Time, Competition Rub Sheen from Accord, Corolla
March 31, 2008

By Dale Buss

Toyota Corolla and Honda Accord are icons of the Japanese automakers’ rise to U.S. market dominance over the last generation — reliable performers on the road, steady draws in the showroom, dependably lauded by public and press alike. And the OEMs have just produced a new generation of each venerable model.

But the long, long run of success could be nearing an end for both Accord and Corolla. Year-to-date sales are off for each nameplate more than for each OEM overall. Proliferating competition — some from sibling models — is squeezing them. Consumer consideration of Corolla or Accord doesn’t translate as predictably as before into purchase. High gasoline prices and a shaky economy have roiled the picture still further.

And it could just be that, well, Americans are tiring of vehicles that have been around since 1966, in the case of Corolla, and since 1976 in the case of Accord. Some Detroit Three nameplates have been retired and then resuscitated in that time span.

“They may just have been around too long,” said David Cole, chairman of the Center for Automotive Research, an industry think tank in Ann Arbor, Mich. “It’s too early to tell a definitive story about them, but it’s pretty clear that something is going on.”

Neither Toyota nor Honda is publicly conceding a thing about the fate and future of such crucial pieces of their lineup. After all, Toyota introduced a restyled tenth generation of Corolla to the U.S. market in January, and Honda launched a redesigned Accord last fall. And Toyota put Corolla on a mighty big pedestal last month when it featured the car in one of its two Super Bowl ads.

But Gary Robinson, senior product planner for American Honda, does allow as how “it’s been an interesting ride the last couple of months watching (Accord sales) and trying to understand” the dynamics.

Crowding Corolla
Corolla sales slid by 28 percent in February and by 24 percent for the first two months of this year, compared with 2007; Toyota’s overall car sales, including the Scion brand, were off by only 7 percent and 6 percent, respectively. Both companies will report March sales on Tuesday.

One big reason clearly is the old-model Corolla was in sell-down mode during that period because the new Corolla just became available in January — hence the Super Bowl ad.

But more than just a model switch appears to underlie Corolla’s troubling dip. Despite the appeal of a new version and broad advertising support, for example, Toyota has decided to provide relatively generous incentives on the 2009 Corolla — an average of nearly $1,000 on a Total Cost of Incentives basis, as calculated by Edmunds.com using a proprietary formula. List prices for the car range from $15,250 to $19,950, according to Edmunds.com

“That’s OK, but it’s a bit concerning because these are high incentives for a new model,” said Jessica Caldwell, sales analyst for Edmunds.com. “Sometimes Toyota’s TCIs are as low as $100.”

One particular problem for Corolla is the California auto market, in particular, is “dead in the water,” said Art Spinella, president of CNW Research, an automotive-market research firm in Bandon, Ore. “And that market was always one of the strongest for Corolla.”

More similar models are crowding Corolla. The nameplate had less than a 9 percent share of the compact segment in February; normally, Corolla grabs at least 10 percent, Caldwell said. Five years ago Corolla buyers had an average of just 3.1 vehicles on their shopping lists, including Corolla, according to CNW’s research; in the last quarter of 2007, that figure was up to 4.9.

Among new competitors to Corolla that are worthier than rival compacts from years past are Chevrolet Cobalt and Nissan Versa. Even Toyota itself may be a culprit: Its Yaris subcompact, introduced in 2006, “may be eating into Corolla sales,” Caldwell said, because it is less expensive and offers better fuel economy, and it’s still a Toyota. Yaris sales grew 64 percent in February and 48 percent for the first two months of 2008.

Targeting Twenty-somethings
Toyota is trying to thwart the drag on Corolla in at least a couple of ways. First is a new approach to design, expressed in the 2009 version. “It’s lower, and the character lines are more flowing,” is how Toyota spokeswoman Cindy Knight described it. “It’s more aerodynamic than ever before, with a slightly wider stance. It’s more eye-catching, because often our styling is called vanilla.”

