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Lexus promises stability to raise margins

Is the lustre starting to rub off the Lexus badge? Rumblings of discontent have been surfacing from the retail network in recent weeks due to the huge growth in new car sales this year, which has seen their profits dip.

Lexus, the current and two-time winner of the AM carmaker of the year award, is looking to increase its new car sales by 50% this year – an objective it is on target to hit with just December’s results to post.

However, dealers say growth, largely from the less profitable fleet sector due to new diesel and hybrid variants, has affected margins.

Miguel Fonseca, Toyota GB managing director, acknowledges that return on sales has not grown as quickly as he or the retail network would like. But, he adds: “Margins are around 1-1.5%, which on average is up slightly on last year.”

In contrast to dealers’ claims, Lexus figures show network profits are up 65% year-on-year. The company has set modest sales growth targets for 2007 and 2008 with retail a priority. This will be driven by quality, customer experience and product, while improved processes and efficiencies will help push up retailer margins and profitability.

Lexus expects dealer profits to grow 17% next year.

“Volumes will stabilize so dealer profits will return,” says Fonseca. “Return on sales should be above 2% but it won’t be much higher than that for the next two to three years – it’s not realistic in the current market conditions.”

He adds: “In theory, dealers should be achieving more than 3%, like they do in the US. It has to come from volume with new products.”

This 3%-plus performance is unlikely until the next influx of models in three years’ time, a fact accepted by one top 10 UK retail group managing director.

“Lexus is about jam tomorrow. With volumes steady over the next three years and new products then coming through, the business will come good,” he says.

Fonseca is also putting more focus on hybrid cars, which must become “more synonymous” with the Lexus brand.

“We have to get consumers to understand the hybrid experience before they start considering a car and we are looking at how to do this now with the retail network. The future of Lexus is hybrid – as is the future of the automotive world,” he says.

The AM view

Most dealers are complaining about sales falling, so it’s odd that Lexus dealers are unhappy about sales going up. But they need volume to fill their showrooms and they will also benefit from a rise in servicing business.

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