Toyota Sales Strategy Threatens Pricing Power

Resale Values Slump as Bargain Shoppers Pounce on New-Car Incentives

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DETROIT ( -- Toyota's aggressive new-car incentives have spurred sales this month, but they have also eroded the brand's late-model used prices and threaten to undercut one of its greatest assets -- pricing power.

The low-rate lease deals and zero-percent loans are working, with some Toyota dealers reporting sales up as much as 50% this month compared to March 2009. And there are no plans for a let-up.

"We have every intention to offer the most aggressive incentives we possibly can for our customers for the entire year," says Ed Sheehy, president of Southeast Toyota, Toyota's largest distributor. On March 1, Toyota Motor Sales USA introduced free-maintenance incentives, subsidized leases and zero-percent financing over five years.

But while dealer traffic is up, analysts said the move could damage a brand that traditionally got by with low incentives in part because its resale values were the envy of the industry.

"Resale values are an indicator of brand strength and Toyota customers are used to strong resale values," said Jonathan Banks, senior director-editorial and data services at NADA Used Car Guide. "If they are forced to give incentives to cover that trade-in [negative equity] they create a really vicious cycle. But they're not there yet."

Long-term high incentives could damage the brand image, render Toyota's new-car sticker prices meaningless and change the way the company goes to market. Resale values on some of Toyota's key models have already taken a hit since its unintended acceleration crisis erupted.

"Toyota is performing well below what would normally be expected of the brand," said Mr. Banks.

On March 8, the average wholesale price of a 2007 four-cylinder Toyota Camry was $10,784, down 4% percent from the Jan. 25 average price, Mr. Banks said, citing AuctionNet data.

If Toyota sticks with its strategy and the value of trade-ins decreases, the company could have to crank up incentives even more to cover negative equity. As the recent history of the Detroit automakers has shown, that could be disastrous.

Some say Toyota may not soon be able to dial back to the incentive levels it offered before the 2010 recalls. "The lessons learned are that once you offer a certain amount of incentives for a model year and take them away, you see a big slip in sales," said Jesse Toprak, VP-industry trends at TrueCar, Santa Monica, Calif.

He predicts that Toyota's incentives will continue to rise until this fall. "Then they can start with a clean slate in 2011," he says.

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