Southern Area Dealer Advisory Council Spring 2011

Top Priorities

1. Remaining relevant - Sales leadership for Lexus in 2011 is unlikely considering the age of the Lexus line-up, the lack of new product, competitive model introductions and manufacturing interruptions. Through February, Lexus was #5 in sales volume behind Mercedes-Benz, BMW, Cadillac and Buick. (And that was prior to the natural disasters that occurred in March.) The dealers agree that sales leadership is an outcome and not a goal. Even though Lexus may not end #1 in 2011, the brand cannot afford to remain #5 and lose sales momentum while competing Japanese brands like Infiniti and Acura show strong sales gains. The division needs to support the sales effort sufficiently to attain the 250,000 unit annual sales plan (less the reduction in manufacturing due to the disasters). The division needs to be more proactive rather than reactive. For example, after a disappointing performance in February, incentives were reduced until a strong response from the dealer body led to a reinstatement of incentives.

2. More Emotional Products - Lexus has succeeded by delivering high quality vehicles that represent a strong value, but luxury car buyers are demanding even more today. Cars must be emotionally styled and fun to drive as well. The Council is encouraged by recent moves to provide designers greater involvement earlier in the product development process. Entering new segments and providing fresh and emotionally styled vehicles is essential in making the brand more appealing to younger buyers that have never considered a Lexus. Lexus cannot afford to rely on selling cars to its existing aging customer base or it risks becoming another Buick.

3. Product - The Council appreciates the discussions during the Fireside Chats about potential future segments that Lexus may enter. The Council urges Lexus to develop the following products:

a. an entry level SUV to compete against the Audi Q5,

b. a three-row, car based SUV styled differently than the RX,

c. an IS coupe and convertible that avoids being a two door version of the NG sedan,

d. a replacement coupe and convertible for the sc.

Several of the underserved segments will help draw younger buyers to the brand. These new segments should address the brand's need to appeal to younger buyers who are not currently considering a Lexus.

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Top Priorities Continued:

4. Commitment to Prestige Segments - Lexus has become too dependent on the RX and other core entry level products such as IS and ES. The LS/LX/GX/GS/SC share of total Lexus sales has dropped from 26.7% in 2007 to 17.5% in 2010. In 2007, the LS commanded 39.2% of the prestige luxury sedan market. In 2010, that share was down to 24.6%. Lexus has been consistently short of LS and LX models for the last two years. The division has failed to promote the prestige vehicles with advertising and programs and have sat on the sidelines while BMW and Mercedes has outsold our vehicles with more expensive models that often times are nearly as affordable as the LS. For Lexus to remain a factor in the luxury car market it must be successful in setting the tone in the prestige sedan, coupe and SUV segments.

5. Cadence - the Council has emphasized the need to even out product launches for a number of years. The need has been acknowledged by TMS and TMC, but nothing seems to change. The Council requests an understanding of whether the division will see any relief over the next five years. At Fireside Chats this year, we heard of a desire to commit to a 6-year cycle for most vehicles with major mid-cycle enhancements after three years. Lexus cannot afford to allow core products like the GS and IS to go 7 or 8 years between major model changes. BMW and Mercedes have a very logical progression with their new model introductions going from 7 to 5 to 3 Series for BMW and 5 Class to E Class to C Class for Mercedes-Benz.

6. Expanded North American Production - The Council continues to urge TMS and TMC to expand the number of models produced in North America. In addition to helping manage the political and currency exposure, adding domestic ES production would help reduce the dependence on Japanese production, the downside of which became evident following the devastating events in March.

7. Value - the Council wishes to thank Lexus for the pricing on the CT. The CT represents the strong value story that helped establish the brand. It is critical that Lexus continue to deliver value in each segment it competes in especially as we prepare to re-enter the midluxury market with next year's all new GS. The success of the new 5 Series and E-Class and the upcoming launch of the Audi A6 means that the new GS needs to be a better car at a better price to get a shot at this target audience who has forgotten that Lexus even has a car in this segment.

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Product

1. The Council urges Lexus to offer a decontented GX460. Less content would allow Lexus to reduce the base price to appeal to families that need a three-row SUV, but find the current GX too expensive. A 2-wheel drive version that does without KDSS, 3rd row electric seats and potentially leather interior would give customers an option to get into a GX at a price that is more in line with the prior generation GX.

2. Lexus is a follower, not a leader in regards to integrating technology into its vehicles.

Delivering intuitive and upgradeable technology is critical to attracting new buyers to the brand. Think of an ipad or other Apple devices; they deliver tremendous functionality without the need for thick owner's manuals or long tutorials while the operating system can be upgraded to provide new functionality rather than having to change devices. Furthermore, this type of technology complements the user's lifestyle rather than overwhelming it.

