Last week, Toyota announced the recall of some of its most popular vehicles. The Japanese automaker shut down factory production lines and told dealers to stop selling prime inventory on their lots.
The Camry, Corolla, Highlander, RAV4, and Tundra account for 60% to 70% of the Toyota sales for Benton Harbor, Michigan-based Signature Automotive Group (No.70 on the B.E. Auto Dealers list with $21.337 million in sales).
“This is probably the most significant auto recall in recent history,” says John Wolkonowicz, senior auto analyst for Lexington, Massachusetts-based IHS Global Insight. That’s because it concerns the safety of products from a company whose reputation is built on bulletproof safety and reliability.
The recall, however, may not turn out to be a disaster for BE100s dealers. Much of what they lose from sales of new and used cars will be made up by the estimated $150 to $200 they will earn from service work they will do to each recalled vehicle, Wolkonowicz says. About half of a typical car dealership’s profitability comes from its parts and service department.
During the first week of February, Toyota is shipping pedal upgrade kits to dealers around the country. Dealers will modify cars that have already been sold or that are on their lots. “My service department will perform the fix on these cars,” says Winston R. Pittman Sr., CEO of Louisville, Kentucky-based Winston Pittman Enterprise (No. 8 on the B.E. Auto Dealers list with $203.633 million in sales), which owns Chatham Parkway Toyota in Savannah, Georgia. “We are scheduling people to work around the clock seven days a week to get our customers in and get them back on the road. We don’t want any doubt in our customers’ minds when they are traveling out there, so we want to get it fixed as soon as possible.” His Toyota dealership has received many inquiries from customers about what they can do and what to expect from their cars. “Most of our customers haven’t had a problem,” he says.
Winter is a very slow auto sales season. Still, the January 27 recall hit at the worst time for that month. Pittman says two-thirds of his sales are in the final week of any month, so the recall will affect the store’s profitability.
“There is never a good time to be short on Toyota product,” says Joe Briglia, service and parts director of Landers McLarty Toyota in Fayetteville, Tennessee. The dealership is part of Robert L. Johnson’s Bethesda, Maryland-based RLJ McLarty Landers Auto Group (No.3 on the B.E. Auto Dealers list
with $410.25 million in sales). “We have been advised that the counter measure should be coming very soon,” Briglia says. “Toyota quality is top-shelf and will continue to be. Our customer base has been very understanding as we advise them of information we have. Together with Toyota, we are sure this will be brought to a speedy resolution.”Will dealers be able to get loans for operating expenses? “Although no formal announcement has been made by Toyota, [the company] is looking at mechanisms such as providing floor plan assistance as a way to ease the financial burden on the dealers until they are able to sell the vehicles again,” says Damon Lester, president of the Lanham, Maryland-based National Association of Minority Automobile Dealers (NAMAD).
Bill Crowder, general manager of Signature Automotive Group, says recalled vehicles will be available within a week and that factory production will resume soon. “Advertising will begin on February 11, 2010, to let our customers know about our extended service hours to perform these recalls on their cars and get our inventory ready for sale. We will then migrate to a message thanking our customers trust in us and begin advertising special deals. Our product supplies will be corrected just in time for the spring market. Overall, I don’t think this recall will affect our sales volume for the year. However, late January & early February 2010 sales will be off considerably. Profits over-all for the year should not be affected,” Crowder says.
This product recall should not be as bad a blow to Toyota’s reputation as bankruptcies were to General Motors and Chrysler. “In the long term, we do not see this having a detrimental effect on Toyota’s image, assuming that the company doesn’t take any missteps in correcting the problem,” says Ivan Drury, an analyst at Santa Monica, California-based Edmunds.com. “For GM and Chrysler, there was more concern about being able to get vehicles serviced in the future, and the future is always an uncertain thing, even though the bankruptcies went smoothly.”
The company’s credibility, however, may be tanking because of its delay admitting accelerator problems were due to more than floor mats. “This has been a very complicated issue because there are currently two reasons a Toyota driver may feel unintended acceleration,” says Drury. “The floor mat ‘entrapment’ issue was announced first and considered to be the only problem, and then a few weeks later it was announced that defective gas pedals were sticking independent of floor mat issues. We have spoken with Toyota officials, and they have reassured us that the problem is mechanical and is not electrical. The more communicative Toyota is in dealing with these issues, the better for the brand’s image,” Drury says.
The U.S. government is investigating the entire problem. “If anything comes up negative toward Toyota in that investigation, that’s going to be very damaging, particularly with the younger people,” says Global Insight’s Wolkonowicz, who has analyzed how different generations make choices as consumers. He says Toyota has very loyal customers, mainly Baby-Boomers who’ve bought the brand for decades. Aging Boomers will give the automaker the benefit of the doubt. “The Baby Boomer generation has a need to always be right, and they are not going to back away from Toyota now,” says Wolkonowicz. So the recall will not have a huge impact — in the short term. However, Toyota has been less successful selling to Generation X and Generation Y, people born 1965 and later. “Toyota’s performance with those younger generations has never been what they wanted it to be. This recall is particularly not going to help for Generation X, who are very much into quality, integrity, excellence,” Wolkonowicz says.
And GenY consumers simply don’t find Toyota products especially appealing. “They see them more as products for their parents.”