AppId is over the quota
By Dale Buss October 11, 2011
BMW and Mercedes-Benz are slugging it out for highest-volume U.S. luxury car sales for the year, and stock-market swings and economic doldrums remain vexing problems for upscale sales. But the fourth quarter is going to be all about Lexus: what the Toyota luxury brand now can do – and still not do. Lexus executives say the brand is finally back to full strength and ready to fight its way up to No. 1 in the segment again, and their robust fourth-quarter production and marketing schedules reflect that conviction.
Yet, German brands are arrayed firmly against such intentions, having taken biggest advantage of Lexus’s relative absence over the last six months. And an amply supplied Infiniti has been rising; Cadillac and Buick are newly emboldened; and the start of Lincoln’s revival timetable gets more imminent. Even Hyundai has grabbed a piece of what used to be Lexus turf. So while Lexus is shifting into reclamation mode, it likely will be 2012 before anyone can determine the extent of the brand’s long-term U.S. share losses and its chances for recouping them.
Meanwhile, the luxury segment as a whole is taking somewhat of a pasting. It comprised 12 percent of all U.S. light-vehicle sales last year but is projected to decline to only 11 percent this year in a slightly elevated overall market. Much of the blame can be fixed on the March 11 earthquake and tsunami, which slashed available output of Lexus and Acura vehicles around the world for several months: Many of their buyers simply chose to wait, particularly younger buyers.
Markets-Watching
Kurt McNeil, vice president of General Motors’ Cadillac brand, noted that the segment “has been running a little behind” the general market this year. “We keep waiting for things to break out a little bit, and so far they haven’t. But October and December are always strong months for luxury sales, historically.”
Stock-market vacillations such as those over the last couple of months can wreak havoc with luxury-vehicle sales because equity valuations are so closely tied to the wherewithal to buy these vehicles, for many upscale purchasers. McNeil said that “there are a lot of high-end people who have a lot of money invested, and as the [stock] market has jumped around so radically, I think it’s having an impact on the luxury space.” The continued slump in housing values also troubles the luxury market because it limits the availability of home-equity funds for big-ticket purchases.
Steve Cannon, CMO of Mercedes-Benz USA, bemoaned the fact that “we sort of navigate from one bad piece of [economic] news to another. We’re not able to string together enough consecutive periods of just quiet. We don’t even need to have good news — just a quiet where people feel comfortable. Everyone is battening down the hatches.” 
Whither Lexus?
Yet, Cannon noted, the luxury segment is actually “doing pretty well against that backdrop of fragility and wounded consumer psychology. It’s not a 16- or 17-million market again, and all the forecasters keep pushing back the date for when they think it will be again ... Could it be better? Absolutely. But compared with the depths of 2008 and 2009, this sure feels better.”
A keener issue for the immediate future is whether that new luxury car once again will be a Lexus. The brand was the segment’s clear volume leader in the United States for 11 years until the natural disaster in Japan ordained that title would be ripped from Lexus’s grasp this year. In its place, BMW has taken a clear lead over Mercedes-Benz for this year’s segment title, with about 177,000 sales through September compared with Benz’s 170,000 sales. “We’re optimistic and confident” about maintaining a lead through the full year, a BMW spokesman said. Buick is in fourth place with 140,000 sales, and Lexus lingers next, with about 136,000 sales – 26,000 fewer, or about 12 percent, than it had notched through September 2010.
It isn’t just supply disruptions that have felled Lexus for the time being, however. The luxury marque was dented by some recalls of its own a couple of years ago when the Toyota Division was being overwhelmed by safety-recall issues. Probably more important, Lexus is only now reaching the end of an admitted lull in its slate of new-product introductions – and it’s new products that drive sales increases more reliably than anything else, especially among upscale buyers. Cadillac’s McNeil remarked that Lexus was “having a challenge before the tsunami. I don’t want to say [the earthquake] was convenient for them, but it has provided them a very visible reason for why their performance has suffered. But the reality is, they were suffering from a share standpoint before that.” And once the earth shook in northeast Japan on March 11, said Cannon of Mercedes-Benz – well, “If you want to use the perfect-storm analogy, Lexus certainly has dealt with one.”
Conquest Scorecards
While Lexus had fewer cars to sell, it wasn’t sitting still. The brand intensified its already-robust schedule of dealership training in new high-tech features of Lexus vehicles, a focus on “customer satisfaction” that executives believed had slipped over time. They intensified the rollout of special editions and of new colors, wheels, equipment and other options, which “for many of our customers was enough to tide them over,” said Brian Smith, vice president of marketing for Lexus. And once Lexus executives realized the extent to which their vehicle supplies would be constrained for most of 2011, they “prioritized our loyal owner base,” he said. “We didn’t advertise it and it wasn’t widely known,” but Lexus dealers’ authorized gambits included extending expiring vehicle leases for two or three months and offering “thank-you” gifts such as a free extra year of Sirius XM Radio service or Toyota’s Safety Connect system. “Our inventory was at a low point, of course, so we knew we couldn’t compete with huge offers that competitors were making,” Smith said. “We were successful in retaining the vast majority” of existing Lexus owners.
