How Toyota Survived

Despite recalls, Toyota's buyers incentives, customer loyalty keep sales strong.

July 13, 2010 — -- Want to understand why month after month of recalls haven't driven Toyota sales off a cliff? Look no further than customers like Andrea Tavernini, 43, of Galveston, Texas.

The past owner of three Toyota vehicles, Tavernini plans to buy her fourth later this year and hopes to take advantage of some of the special deals the Japanese automaker has offered lately.

"I know they've gotten a bad rap lately," she said, but "they're amazing products."

Analysts say that a combination of customer loyalty and uncharacteristically aggressive incentive offers have helped Toyota stay in the black despite the devastating hit it's taken to its reputation since it began recalling millions of its vehicles last year following a series of accidents, some of them fatal. (Most recently, Toyota recalled 138,000 Lexus cars -- Toyota's luxury line -- due to faulty engine valve springs in the vehicles. The company said it received no reports of accidents or injuries as a result of the engine flaw.)

Though Toyota sales rose just 11 percent in June over last year -- sales industrywide were up by 15 percent over the same period -- Toyota says its U.S. retail sales, which don't include sales to rental car agencies and other commercial customers, are still the highest of any automaker so far this year.

Some customers are actually more confident of the brand than ever, according to auto information website Edmunds found that 49 percent of Toyota's sales have come from consumers trading in other Toyota vehicles, up from 42 percent last year.

"A lot of people have their Toyota, they never felt unsafe in it, they still feel comfortable to drive it and they feel these [recalls] are isolated cases," said Jessica Caldwell, an Edmunds senior analyst.

"Sometimes the deal helps too if it's too good to pass up," she said.

Those incentive deals have included low interest rates -- and in some cases, zero-percent financing -- for loans on Toyota models, as well as deep discounts on monthly rates for leased vehicles. Such incentives were promoted heavily in March and the impact was noticeable: Toyota bested Ford in total U.S. vehicle sales that month and nearly beat General Motors too.

But the promotions have come at a price. On average, incentive programs cost Toyota nearly $2,800 for each vehicle it sold in March, according to Edmunds. That per-vehicle incentive cost was still hundreds of dollars lower than top rivals GM and Ford, but it's also a far cry from the relatively paltry $838 per vehicle Toyota spent in March 2008.

Historically, buying incentives have been more typical of the Big Three Detroit automakers -- GM, Ford and Chrysler -- said Stephen Spivey, a senior auto industry analyst with Frost & Sullivan.

Now, he said, "Toyota's sort of joining the game."

Fortunately for the automaker, its solid fiscal health meant it had money to spend on the incentive programs.

"When a company has money and goes through a rough time, they can shepherd themselves out of it with the least amount of damage," said David Lucas, the vice president of the research group Autodata. "If it had been a fragile company, [the recalls] certainly could have had a much larger impact."

Toyota coupled its incentive program with an ad campaign to remind peopel of its pre-recall reputation. John Wolkonowicz, a senior analyst at IHS Automotive, said he believes the marketing push has been effective.

"It's an excellent campaign to convince you that though Toyota hit some rough ground earlier this year, it's still same company you've always loved," he said.

Toyota's path to a full recovery, however, is far from certain. Since its most recent high in March, Toyota's total U.S. auto sales as well as its market share have fallen and now stand lower than both those of GM and Ford.

"The bloom is off the Toyota rose," Wolkonowicz said. "They're not this on-a-pedestal automobile company that they used to be."

Wolkonowicz said that Toyota's most loyal customers come from the aging Baby Boomer generation and, as those consumers cut back on their auto purchases, that could further hurt Toyota sales.

"The two younger generations, Generation X and Generation Y, are more skeptical" about the brand, he said.

Toyota is also facing stiff competition from new models offered by both GM and Ford, as well as Nissan, Volkswagen and Hyundai, he said.

"There's a lot more outstanding choices for the consumer in the car market than there have been in a long time," Wolkonowicz said.

But Lucas said that Toyota's increasing customer loyalty should prove to be an important strength in the face of heightened competition.

"At a very basic level," he said, "it's easier to keep your own customers than to get new ones."