Lexus Dropping HS Hybrid, Bringing Revamped Arsenal to Luxury-Brand Battle

NEW YORK – Lexus’ first dedicated hybrid, the slow-selling HS 250h, soon will exit the luxury brand’s lineup, a top brand official tells WardsAuto.

“There is a 2012 model, but the HS essentially is in its sellout phase and there won't be another generation here,” Mark Templin, group vice president and general manager for Lexus’ U.S. arm says. “The HS was never intended for multiple generations here, (and) we’ll have other alternatives.”

The HS, sharing a platform with Toyota’s European Avensis model and powertrain with the previous-generation Camry Hybrid, never came close to Lexus’ customer or sales expectations.

A Lexus official told WardsAuto last year the car was underperforming due its relatively staid, 3-box design and attracting an older-than-hoped-for demographic.

The luxury brand initially targeted sales of 30,000 HS cars annually in the U.S. before dialing the goal back to 25,000, then 20,000, in 2009.

HS sales tumbled 72.8% through October, compared with year-ago, to 2,383 units, WardsAuto data shows.

Toyota says ’12 Lexus ES ends Camry confusion.

Pinched by low inventories, total Lexus sales are down more than 16% this year. But Templin says the timing of the downturn couldn't have been better.

“We were clicking along pretty good at the beginning of this year,” he says. “But then the earthquake and tsunami (in Japan) made a huge hit on our (sales) volume when we had a lot of products at the end of their lifecycles.”

Another round of natural disasters would be at least as devastating to Lexus next year, when the brand plans nine new product debuts, Templin says.

He doesn’t reveal whether a car-based cross/utility vehicle larger than the RX hybrid that is under study is among the nine.

A new GS model is part of the new-model mix, the auto maker has revealed. It will debut early next year, but details of the other eight introductions haven’t been disclosed.

The new models will pace a rebound in Lexus sales, Templin predicts, adding he's not concerned about volume. “Our customers don't pay attention to what brand sells the most.”

To Templin, luxury buyers are drawn to Lexus by how they are treated in the showroom and the service department. “We define our brand by the customer experience,” he says. “Time that dealers can save them is another high consideration for Lexus buyers.”

Lexus’ two main competitors, Mercedes-Benz and BMW, generally have not matched the Japanese marque's quality and customer service, Templin contends, but he concedes Lexus hasn't managed to convey the excitement generated by the German brands.

Perhaps that's why Lexus launched the $350,000 LFA ultra-luxury coupe powered by a 10-cyl. engine inside a distinctive carbon-fiber body. The division plans to sell only 500 LFAs worldwide, including a mere 170 in the U.S.

But with only 48 LFAs sold through Oct. 31, the coupe gives no sign of having a halo effect on the rest of the brand's portfolio.

Templin started his automotive career with General Motors’ Oldsmobile Div. The 50-year-old Lexus chief joined Toyota in 1990 and has held several sales and marketing positions with the division.

His resume includes running the Scion youth brand, but he says Lexus won't grow by downsizing its vehicles. “The CT is as small as we'll go. Lexus has no plans to launch entries in the A and B small-vehicle segments. There's not a lot of demand in the luxury segment for small cars.”

Templin concedes Mercedes margins probably are higher than those of Lexus because the German importer sells more expensive E- and S-Class models. “We have traditionally talked a very good value proposition,” he explains. “We don't plan on changing that strategy.”

Lexus is looking at entering other new segments, but Templin won’t reveal them. However, he would like to see increased U.S. sales of hybrids, which account only for 15% of Lexus deliveries in the U.S. In Japan, by contrast, hybrids account for 85% of sales.

There will be more differentiation between Toyota-brand and the upcoming Lexus models, Templin promises. For example, Lexus has been criticized since its inception for not doing enough to create separate identities between its ES sedan and the Toyota Camry. But, he insists, “You'll see big changes between the (’12) Camry and our next ES.”

In the meantime, Templin says the sell-down of ’11 models has benefited car buyers.

“Now is a good time for consumers to buy luxury cars, and now is a great time to buy a Lexus. That's because incentives are higher than I've ever seen,” he says, adding he doesn’t expect that to change anytime soon owing to Lexus’ rivals emphasis on volume.

“From my perspective, (competitors) are battling for volume. That's not a smart way to do business.”

With research showing many Lexus customers are influenced by their children when shopping for new luxury vehicles, Templin says the brand's portfolio and advertising will aim at appealing to the emotions of the kids who motivate their parents.

He notes the Lexus buyer’s average age is mid- to late 50s, about the same as that of BMW and Mercedes customers, but they don't want to be perceived as being old.

Speaking more directly to Lexus’ customer base, Templin was in New York to host one of a series of dinners with customers and guests around the country. Local hosts are chosen by a Lexus Advisory Board consisting of 30,000 customers.

Those who volunteer to host a dinner at their home for 16-20 people – some of them customers and others prospective buyers – a celebrity chef will be brought in to prepare the meal.

“It's like a focus group with wine, and I'm not trying to sell them anything,” Templin says. He insists customers don’t voice much dissatisfaction with the Lexus product, but the dinners nevertheless provide him and his marketing team with valuable feedback.

With about 50% of Lexus's output sold in the U.S., it has been a true global brand for only the past six years. Before then, many Lexus models were sold in other markets as Toyotas. Templin says Lexus is growing rapidly in global markets, but predicts China will become the world’s largest luxury-car market. The brand’s German competitors already have established a sales footprint there.

Overall growth in the luxury segment worldwide is likely, but Templin predicts Tier 1 brands such as BMW, Mercedes and Lexus will see their market share slip as Tier 2 brands, including Cadillac and Audi, gain ground.

Lexus has depended on customer loyalty to stay competitive during both the production downturn that followed the natural disasters in Japan and Toyota’s public-relations predicament stemming from the unintended-acceleration controversy.

Although the trial of the first unintended-acceleration case is scheduled for 2013, Templin expects the new-product-introduction blitz will boost conquest sales further next year.

Most conquests now come from among the ranks of happy Toyota customers, but even Scion owners wanting bigger vehicles have jumped to Lexus, Templin says.

Templin says Toyota Chairman Akio Toyoda gives special attention to the Lexus brand. He meets with Toyoda about three times a year to discuss strategy and new-car development, and says the CEO especially is interested in Lexus’s structure as a more-streamlined organization with less bureaucracy.

The Toyota chairman follows the development of every new Lexus, from design studio to production line, and drives new vehicles at every stage. Templin says Toyoda prides himself on being a race-car driver.

Lexus has 153 dealers in the U.S. who run 223 stores. All are profitable, Templin claims, adding high throughput rates make those dealers the most profitable in the industry. That, in turn, has enabled them to spend an average of $500,000 on upgrading their facilities.

About 13% of the dealerships are owned by minorities, including African-Americans, Hispanics, Asians and women.

Templin says Lexus has right of first refusal when a dealer wants to sell an outlet. “If a dealer wants to sell, we have to approve the buyer,” he says. “We won't approve a sale to a dealer who doesn't have a good track record of customer service.”