Lexus, Toyota’s luxury eight-year-old car brand is about to grow up. For the first time, it is developing its own dealership network, separate from the crowded Toyota showrooms from which its marques have been sold in the UK. Up to 300 Lexus-only showrooms are planned across Europe by 2005, including 55 in the UK, the first of which is opening in June.
The brand is also preparing to drive full throttle into continental Europe, the citadel of BMW and Mercedes and a market that it has so far treated with indifference.
The charge will occur as a new Lexus model, the IS 200, is launched this year. This marque will take the brand into the compact executive sector alongside the BMW 3-series and the Audi A4 for the first time. Compacts are big sellers: they account for almost half the 2 million premium-priced cars sold in Europe a year. By 2002, Lexus hopes to have boosted European sales tenfold to about 40,000 cars a year.
It is a critical phase for the brand. If it doesn’t manage the creation of its new dealerships correctly, it may destroy the reputation its cars have already earned in the UK. If there are any supply problems with the IS 200 or it fails to sell in the quantities expected, the new dealerships may not have sufficient volumes to support themselves. But central to all of this, if Lexus fails to forge a stronger brand personality, it will struggle to compete in Europe where the premium car market is becoming tough and fragmented.
Toyota first launched Lexus in 1990 with the US market in mind. Yet it is the brand’s recent success in the UK which has prompted the decision to build the IS 200 and expand. At the moment the brand sells two marques, the LS 400, which competes at the top end of the luxury market, and the executive-positioned GS 300. These cars have successfully carved out a niche for Lexus in the UK, with sales of about 3,500 vehicles in 1998 – nearly a 70 per cent increase on the previous year.
But, as Professor Garel Rhys, director of the Centre for Automotive Industry Research at the Cardiff University Business School, points out, Lexus remains a new Japanese brand in a market dominated by European prestige and heritage. “[Lexus] is an artificial brand in a way. There isn’t the perception in the market yet to make it a ‘must-have’ brand,” he says.
In the car world, the measure of a brand’s strength is its residual value, a figure calculated by comparing the original cost of a car when new and the cost it fetches secondhand. Depending on who you talk to, the residual values for Lexus have been simmering just under or equal to those of BMW, Mercedes or Audi.
According to Glass’s Guide, one of the car industry’s best known trade information providers, in December a 1997 registered LS 400 with 16,000 miles on the clock had a trade value of 30,775, a residual value of 64.5 per cent when compared with its original cost of 47,570. In comparison, a BMW 740I (4.4) of the same age had a trade value of 33,625, an original cost of 50,420 and a residual value of 66.5 per cent.
As the brand moves into Europe, it must contend with more than just the Germans. It must also grapple with a revived Jaguar, which is clawing its way back into the premium market with a new S-type and a forthcoming baby Jag for the compact sector. The rise of four-wheel drive vehicles has also dented the executive market. Sales in the lower end of the sector have been hardest hit, particularly among the mass market marques such as the Vauxhall Omega and the now defunct Ford Scorpio. Lexus does not yet have a 4×4 in its line-up, but it is believed to be working on one.
David Brimson, marketing manager for Lexus in the UK, says Lexus’ marketing budget will increase 400 per cent across Europe this year, though he refuses to state a figure. In the UK last year, Lexus spent 5m on advertising. A new pan-European campaign for the IS 200 is due shortly from Saatchi & Saatchi, Toyota’s UK agency. Marketing Week reported before Christmas that a new Brussels-based unit of Lexus, which was opened early last year to oversee expansion in Europe, is also talking to agencies about setting up a separate pan-European ad account.
“Lexus is not a me-too BMW or Audi,” says Brimson. “If you look at the UK and the continent, the German brands still have a prestige image – they are about status. Lexus is coming from a luxury proposition, which differentiates it from the Germans.”
Establishing a separate dealership is an important step towards further defining this image. The Lexus showrooms will build on the luxury image and free the brand from the mass market taint of Toyota. Pricing and specifications will also contribute. Lexus marques will continue be sold at prices two to five per cent below the likes of BMW or Mercedes.
Lexus has come a long way fast thanks to Toyota’s acumen and resources. If it manages to handle the transition to its own dealership successfully, many in the UK motor industry are optimistic about its chances in Europe. But Lexus would be wise to consider the fortunes of Audi. It has taken many years for VW to turn the brand, which already had a long history, into a major player in the premium market.