Toyota dealers dig deep to move metal
Customers keep coming, but discounts hit profits
Mark Rechtin
Automotive News | October 25, 2010 - 12:01 am EST
LOS ANGELES -- Even for a brand as rock-solid as Toyota, pulling out of the company's safety recall crisis is proving to be a long and painful process.
Toyota has held on to loyal customers throughout the crisis, and the brand's conquest rates have in recent months returned to pre-recall levels. But to keep selling cars, dealers are having to accept lower gross profits.
According to TrueCar and Edmunds.com, Toyota's transaction prices on new 2011 models are the lowest, as a percentage of sticker prices, of all mainstream brands.
Some of the discounting has been covered by higher factory incentives, but Toyota is still spending much less on spiffs than other brands. That means dealers are having to dig further into their own pockets to move the metal.
"We're seeing it; the pressure is definitely on the bottom line, the gross line," said Jack Wilson, president of Toyota of Vallejo, north of San Francisco. "I see no reason other than we're still recovering from the recall situation. It's a factor, and we can't sit and not talk about it."
Ford, Chevrolet, Nissan, Hyundai and Dodge all posted double-digit percentage sales gains through September, while Toyota brand sales rose 1 percent.
Jesse Toprak, TrueCar vice president of industry trends and insights, said Toyota's transaction prices traditionally start the model year much stronger. Every Toyota brand model is seeing weak dealer gross margins, he said.
Lexus discounting also has increased, although not as much as the Toyota brand.
"The most worrying thing is if [Toyota dealers] are already offering the highest discounts in mid-October, where is Toyota going to be in February or the middle of next year?" Toprak said. "The trend trajectory is not looking great for their pricing."
Not that Toyota is the only brand doing lots of discounting.
In blowing out its remaining 2010 models, Ford Motor Co.'s three brands have had the largest percentage gap between sticker and transaction price in the industry. Ford brands accounted for nine of the top 10 most discounted vehicles for the 2010 model year, according to TrueCar.
Ford's average discount from sticker on 2010 models sold Sept. 1-Oct. 8 is 14.7 percent, Lincoln's was 12.3 percent, and Mercury's was 11.5 percent.
Toyota executives say the brand's conquest rates are back to what they were before the crisis. Dealer Wilson said retaining loyal Toyota customers has not proved to be difficult. But convincing potential conquests from other brands has meant digging deeper into the incentive pot to convert a sale.
'Deal of the Decade'
This month, Toyota dealers in Southern California launched a "Deal of the Decade" sales promotion with blowout lease and interest rate deals usually saved for midyear. Camry leases had zero down payment and security deposit and $249 a month for 36 months, and Corollas had similar "zero-zero" terms and a $229 lease.
On the sales side, 0 or 1 percent interest rate deals were common across the lineup. Dealers in the Midwest said similar programs are in place there.
But Toyota is still spending half of what the Detroit 3 are in incentives on a per-unit basis. That means dealers are having to pitch in -- losing more of their gross, Toprak said.
"We're seeing an incremental increase in Toyota's discount, but their incentives haven't kept pace," he said. "Dealers are having to discount just to remain competitive in the marketplace."
Toyota executives told dealers at their recent Las Vegas national meeting that the brand must return from 1.5 million annual sales to 2 million within three years, said a California dealer who spoke on the condition of anonymity.
"Toyota is not looking to lose any ground," the dealer said.
Deep discounts
Toyota's transaction prices on 2011 models sold Sept. 1-Oct. 8 are the lowest, relative to sticker prices, of all mainstream brands, according to TrueCar. Ford has the largest gap on 2010 models sold during the same period.
Brand % discount on 2011 models
Toyota 8.30%
Mercedes-Benz 8.1
Lincoln 7.9
BMW 7.7
Acura 7.6
Brand % discount on 2010 models
Ford 14.70%
Lincoln 12.3
Mercury 11.5
Hyundai 10
GMC 9.8
Early days
Still, it is early in the model year, and Toyota's discounting in October stems partly from the early introduction of some 2011 models. Cars typically hold closer to sticker in the first months of a new model year. But because the 2011 Camry was launched six months ago, the typical slide in transaction prices that happens over the course of the model year already has begun for Camry, said Toyota spokeswoman Celeste Migliore.
"While other makes are just launching their 2011 Camry competitors, Toyota is already into sales programs for it," she said.
Dealers have long complained about their inability to get good margins on the Camry, America's best-selling car for eight years. Through September, the Camry held a narrow sales lead of about 15,000 units over the Honda Accord.
What's more, Toyota sales are weighted heavily in two markets still rooted in recession, California and Florida. That could skew nationwide transaction price figures as dealers in those states become more desperate to sell cars.
Toby Hynes, president of distributor Gulf States Toyota, said he has not seen transaction prices drop in his territories of Texas and Oklahoma.
"You'd think you'd see it with Camry, but our dealer grosses are flat from last year," Hynes said. "Dealer profits are solid despite the recall issues."
Doing deals
Some 2011 Toyota models have been getting big discounts.
Model Avg. sticker Avg. discount Discount %
Avalon $34,825 $3,548 10.20%
Camry $24,415 $2,339 9.60%
Camry Hybrid $27,335 $2,396 8.80%
Sequoia $49,139 $3,985 8.10%
Sienna $33,112 $2,613 7.90%
Note: For vehicles sold Sept. 1-Oct. X
Source: TrueCar
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