Upwardly Mobile? : Mazda May Join Honda, Toyota and Nissan in Run for the Luxury Car Market

Remember when Japanese cars meant something that was small, plain and cheap?

The concept worked for Japanese automobile manufacturers in the United States. But they may have done their selling job a little too well. When those same manufacturers decided to enter the U.S. luxury car field, they found they needed new identities.

Honda Motor Co. was the first to create a separate, top-of-the-line car division and dealership network with Acura. This month, Toyota Motor Corp.’s Lexus division officially opened, and Nissan Motor Co.’s new Infiniti division expects to introduce its first top-of-the-line models in November.

The next to join the fray may be Mazda. The company’s U.S. marketing arm, Irvine-based Mazda Motor of America Inc., announced last week that it is studying whether to establish a second dealer network for a luxury car line.

If Mazda gives the green light to a separate distribution channel, it would be for a top-of-the-line model that almost certainly would have a distinctive name and identity, a company spokesman said.

The strategy may provide Japanese car makers the image needed to attract well-to-do buyers who in the past have viewed their low-priced cars as workhorses for the hoi polloi. The drawback, however, is that the new ventures are riskier, have higher start-up costs, can take years to establish and are facing some dealer resistence in an increasingly glutted market.

“There may be too many cars in the market,” said Jim Slemons, an owner of six dealerships who turned down chances to sign on with Lexus and Infiniti.

Slemons said a lot of dealers are not anxious to invest the $2 million to $5 million it often takes to open a separate dealership for a new model. “They’re afraid to come up with the big investment for one new car that might or might not sell,” he said.

Three years ago, Slemons was one of the first Acura dealers in the country. At the time, Slemons was making a multimillion-dollar bet on an unknown name whose biggest selling point was that it was built by Honda, the star performer among Japanese auto makers. That distinction proved to be a key to Acura’s success.

With the new model, Honda was aiming to hang onto those consumers who had been happily driving its highly regarded vehicles, often referred to as “econoboxes” because of their good maintenance records, since their college days. As these satisfied customers got older, Honda reasoned, they would make more money--and graduate to more expensive cars that reflected their success.

With an estimated 13 million Americans now driving imports, what better way to keep Honda customers loyal than to provide a luxury model by a company already well-regarded for reliability?

It was the same basic game plan that had paid off well previously for General Motors (with Cadillac) and Ford (with Lincoln).

Even so, the strategy was a gamble. After all, in March, 1986--when the first Acura showrooms opened--no one had ever sold Japanese cars in the $20,000 price range.

“Every now and then, we’d have somebody in the showroom who would say the Acura looked good and was incredibly reliable. Then they’d scratch their heads and say they still had a problem writing a $28,000 check for a Japanese car,” said Bruce Edmondson, general manager of Canyon Acura in Anaheim Hills.

So Honda launched an intensive advertising campaign--mimicked by dealers such as Slemons--that touted the brand-new Acura as “from the new division of American Honda.”

But Honda still needed to avoid a collision course with its own stand-bys. So Acura dealers were required to invest in free-standing facilities with separate showrooms and service departments. A second ad agency was hired to come up with fresh concepts to tout the Acura. And at company headquarters, a new division was created for the upscale model.

“If you want to create a brand identity that competes with well-established nameplates like Mercedes, Cadillac, Lincoln and Jaguar, you have to come to the ballgame with the attributes that they offer--and none of them have extensions of existing brands,” said Bill Bruce, vice president and general manager of Nissan’s Infinity division.

“Customers in the luxury market are spending considerably more and don’t like waiting in line. . . . And it takes a lot more to explain luxury cars,” added Kurt von Zumwalt a spokesman for Toyota’s Lexus Division. “The salesman has to justify to the customers why they’re spending the amounts that they are.”

Lexus Followed Acura Lead

So Lexus followed Acura’s lead. When Lexus customers arrive, they see a receptionist in showrooms that looks as much like a corporate office as a car dealership. There are fewer cars on the floor than at similar dealerships with less pricey models.

