Sales Report, Lexus Enthusiast, June 2015 []
  2. Ref: 1 [] [] []
  3. Lexus Jumps Back Into U.S. Luxury Sales Race With New SUV: Cars, Bloomberg, March 2015 []
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