3-2-1 – The Genesis Launch is a Go!

After years of slowly improving the quality of their offerings, and finally convincing the buying public they belong in a conversation with Honda, Nissan and Toyota, Hyundai has decided to make the same leap virtually every other mainstream car manufacturer has made, and form their own luxury brand. While Genesis has been the Hyundai flagship model for years, Hyundai has now decided to make Genesis its own brand, challenging the world of Lexus, Acura, Infiniti and other luxury nameplates.

It was 27 years ago when Toyota and Nissan announced they would challenge the European luxury automakers such as Mercedes, Audi and BMW for the upscale customers in the United States. While many saw their foray into the luxury market as nothing more than charging more for their products, they worked hard to separate their brands, and over time have convinced American consumers they can compete with the European brands.

While Toyota has spent billions establishing a very successful luxury brand in Lexus, Honda and Nissan have had much less success attracting customers to its Acura and Infiniti brands. With low volume sales, and many model changes from year to year becoming the norm as they attempt to lure customers to their high-end cars, Honda and Nissan may regret ever having made the decision to open new showrooms and launch their luxury brands.

Perhaps Hyundai has learned some lessons from watching these two automakers struggle, as it has announced it will not open new showrooms with the Genesis Brand, but rather select the best Hyundai dealerships to carve out a section of their floor space for the upscale customer.

This itself opens up a number of questions as to how the manufacturer should best handle the new arrangement to garner the highest amount of profit in the long run. Some may argue the Genesis brand places a halo on all the Hyundai products, especially since they will be in the same showroom. Others might contend this sharing of space will not provide adequate separation of the brand, and many buyers will perceive the Genesis products to be high end Hyundais, just as many still see Acura’s products as high end Hondas.

Now Is the Time to Take the Chance

Hyundai Genesis Back

Hyundai Genesis Back

The South Korean automaker will be riding the wave of unprecedented vehicle production, as 2015 was not only a banner year for Hyundai, but with 17.47 million cars sold in the US in 2015, it was the highest volume year ever for US car dealerships, topping the 17.35 million sold in 2000. While there is much speculation regarding the reasons for these record sales, a low unemployment rate of 5%, low gas prices, low interest rates and improving economy make some in the industry hopeful that 2016 will produce equally fantastic sales numbers.

With Lexus currently holding 16.4% of the luxury car market, Acura trailing with 8.4% and Infiniti far behind at just 6.3%, many in the industry wonder if Hyundai can obtain the volume necessary to justify their own brand. However, with much wider profit margins, and the hope that the entire Hyundai brand will benefit from being associated with higher quality products, it is hard to define accurately just how much tangible gain this new luxury moniker will bring to the Hyundai brand.

In reviewing recent sales figures for luxury brands, it is apparent why Hyundai has decided now is the time to make the move to form its own Luxury brand. Sales for Lexus rose 11 percent in 2015, far above the rather pedestrian 4.7% increase in the overall Toyota sales figures. While Infiniti’s sales increase of 14 percent was not as good as the 18 percent seen by the entire Nissan Division, it is also a terrific sign that consumers are willing to pay for luxury. Honda reported an overall sales increase of 3% in 2015, while their Acura division reported an increase of 8.4%. Yet Hyundai sales were up a mere 5 percent, demonstrating that while six consecutive years of sales increases is positive, it has actually lost ground to its competitors, especially in the luxury car segments.

With BMW able to sell 346 thousand luxury cars in 2015, Lexus selling 344 thousand and Mercedes with 343 thousand, perhaps Genesis has something to shoot for in the long-term that will turn into more than just an add-on to their Hyundai brand. Overall, the luxury segment in the United States grew by 7.7% in 2015 to just over 2 million vehicles sold. If Genesis were able to obtain just 10% of this growing market, they would sell 200,000 luxury vehicles. Not to be overlooked are the extremely wide profit margins each of these cars carries compared to mainstream cars.

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Should Genesis Have Its Own Showrooms?

This brings us to one of the most interesting questions. Should Genesis have its own dealerships, or should they be shared with Hyundai? While new vehicle automobile dealers are generally accepted to have very thin net profit margins of just 1-2%, gross margins on the cars being sold are not created equal. Most typical mainstream cars produced by GM, Ford, Honda, Toyota and the other large sales producers have gross margins in the 8-10% range, which translates to about $1,500 to $2,500 profit per vehicle sold. However, luxury brands can often garner gross margins of 10-15% on sales figures in the $45,000-$60,000 per vehicle sold, depending on the brand, which translates to $4,500 to $9,000 profit per vehicle sold.

Facilities to sell and service cars are extremely expensive, so should Hyundai use the profit from the sale of Genesis brand products to subsidize Hyundai products or will the separation of Genesis brands in existing Hyundai showrooms actually reduce the number of Hyundais sold, thereby cannibalizing sales of the existing products? Staff requirements in these dealerships will change as well, with some people able to wear the hats of both brands, while others will need to be retrained, or perhaps even additional staff hired to handle just Hyundai or just Genesis products.

Will the Service Manager be able to handle the technicians for both brands? Will the Sales Manager be able to manage the sales personnel needed for both brands? While the detailer that cleans the exterior and pulls the plastic packaging off the new car will certainly be able to work on both brands, how about the pre-delivery technician that needs to check the fluids and install some last minute accessories? While the Finance Manager should have little or no problem processing the necessary paperwork, getting funding for loans, and running credit checks for both customers, are two dealership managers necessary, one for each brand?

Perhaps the biggest challenge to integrating a mainstream brand with a luxury brand is in perfecting the Service facilities necessary to make both customers feel comfortable, and to staff correctly for the proper maintenance and repair of the vehicles. At an average dealership, eight people play a significant role in servicing a vehicle, and making those relationships match customer expectations, while also making sure the vehicle is serviced professionally will be a challenge for all these newly established Hyundai/Genesis blend dealerships.

Front service desks with receptionists or greeters are common at dealerships, yet they will differ at Mazda vs. Mercedes. Waiting rooms at low cost dealerships need to be adequate, but not luxurious, or customers will feel their dollars are being wasted on needless comfort they did not expect and do not want to pay for. Service advisors, or technicians who are capable of dealing with customers while also understanding the technical aspects of the vehicle are perhaps the most important relationship contact for all customers. They must be able to listen to what the customers want or need and translate that into a workable plan for the people that will actually be working on the car. These folks must be very good at upselling additional services and explaining why your vehicle would benefit from these additional maintenance or repair costs, and buyers of $20,000 vehicles will need to be treated differently from buyers of $45,000 vehicles. Service technicians require in-depth training about the new technologies for all cars they see, and high-end luxury cars such as the Genesis brand will have self-driving capabilities, lane departure technology and many other high-end features not yet found on Hyundais. A completely new set of parts will need to be maintained, with larger inventories of the most popular items such as tires, oil and air filters, mufflers, etc., and unless adequate space is made, and is divided for the two brands, mistakes will be made regarding which part is appropriate for which vehicle.

With Hyundai embarking on what will be a long, slow campaign to lure luxury buyers into their dealerships, this is surely the first step into becoming a global brand, recognized alongside the other established Asian automakers that have transformed the auto industry over the past 40 years.

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