Toyota Lexus Line Proves Luxury Exception

Introduction of hybrid-electric model Lexus an effort to prove luxury buyers will be willing to pay premium for horsepower and fuel economy

Published: 20-Jan-2004

ONG>SOUTHFIELD, Michigan Toyota Motor's Lexus could be an exception to the rule that a luxury brand needs decades in the market, or longer, before it can evolve into a status symbol.

In 2003 Toyota sold 259,755 Lexus vehicles in the United States, up 11 percent from a year earlier, and more than (in order) BMW, Mercedes, Cadillac or Acura. It was the fourth straight year that Lexus has been the nation's No.1 selling luxury nameplate - a remarkable feat considering the franchise is not yet 15 years old.

Lexus is positioned to continue its streak, with plans for a new version of its car-based sport utility vehicle later this year, powered by a gas-electric hybrid engine.

Encouraged by Lexus's success in the United States, Toyota will introduce the brand in Japan this year. It also hopes to carve a bigger foothold in Europe, where it has run into difficulties.

General Motors's Cadillac franchise, on the rebound after several years of decline in its sales and image among luxury buyers, also has been trying to extend its brand worldwide.

I can recall the 1989 auto shows in Detroit and Chicago, when U.S. executives - including several from Cadillac - could barely suppress their amusement at the announcement that Toyota would try to crack the luxury market with a new brand.

"Lexis? Isn't that the name of the information retrieval service used by lawyers?" Sure, the executives cackled, Toyota builds decent enough economy cars like the Corolla and Camry, but they won't attract wealthy buyers the way Cadillac, Lincoln or Mercedes do.

In fact, Toyota knew more about the luxury market than anyone imagined. Wealthy customers expect luxury features and top performance in a vehicle; they demand outstanding service as well.

Lexus delivered vehicles that scored high in ratings for quality and satisfaction. The automaker also gave its dealers incentives to provide pampering, such as personal delivery of vehicles.

"The European brands may have been caught off guard in 1989," said Mike Michels, a Toyota spokesman. "They quickly responded. We saw them work on pricing and the sales experience."

Lexus has capped its distribution network at about 200 dealerships in the United States, compared with 340 for BMW, 325 for Mercedes and 1,495 for Cadillac. Toyota determined that keeping the distribution network lean would improve the profit potential for each dealer.

As a result, Lexus dealers have generated substantial capital to reinvest in dealerships and inventories, thereby improving conditions for customers and spurring new sales.

The new gas-electric variant of Lexus's RX sport utility should help a model that already has become the most popular in the Lexus lineup, accounting for 40 percent of the brand's sales. The RX330 gas-engine models start at a price of $35,800.

Lexus believes customers will pay a premium for the hybrid engine, which will develop 270 horsepower while delivering fuel efficiency equal to that of a compact car.

A Toyota spokesman said Lexus could sell 350,000 vehicles annually within the next five to six years, assuming that the luxury sector continues to expand.

About 12 percent of vehicles sold in the United States are classified as luxury, up from about 8.8 percent less than five years ago, the spokesman said. Lexus has about 14 percent of the luxury market.

Toyota earns about 80 percent of its operating profit in the United States. The automaker aims to sell as many as 60,000 Lexus cars in Japan by 2006 through 180 dealerships. Toyota also plans to open Lexus dealerships in China in 2005.

In Europe, Lexus sales have amounted to only about 20,000 annually, a tiny sliver of the continent's luxury market. Toyota has been caught without diesel-engine capacity, which many European customers prefer in luxury models. The automaker hopes to triple Lexus sales in Europe by 2010, in part by offering diesels and hybrids.

"It's just a matter of time before Lexus busts through" the preference in Europe for BMW and Mercedes, said Jeff Kuhlman, a Cadillac spokesman.

General Motors, enjoying a resurgence of its Cadillac brand, sees Toyota as its most formidable competitor and Lexus as the tip of the spear.

Cadillac plans to introduce its STS large sedan to replace the Seville in the United States later this year. A version of the Saab 9-3, restyled as a Cadillac and built in Sweden, may be headed for European showrooms.

Rick Wagoner, the GM chief executive, said the automaker was also considering an even larger Cadillac, selling for more than $75,000, to compete with Lexus's flagship, the LS430, and with the Mercedes S Class and BMW 7 Series.

No one these days underestimates Lexus, which may be why the brand has softened its slogan recently to "passionate pursuit of perfection" from "relentless pursuit of perfection."

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