Six Months After The Recalls: Toyota Bruised, Lexus Less So?

August 6, 2010
It's been a tough and trying year for Toyota—and Toyota owners.

There had already been a few isolated claims of accelerators sticking. But it was the news of an incident, last August—a family (and off-duty cop) in an ES 350, who sped out of control to a fiery death—that punted Toyota's apparent issue with unintended acceleration into the national spotlight.

By late September, Toyota (NYSE: TM) responded, issuing a safety advisory for mismatched floor mats. As part of a full-fledged recall initiated in November, the automaker announced plans to shorten 3.8 million accelerator pedals and install an override system in cars with push-button ignition. Surprisingly, at this point, sales hadn't hiccupped severely. But they sure did in January, when Toyota announced a second recall, of 2.3 million vehicles, for sticking gas-pedal mechanisms, and lawmakers started following. Overall, with a late-January extension to more than a million more vehicles, a total of 5.1 million vehicles—many different models—are affected in some way by either recall. And by then, some safety-worried shoppers had started crossing Toyota off their lists.

To cut to the chase, since then we've had congressional hearings, some unanswered questions, plenty of apologizing from Toyota, and an automaker with a very bruised reputation.

And then in March Toyota put everything on sale.

Suddenly, with the help of the biggest, most comprehensive incentives program Toyota had ever offered, it managed to boost sales 41 percent versus the previous year, reclaiming the market share that it had lost. The deals were great, including thousands off, as well as two years of free maintenance to those who already owned a Toyota, Lexus, or Scion model.

2010 Lexus ES 350

2010 Lexus ES 350

Toyota hasn't been the same since

Turns out, the Toyota-buying frenzy made up for the previous two battered months (during the recalls and hearings), but things ever since then have not settled back to where they were before then for the automaker.

Looking in a cursory sense at the Toyota sales numbers and transaction prices from the past year—courtesy of the pricing intelligence firm TrueCar—it would be possible to say that Toyota wasn't so seriously affected by the recalls. Toyota as a brand sold about 150,000 cars last July, in a total market 997,000. This July it sold nearly 146,000 vehicles, in a total market of 1.05 million. Looking at the Corolla, sales are down from about 29,600 last July to about 27,300 this July. Overall transaction-price discount from MSRP changed from 9.2 percent to 9.9 percent, and days in inventory went from 45 to 63. Toyota RAV4 models remained relatively even, compared to last year, while actually seeing lower discounts; and even sales of the mid-size Camry, soon to be redesigned, have been steady.

However, with a closer look, again thanks to TrueCar, the signs are a little less optimistic; it's clear Toyota's fine-tuned supply-and-demand system remains a bit disrupted, and it's still piling more incentives on each sale than it had before. Since last year, the number of days in inventory (how long vehicles sit on lots, essentially) has risen from the 20-to-30-day range up to 40 to 50 days—even higher in some cases. Average incentive spending per unit has risen from less than $2,000 per vehicle some months last year to more than $3,000 per vehicle for much of this year.

No frugal-shopper feeding frenzy

That said, Toyota still remains one of the automakers with the least incentive spending per vehicle, according to Toprak, and the company has been reluctant to step up the discounts. "They're not selling like drunken sailors, as that is the trap that the Big Three have fallen into in the past," said Toprak, referring to how Chrysler has at times over the past couple of years, kept some of its trucks like the Jeep Wrangler and Dodge Ram moving only with nearly 30-percent discounts. This has helped minimize the hit to its residual values and preserve values on the used-car market—albeit at the cost of some new-car sales.

You might think that Toyota has been doing very well with its incentives, as average transaction prices have actually been rising for some models. Toprak says that even that's a bit misleading, as last summer under Cash for Clunkers (and into the fall, when inventories were restocked), shoppers had overwhelmingly gone for the cheapest models possible. So looking into this past winter and spring, there was a natural rise in transaction price as other types of shoppers who were "comfortable with the economy"—including Toyota loyalists taking advantage of the deals—returned to the showroom.

2010 Toyota Prius

2010 Toyota Prius

Lexus less bruised; Prius more so

Lexus models haven't been nearly as affected. Looking across all models, even the LS 460 and LS 600h, which were hit by an engine recall last month, they haven't seen a major dip in sales or had the same sorts of aggressive incentives applied as with the more affordable Toyota vehicles. And Lexus, breaking it down, has managed to keep its market share—even though the impact of more recent Lexus recalls might yet be seen later in the year with Mercedes-Benz overtaking it as the number-one luxury automaker.

However one of the biggest sales losers, over the longer run, is the iconic Toyota Prius flagship, which for the past two months has been significantly down in sales versus last year—despite incentives going from an average $218 per vehicle last July to $1,644 per vehicle this past month. The Prius had been affected by yet another highly publicized brake issue.

"The Toyota brand was more clearly associated with the recalls," said Toprak, who said that Lexus' superior ways of matching demand with production, and maintaining a very slight lack of supply, have paid off when demand stumbled slightly.

Market share quickly lost, and hard to win back

While prices aren't showing much difference and discounts haven't really been that deep, the overall impact can be seen in looking at market share. The price Toyota paid for the recalls, Toprak says, is "a dramatic decline in market share"—about 1.5 percent of the entire U.S. light vehicle market, as well as a loss of consumer confidence. Before the recalls, Toyota was pushing 17.5 percent market share; now they've steadied at about 16 (after dropping below 13 percent in February). That might not sound significant, but over the course of a year that could be 180,000 vehicles.

Toprak says that it will be a struggle for Toyota to regain any of the market share they lost so quickly. "It's not a death sentence, but the outlook for them is not great," said Toprak. When they kicked off their major incentives program, in March, he said, "At first they were only able to attract their loyal customers…Unfortunately there is not an unlimited supply of loyal Toyota buyers."

The aftermath: A little smaller, perhaps stronger

The recalls, the huge loss associated with them, and particularly the public humiliation of the hearings, have clearly been cause for company officials to take a step back and reconsider the breakneck pace and rapid expansion of the company in recent years—to the degree that some have openly admitted that the company has missed some of the crucial elements of its kaizen (continuous improvement) methods.

After years of going aggressively after market share, and falling into some of the same issues as GM and Ford, Toyota ended up weakening itself as a company—of which it's now aware.

"Clearly, Toyota is looking like they might be okay with 16 percent [market share]," said Toprak. With consumer confidence in the brand shaken, Toyota might hold the line for a while, working toward profitability with a lower volume, controlling cost, and returning to core values like reliability, quality, and affordability.

[TrueCar]

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