Small-car design, however, is a moving target, Caldwell pointed out. “They’re more stylish than they used to be,” she said, but even the newly tweaked Corolla isn’t as compelling as some others.

Second, Toyota is goosing Corolla marketing. Its target is “more of a mainstream consumer than for Scion or (Toyota) Matrix,” Knight said. Ages are 18 to 49, with a “sweet spot” of 26 years old, a young professional just starting to make it in their field. They’re very much into success, and style-conscious.” She called Corolla’s customer base “youthful, optimistic and upwardly mobile.” (Toyota executives declined to comment for this story.)

As part of identifying with twenty-something targets, Knight said, Toyota is presenting Corolla “not only as more stylish but also more in tune with their self-image. One of our key tactics is using humor.” So TV advertising appears, among other places, on cable TV’s Comedy Channel and the show Adult Swim.

“Our unifying theme is mock pretension, poking fun at to-the-manor-born silliness,” Knight said. Thus, Toyota created a “crest” for the new, tenth-generation model, “Corolla X.” And its new ad, popular during the Super Bowl, uses a caricatured old-money backdrop to set up an incongruous demonstration of Corolla’s interior quiet featuring a momma badger and a very nervous driver. The voiceover concludes with "Live the dream — for less coin."

Toyota also is ramping up digital-marketing efforts to reach what Knight called Corolla’s “very connected audience.” That includes advertising online at sites including The Onion, YouTube and Myspace as well as “hosting” some comedy channels on Google, and a growing number of mobile applications. Corolla has 20-some interactive-advertising initiatives, Knight said, more than for any other Toyota nameplate.

Despite all of this, however, Corolla’s forward motion may be slowing inexorably. The younger consumer who historically considered Corolla, Spinella said, “is now looking for something with a bit more buzz.”

Supply-constrained Accord
Accord sales dropped by about 10 percent for the first two months of 2008 compared with 2007; Honda’s overall car sales drifted down by only about 1 percent.

Honda is confident it understands at least a couple factors in Accord’s short-term distress. First, with the new model introduced in September, the automaker has eliminated the huge incentives it was offering on the nameplate a year ago. Edmunds.com reported the average Total Cost of Incentives for Accord was under $500 in February compared with a peak of more than $2,000 in June. TCI includes dealer as well as factory incentives.

Honda’s Robinson said Accord incentives last year averaged $1,500. Though he said that was “half of what our competitors’ incentives were,” he noted, “typically for Accord, incentives would be something like $500.” And for the new 2008 model, factory incentives are “zero,” he said.

Also last year, in part to clear the way for the new model, Honda operated a dealer-incentive program it called Accord Challenge “to try to pump up some excitement with the car,” Robinson said. And it offered a $199-a-month lease on the LX version for most of the year. “That’s the cost of lease that you now see,” he said, “for competitors’ cars that cost only $20,000 to $21,000 at retail. List prices for Accord range up to $30,510, according to Edmunds.com.

A second reason Accord’s sales numbers have been disappointing so far this year, Robinson said, is Honda has gotten caught in a bit of a powertrain mismatch. Strong demand for the V6 version “has taken us by surprise,” he said. Turnover is very quick for the V6, and grosses are “very high,” he said. But although executives are happy about the development, to this point a supply-constrained Honda hasn’t been able to keep up with demand.

“From 2004 through 2006, we sold about 30 percent of Accord sedans with a V6, but since then the percentage had fallen to about 25 percent,” Robinson said. “With gasoline prices moving higher still, we were expecting that sort of percentage to continue with this new model, so that’s what we’ve been building: about 25 percent V6s in the four-door.”

But a couple of things tripped up Honda’s assumptions. First, Honda’s Variable Cylinder Management (VCM) feature on the V6 — in which some engine cylinders shut down when their power isn’t needed, boosting fuel economy — has proven popular, and the difference in fuel economy between a VCM six-cylinder engine and the Accord’s four-cylinder powertrain is only two miles a gallon. “Our customers tend to be pretty high income and education levels,” Robinson said, “so a lot of them are influenced by VCM.”