3. Lexus is the flagship brand for Toyota and leading technology should be introduced through the Lexus division. The Toyota entune system delivers much of the functionality that dealers have been seeking for several years, yet the system is being introduced through the Toyota division while Lexus launches new product with less sophisticated systems.

4. The Council has continually raised the issue that alabaster and ecru interiors are too light to be practical regardless of whether they come with a protective coating. Customers are frustrated that they cannot get a traditional ivory or cashmere interior. The Council requests an update on the status of adding a darker neutral interior (like ivory or cashmere) to all models.

5. The Council requests an update from TMS on the status of new engine and hybrid battery technologies. Will Lexus move to turbocharged or supercharged smaller displacement engines such as Audi, BMW and Mercedes? Will Lexus vehicles migrate to lithium batteries? What is the timing on plug-in electric models? The Europeans are adding more diesel models to the US and they have the potential for gaining market share as customers migrate to vehicles that provide better mileage without sacrificing performance or having to downsize.

6. Blind spot indicators should be available on all models. Buyers are basing purchase decisions on the availability of this feature.

7. The Council asks Lexus to re-examine the number and placement of 12V outlets in each of its models, but especially in its LUV's.

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Marketing

1. The Council applauds the division's decision to entertain competing creative proposals for major launch work. Competition brings out the best in everyone. The GX and CT launch ads were well received by the dealer body and the public as were the core product ads that took a more aggressive tone during 2010. New marketing directions taken by competing brands have made it imperative that Lexus continue to reinvent itself to avoid its marketing message from getting stale.

2. The Council is pleased with the division's branding efforts that help define what Lexus is and why potential purchasers should consider the brand. The commitment has also helped the brand recover from the impact of the recalls and negative media attention over the last 18 months. Lexus is a luxury brand and it is important that we continue to promote our higher end products, such as the LX, LS and GX. So much of the Tier I and II budget goes to promoting our core products (IS/ES/RX) to the point that we are missing the opportunity to remind the market that Lexus is a luxury brand.

3. The Council is concerned that the brand will lose additional sales momentum as we move closer to new model launches with the GS, ES and IS models. Lexus and LFS should offer attractive, 24-month leases on these models over the next two years to keep the interest level in the outgoing cars and to set customers up for the next generation models.

4. Owner loyalty benefits should be provided based on customers who return to the brand and not tied to an LFS finance contract. Owner loyalty incentives are incredibly important to retaining our customers. Lexus should consider enhancing owner loyalty benefits based on the number of purchases an owner makes. Other forms of owner loyalty might include some form of pre-paid maintenance, a longer pre-paid Enform period, a payment waiver program or additional rate discounts.

5. The Southern Area Board asks Lexus and LFS to consider providing maturing lease customers an incentive to extend their leases until we recover from lost production. Two suggestions include reducing a customer's payment during the lease extension period and/or providing an enhanced customer loyalty certificate that would be valid for the last three months of a six-month lease extension.

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LFS

1. Dealers are facing a growing number of customers that are purchasing their off-lease cars, in part due to residuals that are below market value. The conservative residuals placed on vehicles in the last several years are costing the division new sales as these existing customers purchase their vehicles. The Council urges Lexus and LFS to consider the reduction in off-lease cars that will be entering the market over the next three to five years when setting residuals. Being too conservative will cost Lexus current and future sales.

2. The Council requests that LFS examine the possibility of enhancing encore programs based on the number of vehicles leased or financed by a customer.

3. Even though the launch of the new GS is nine months away, it is critical for Lexus and LFS to understand the importance of this new model. In the last three years, Lexus has allowed the sales rate to decline to the point that Lexus is no longer a factor in this significant market segment. The Lexus sales plan calls for nearly a four-fold increase in GS sales for 2012. For Lexus to successfully relaunch the GS, it will need to be priced aggressively and the residuals will need to be competitive with the Mercedes E-Class and BMW 5 Series.

Distribution

1. The Council requests that Lexus consider a port pooling option for high-end, low volume vehicles such as the IS-F, GSh or 600h. The limited sales potential for these models prevent many dealers from stocking these vehicles. Salespeople tend to discourage customers from looking at these models since they require long lead times if they are ordered.

2. The Council thanks TMC for the new process that shortens the delivery cycle for special order CBU vehicles and encourages TMC to adopt a BOS type system that allows dealers to alter the equipment level and color and trim selections on CBU units similar to what is available on NAP RX's.

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Service

1. The Council continues to be concerned over existing product issues that remain either unaddressed or which still exist despite repeated field fixes. Please refer to LSA Diagnostic Specialist Council spring 2011 notes that were sent to National.

