Lexus' Path to Big Sales： Make Sure Dealers Get Very Rich

[pic]Lexus' path to big sales: Make sure dealers get very rich

Forbes, Jun 21, 2004, Vol.173, Iss. 13;  pg. 068

When you drop your car off for service at Ray Catena Lexus of Monmouth, in Oakhurst, N.J., bring your golf clubs: You can practice your game at an indoor driving range and golf course simulator adjacent to the plush waiting lounge. If you happen to be at Fletcher Jones Lexus in Las Vegas, feel free to get your nails done with the on-site manicurist or browse the Neiman Marcus boutique.

In the past two years Lexus has persuaded its 207 U.S. dealers to spend $750 million of their own money upgrading their stores. We're not talking streamers and bright paper signs advertising low APRs. Instead they built huge, clean service bays and thousands of square feet of showroom space appointed with espresso machines and grand pianos.

Why dealers are willing to do this says a lot about why Lexus, already the nation's bestselling luxury brand, is pulling away from competitors. Sales are up 21% through April, while Cadillac's have grown 5%, BMW's are up 2% and Mercedes-Benz's have shrunk 3%. In 2003 Lexus, a division of Toyota, sold 260,000 vehicles in the U.S., 19,000 ahead of number two BMW.

Lexus has perfected a model that revolves around this simple proposition: Pamper your dealers, and they will pamper your customers.

It helps that Lexus makes high-quality vehicles in hot segments. But, says Joseph Ivers, a J.D. Power & Associates partner who tracks customer satisfaction, "The Lexus phenomenon is in a large way a retail phenomenon."

Far more than other car manufacturers, Lexus manipulates its business to accommodate dealers. For instance, Lexus keeps the number of dealerships at a minimum, so dealers sell more vehicles per store than any brand but Toyota (see table, below). Lexus has also never reduced a dealer margin on a slow-selling vehicle by lowering the listed price or raising the price dealers pay. So the difference between the $35,900 sticker price of...