Moreover, Honda had assumed with the economy getting more tenuous, “consumers would really be emphasizing lower-priced models, and that would be where the demand was. But this particular Accord, with larger size and premium styling, was designed in part to appeal to people who might want to come out of luxury cars and higher-end SUVs because of fuel prices or financial wariness. This strategy has worked. “And that buyer is pretty much only willing to consider the V6 in an Accord,” Robinson said.

Still another factor contributing to the V6 squeeze is the new Accord benefits less than previous generations from an influx upward into its segment from compact cars. Historically, about 10 percent of Accords are sold to former owners of the compact Honda Civic, Robinson said. “But as people are more worried about their finances, and the price of gas, people in the compact segment are much more likely now to stay in that segment than to move up,” he said. “So our inflow (to Accord) from compact cars has actually dropped off quite a bit.”

All told, Robinson said, “Our intuitive expectation about V6 sales is that as the economy declines, you shift lower in terms of mix and engine choices. But since what we’ve been losing is compact buyers moving up to Accord, and what we’ve been gaining is downsizers, it almost goes the other way.”

In any event, Honda is still limited by the availability of a few Japanese-made components for the V6. But Robinson said the company is determined to make more V6s available in the new Accord. “I think if we can produce more, we can sell more,” he said.

Doubting the Malibu
The V6 constraints, though, aren’t the whole story of Accord’s troubles, others said. For one thing, the rest of Honda’s lineup is providing more competition than before to budget-minded buyers, including not only the classic Civic but also the new subcompact Fit. “In hard times, they are better competition for Accord,” said Caldwell, of Edmunds.com. “and Civic is plenty big.”

Consumer consideration for Accord competitors also is rising. Until two years ago the typical Accord shopper's list had 2.1 vehicles on it, CNW said, and the other usually was Toyota Camry — the compact that has been the nation’s best-selling car for several years running. But in the final quarter of 2007, that shopper’s list had expanded to an average of 3.4 vehicles.

Increasingly the other cars on those shopping lists are from the Detroit Three, including Ford Fusion, Saturn Aura and the new Chevrolet Malibu, the last of which car-poor GM specifically targeted to take on Accord and Camry more aggressively than ever before.

“These are good cars, and so consumers’ choice range is significantly increased from where it was just a year or two ago,” said Cole, of the Center for Automotive Research.

Robinson conceded Fusion, as well as Hyundai Sonata, are coming up on more Accord shoppers’ consideration lists these days. “But for the most part,” he maintained, “our shoppers are pretty much shopping between Accord, Camry and (Nissan) Altima. There are others on the list, but they tend to be second- or third-level choices. And at this point Malibu, though a good car, isn’t yet that significant for us.”

The entire compact segment in which Accord resides “has become really good; there are a lot of really good cars that offer a ton of value,” Robinson said. “It’s probably one of the best value segments in the entire industry. That’s increased competition for (Accord), but for us so far there hasn’t been much impact.”

Well, then, what about the significantly streamlined styling of the new Accord compared with its predecessors? Spinella, of CNW, said the “core buyer” of Accord has been “older buyers looking for a generally conservatively styled vehicle.” And those buyers, he maintained, “have pulled back substantially” on Accord in part because “they find it to be too aggressively styled.”

Again, Robinson begged to differ. “So far,” he said, “we’ve gotten almost 100 percent good feedback on the styling.”

Nevertheless, said Spinella, Accord’s historically hefty pricing — meaning, among other things, Honda’s return to sparse incentives on the nameplate — will be tested in coming months. “Because Honda resists incentives, the price differential between Accord and most other models in the category (is) even wider,” he said. “Today’s buyer puts price and monthly payment ahead of virtually all other immediate attributes.”•

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