2. The Council is very concerned over the pre-mature failures of drivetrain and related components such as engine oil leaks, leaking water pumps and radiators and cam gear and valve spring failures. These occurrences are not consistent with the highest standards that Lexus has set for itself and indicates that the durability standards have dropped from the levels in place when the brand began.

3. Dealers continue to be concerned over the availability of Lexus branded, grey market parts that are being specified by insurance companies. These parts are offered at discounts to the same parts that are available through TMS. The Council requests an update on the planned pilot program that was being considered to address this situation.

4. Currently if a dealer's facing PDC is out of stock on a part, there is no referral to another PDC. Instead common parts that dealers sell on a regular basis go to back order status with no indication of an expected fill date. Parts managers are faced with the decision to wait on the part or elect to purchase from another dealer and pay mark-up and shipping costs. The delays result in dealers being unable to meet promised repair times and the use of more loaner car days. Lexus needs to do a better job balancing inventory between PDCs or agree to refer parts that should be in stock.

5. Estimated arrival dates for backordered parts are not accurate. It is not unusual for a part to show an arrival date of a week out, only to show up the next day. This sounds like exceeding expectations, but it does little good when the dealership sources the part from another dealer and pays mark-up and freight only for the part to arrive in the exact same delivery vehicle. The Council requests that Lexus examine its delivery system to improve the accuracy of its arrival estimates.

6. There have been discussions about a potential pilot program that would help dealers focus on service retention for older model Lexus vehicles by offering reduced parts pricing or rebates based on a dealer's willingness to offer lower labor rates. The Council requests an update on this effort.

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Service Continued:

7. Total cost of ownership continues as a primary concern for the Lexus dealer body.

Affordability takes many forms, from maintenance costs to parts pricing and rebuilt components. The Council requests that Lexus take the following actions to address the escalating cost of maintaining Lexus vehicles:

a. Continue to expand the list of components that are available as stand alone parts as opposed to being packaged within larger assemblies.

b. The Council requests cost reduction efforts continue in the following areas: LS460 front suspension arms, LS460 air suspension shocks, 2004 - 2009 RX steering racks, GX470 air injection components, LS430 sunglass holders, LS430 air conditioning compressors and AGM replacement batteries.

c. Insuring that vendors that service components are being reasonable in setting repair terms for high dollar items like navigation units.

Communication

1. The dealer body is frustrated that the Council has raised critical issues that are acknowledged as being important, but little progress is made in addressing some of these issues. Examples include product cadence, unresolved product issues and something as simple as light colored interiors. The Council would like to see a greater effort placed on resolving outstanding issues from prior periods or at a minimum telling the Council that "this won't happen."

2. The Council requests that Lexus publish the notes from the final Dealer Council meetings in a more timely manner. In most instances, the final written responses are provided to the Council at its final meeting, but then it takes months for the actual document to be distributed to dealers. The delay undermines the considerable efforts made on the part of TMS and the Council.

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Customer Satisfaction

1. The dealer body appreciates the ALE certificates that were provided to customers whose cars were subjected to the valve spring recall. The certificate helped minimize the negative goodwill caused by such a significant repair. The redemption process for the certificates turned out to be very un-Lexus-like. What started out as a valuable gesture on the part of Lexus, resulted in additional customer dissatisfaction. The Council understands that this program was administered by a third party that was unprepared to handle the effort. The Council urges Lexus to handle this type of program internally in the future to insure Lexus standards are maintained.

2. The last 18 months has placed a huge burden on the 1-800 Customer Satisfaction hotline.

The call volume spikes resulting from numerous recalls lead to uneven experiences for customers. Stories of underprepared associates or extended wait times quickly filtered back to dealers. In many instances, the CS hotline was the first contact that a customer has following a recall announcement. It is critical that these associates are fully informed prior to the announcements so that a clear and consistent response can be provided. Having contingency plans in place to handle call spikes the day of a recall announcement is also important in conveying to our customers that they have nothing to be concerned with.

CPO

1. The Council requests an update on the effort to be more diligent in enforcing CPO standards during dealer site reviews. There continues to be too much disparity among dealers in the quality and thoroughness of CPO reconditioning. Dealers who elect to cut corners should be held accountable and should have to bare the cost of the enhanced site reviews.

2. The Council requests that Lexus enhance the CPO program by looking at offering:

a. 6 year, lOOk option in addition to the 3 year lOOk total mile warranty,

b. 3 months of Enform to go with the temporary XM subscription,

c. Make the CPO warranty transferable to a new owner similar to BMW, and

d. Owner loyalty for returning Lexus CPO customers.

3. Competing CPO marketing programs such as BMW's, are far more extensive than Lexus.

Currently, Lexus offers two CPO sales events per year while BMW has monthly programs. The Council asks Lexus to examine offering more CPO events and varying the programs to target specific models based on dealer availability.

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