Such separate dealerships also provide another plus for manufacturers: Dealers are far more inclined to push a line of cars when it’s the only one available in a showroom.

While it is too early to gauge results for Lexus and Infiniti, setting up a separate Acura dealer network has worked very well indeed for Honda.

Acura started slowly, opening with 60 dealerships in early 1986. By the end of that year, they had increased to 150 and had sold 52,860 cars--meeting the company’s projections. Acura now has nearly 300 dealers who last year sold 128,238 luxury Legend and sporty Integra models--which became the standard by which many consumers judge performance luxury cars.

Eyeing its competitors’ success, Mazda has just named Richard Colliver to head a task force that will study whether the company wants to be the next to try to take on European auto makers with a new luxury line. No deadline for a decision has been set.

Mazda Basks in Success

The move comes at a time that Mazda, which sells imported and domestic-made cars and trucks through its 844 U.S. dealerships, is basking in the success of the Miata, its new two-seater roadster that has some car buyers in a bidding frenzy.

Mazda has already entered the luxury competition with the 929, a mid-size luxury sedan listing for $23,300, and the 929-S, a more powerful, sportier 1990 model that lists for $24,800.

Sales have been slumping for the 929--which competes with the low-end models of Lexus, Infiniti and Acura. For the first eight months of 1989, sales of the 929 have been off 22.7%, totaling only 14,076, compared to the same period a year ago when 18,217 cars were sold.

If Mazda decides to set up a separate distribution channel, it could use a lot of the 929’s basic engineering in a pricier model. And a new, luxury addition would make sense, automotive experts say.

“You have to have a separate, luxury brand to build true luxury cars. The 929 is more of a near-luxury car,” said Jesse Snyder, Los Angeles bureau chief for Automotive News, a trade publication.

Al Binder, managing editor of Detroit-based Ward’s Automotive Report, added: “When Mazda decides to seriously compete with Lexus and Infiniti, they’ll go the same route and establish a separate sales network with a unique product.”

Sizable Investment

If the manufacturer does enter the luxury-import fray, one thing the task force will have to decide is whether dealers for the new line must open separate facilities. That strategy that would require a sizable, early investment in the dealerships, showrooms, real estate, inventory and operating capital.

For some Acura dealers--three years after the division was launched--that capital outlay still has not been returned. Industry experts and dealers said that as many as half of Acura’s dealerships are unprofitable. Honda officials discount that estimate.

Part of the reason for the financial squeeze on some dealers is related to their service operations. Consider that an estimated 67% of profits for the average import car dealership come from service. And Acuras--which have only been on the road for three years--have not yet required much repair.

“Dealers are very reliant on parts and service,” said Edmondson of Canyon Acura. “Sometimes over the last few years, (Acura’s) service departments have been compared to the Maytag repairmen--they have nothing to do.”

Moreover, even Acura--which consistently tops independent measures of customer satisfaction--still has some problems with name recognition. While more and more customers are familiar with Acura, “there’s definitely still work to do,” said one Acura dealer who asked not to be named.

The result is that--at least in the initial years--second dealer networks are riskier than rolling a new luxury line into an existing showroom.

Flat Luxury Car Sales

That uncertainty--combined with the realization that luxury car sales have been virtually flat in the past two years--has caused some industry experts to wonder whether the market for new Japanese luxury lines is already too congested.

After all, said Douglas K. Laughlin, automotive analyst with Bear Stearns & Co., “If you’re going to spend $35,000-plus on a car, most people would rather buy the real thing--like a real Mercedes or a real BMW.”

UPWARD MOBILITY

As major Japanese automakers move into the luxury car arena, they are setting up separate dealership chains to market their upscale models.

Manufacturer Luxury Division Status Honda Acura Opened 300 dealerships in U.S. since 1986 Nissan Infiniti Car to be introduced Nov. 8 and offered in 45-50 dealerships Toyota Lexus Began selling auto in 70 dealerships nationwide Sept. 1 Mazda Unnamed Beginning feasibility study

Source: the companies