Lexus Set To Gain Share Of U.S. Luxury Market With Refreshed Model Lineup

In 2013, Toyota Motor Corp‘s (NYSE:TM) premium car brand, Lexus, sold nearly 274,00 vehicles, a 12% jump over 2012 sales figures. ^[1] Lexus has been gaining ground on market leaders in the U.S. premium car space, Mercedes and BMW, in the last year, after production in Japan was affected by the earthquake and tsunami in March 2011. Lexus had been the best-selling premium vehicle brand in the U.S. for 11 years, before both Mercedes and BMW overtook the company in 2011. The brand’s resurgence seems set to continue in 2014, as the brand will attempt to narrow the gap with Mercedes and BMW with the launch of a refreshed IS sedan and GS SUV. Additionally, the company will launch a compact crossover, Lexus NX, as a 2015 brand later this year ^[2] and begin production of its best-selling sedan, ES 350, in its Kentucky based factory in 2015. ^[3] The Lexus ES 350 sold ~73,000 units in the U.S. last year, a 29% year-over-year increase, making the ES models the fourth highest selling premium vehicle range in the country. Production of the ES 350 in the Kentucky plant will be operational by 2015, and Lexus may be able to supply two-thirds of the ES demand in U.S. through production in this plant.

With revenues of $30 billion a year and gross margin of 25%, 7% higher than for Toyota’s non-premium cars, Lexus contributes around 9% to our valuation of Toyota. Given its higher margin, any increases in Lexus’ revenues are more likely to turn into cash profits for the Japanese automaker, which makes it a very important business segment for the company. Below we discuss the growth prospects for Lexus in the U.S. premium luxury car market.

See our complete analysis for Toyota Motors here

Luxury Share Of U.S. Auto Market Stagnant

The share of the luxury car market of the overall U.S. auto market has stayed in the 10.5%-11.5% range since 2008. Even though several luxury car makers such as Audi, Land Rover, Mercedes-Benz, Porsche and Tesla have been gaining share, other car makes have slipped or disappeared entirely. Lexus belongs to the former category. Despite luxury car makers managing to persuade non-luxury buyers to upgrade to the luxury car space with the use of attractive lease programs, roughly the same number of luxury car owners have exited the space.((Luxury Share of US Auto Market Remains In 10-11% Range, Polk, January 2014))

However, car sales at the high end are often driven by stock-market gains. In 2013, factors such as pent-up demand, new car launches and cheap credit contributed to the near 8% gain in auto sales, most of the wealth funneled into the auto market was a result of some of the best results recorded by Wall Street stock-indexes. Consequently, the biggest movers in the auto market were luxury vehicle brands such as Cadillac and Lamborghini. ^[4] After hitting all time highs in March last year, gains in the stock market are expected to slow in 2014. Correspondingly, it is highly optimistic to expect the luxury vehicle brands to start eating up the non-luxury brands’ market share. ^[5] Unsurprisingly, many premium car brands are looking instead at the Chinese luxury car market. However, with Toyota unlikely to shift the production of Lexus to China anytime soon ^[6] given its concerns over quality, gains from this space are unlikely. Lexus sold 73,000 vehicles in China last year, up 14% from 2012, but still far behind BMW and Audi. Both German companies have been concentrating on volumes instead of price or quality and offer discounts of up to 20%-30% in order to prop up their sales numbers in the region. ^[7]

Small-Car Segment Gaining Pace

The biggest gainer in the luxury car segment over the last five years has been the compact crossover, which has quadrupled its share from 0.3% in 2008 t0 1.16% in 2013. ((Luxury Share of US Auto Market Remains In 10-11% Range, Polk, January 2014)) Meanwhile, full-size SUVs and cars, midsize and compact cars have lost market share. With the Lexus NX, which will go on sale in late 2014 as a 2015 model, the brand is jumping into the growing compact crossover segment. Toyota anticipates that the foray into the compact SUV market will help it grow sales by as much as 30%. The company expects 80% of those sales to come from first-time buyers of luxury vehicles and the rest of the sales to come from prospective buyers of competitors such as BMW, Mercedes and Volvo. The Japanese automaker hopes that Lexus NX’ trendy design and best-in-class CO2 emissions will help sway buyers. ^[8] However, as the large-vehicle segments gradually cede share to the small-vehicle segments, both dealer and car maker profits should decline, meaning less overall profit for the company in the U.S. luxury car market in the future.

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1. Lexus December 2013 Sales Report, Lexus Enthusiast, January 2014 [↩]
2. 2015 Lexus NX Targets The Booming Compact Crossover Segment, Forbes, April 2014 [↩]
3. Toyota Confirms It Will Move Lexus Production To US, USA Today, March 2013 [↩]
4. Wall Street Gains Power Luxury Car Sales Into Fast Lane In 2013, Yahoo, January 2014 [↩]
5. Here’s What 14 Top Wall Street Strategists Are Saying About The Stock Market In 2014, Business Insider, January 2014 [↩]
6. Lexus aloof from China production while Nissan, Honda step in, Reuters, April 2014 [↩]
7. BMW Holds Off Audi As Race For Luxury Car Lead Tightens, Bloomberg, June 2014 [↩]
8. New Lexus NX Targets Q5, X3 And Evoque, Auto Car UK, May 2014 [↩]