But not all of them – not by a long shot. Clearly, defectors from Lexus comprised a huge portion of the herd of luxury buyers stampeding into other brands over the last six months, and competing brand executives are happy to tick off their successes in “conquesting” former Lexus customers during the second and third quarters. In September, for instance, Cadillac’s SRX CUV came closing to outselling the Lexus RX -- which has led the luxury-crossover segment uninterrupted since its launch 13 years ago, McNeil said; SRX sales were 4,901 units while RX-line sales were 5,003 units, but the latter included the RX 450h hybrid as well as the 350. It marked the first time the SRX beat the non-hybrid RX since March 1998, which was when the SRX was introduced, McNeil said. “For us to beat the [RX] 350 specifically – we were pretty happy about that.” Cadillac incentive levels were 8 percent higher in September than a year earlier, according to the True Cost of Incentives, a proprietary Edmunds.com formula.
Meanwhile, Mercedes-Benz reached an “unprecedented” level of Lexus-customer conquests in the second quarter, Cannon said. Roughly, for every Benz customer who left the brand for Lexus during that period, nearly four Lexus customers left that brand and came the other way, to Mercedes-Benz; a year earlier, that ratio was about 1-to-2, only half as good for the German brand; and three years ago, Lexus had a 4-to-3 conquest advantage against Mercedes-Benz. “This data is phenomenal,” Cannon said. “Quarter by quarter, we have turned around this relationship 180 degrees, from where the bucket was leaking, to where now we’re filling it,” he said.
Audi Gains Too
In August, Edmunds.com said, Mercedes-Benz beefed up incentives in the particular parts of its product line where it competes most with Lexus. “We’ll do an occasional conquest program against a basket of key competitor vehicles,” Cannon admitted, obliquely. Indeed, Mercedes-Benz’s TCI spiked at $4,204 in July, up a whopping 20 percent over its TCI in June. But then its TCI dropped to $3,596 in August and plunged another 19 percent in September, to $2,901, as Mercedes-Benz was intensifying its surge of new-vehicle launches this year with the introduction of a new C-Class sedan.
And Audi continues to ride the momentum of stronger brand equity and new upper-end products to a robust 15-percent year-to-date sales gain over 2010. Lately that has helped bring Audi a 3-to-1 conquest ratio among Lexus customers compared with Audi’s 2-to-1 conquest advantage over Mercedes-Benz and BMW, the company said. Audi’s introduction this year of the all-new A7 and of new versions of its venerable A6 and A8 nameplates have added up to a huge infusion of fresh products in exactly the space – the upper end of the luxury segment – where sales have remained strongest, resulting in a huge payback for Audi; that advantage is expected to build through the end of the year.
“We’re seeing dramatic shifts from the competition,” said Loren Angelo, general manager of brand marketing strategy for Audi in the United States. In the parts of the market covered by Audi with the three models, he said, Audi’s recente share of the mix has been 26 percent to 28 percent compared with only about 10 percent a year ago. And specifically with A8, the brand’s flagship sedan, Angelo said, “We’re seeing a lot of cars being completely speced out and ordered with all available options.”
Lexus Redux
Now comes the time for Lexus to begin its long climb back out of its hole. The fourth quarter is always important for the brand, Smith said, what with its archetypal “December to Remember” promotion, the granddaddy of the industry’s flurry of winter-holiday discount programs. “But beyond that,” he said, “we really have our first opportunity to bring production back to normal.” That means a 20-percent increase for the Lexus lineup over year-ago fourth-quarter production, a number that be 40 percent higher for the RX. “RX is our bread and butter, and its production was the last to come back to full speed for us,” Smith said.
Overall, Smith is counting on pent-up demand, current owners coming off of extended leases, and replenished inventories to add up to an outsized fourth quarter for Lexus – although the brand has run out of time to come anywhere close to reclaiming its annual luxury-sales title for this year. Still, Cannon said he’s expecting “Lexus to come in like gangbusters” to reclaim what market share it can by the end of the year; “we know they’re not going to give away all those years of being the top dog very easily.” And when 2012 rolls around, Lexus’s Smith said, “We’ll have one of the most robust years ever for new-product introductions.” If instead some important launches had been scheduled for this year and then disrupted by the natural disaster in March, he said, they would have had to be rescheduled. “It will work out fine,” Smith concluded.
But the battle for the 2011 sales crown that Lexus will vacate remains intense, as well as for other scraps of market share. . “Everyone will try to make their numbers in the fourth quarter,” Cannon said. “They all started the year with higher production plans than what the market is giving up in sales. They will push the market with incentives and [marketing-]communications dollars, so the fourth quarter is going to be very crowded ... Between everyone’s forecast and expectations for the fourth quarter, and what the market is actually yielding, will be a significant gap.”
Race to the Finish
Indeed, while Mercedes-Benz’s incentive level was down in September, BMW fired up the giveaways, as its TCI rose to $4,135, up about 9 percent from August and a full 50 percent higher than a year earlier. Despite trailing BMW going into the period, Cannon expects Mercedes-Benz to acquit itself well in the fourth quarter, as a launch of its new M-Class SUV joins the brand’s new C-Class as high-volume introductions for the year, supplementing a couple of new niche-product versions earlier in the year.
And as 2011 gives way to 2012, the combatants will regroup again. This time, Lexus promises to be re-ascendant compared with the last six months, but Mercedes-Benz’s Cannon is among those who believe the luxury segment already has been altered for the long term by Lexus’s difficulties over the last couple of years. “Their dominance might diminish,” he said. “They’re never going away, of course; they’ll always be a significant player. They’ve got product and reputation – although a tarnished reputation – and the money to keep playing at the level they’re playing at. But the air of invincibility that Toyota [and Lexus] enjoyed for a time, when for many years it felt they could do no wrong, is gone.”
Dale Buss: is a frequent contributor to AutoObserver.com.
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