Toyota Shows Their Dealers the Money

One of my favorite pop culture movie lines is Tom Cruise screaming, “Show Me the Money,” from the 1996 hit film Jerry Maguire. 

In today’s car business, no manufacturer does a better job of showing their dealers the money than Toyota/Lexus. Not only has Toyota become the #1 volume brand – and is expected to deliver 20% year-over-year growth in Q1, thanks in part to better inventory availability – but it also delivers top-shelf new vehicle gross margins to its network of Toyota and Lexus dealers. Cox Automotive’s data intelligence reveals that Toyota consistently has the most robust online shopper interest, low days’ supply, and some of the healthiest transaction prices within their competitive segments. While many manufacturers are turning to incentives to push sales, with industry average incentives as a percent of transaction prices now at 5.9%, Toyota and Lexus continue to pull sales with only half the average industry incentive spend.

The extent to which these two brands drive profit is staggering. According to Cox Automotive analysis, Toyota and Lexus dealers captured 29% of the industry’s total new car gross margin in February, despite their combined dealer network representing only 9% of the nation’s dealerships. This math helps explain why the average Lexus dealer blue sky valuation from Haig Partners is 8-10x earnings, and Toyota’s is 7-8x earnings, both best in class for luxury and non-luxury franchises. 

There are three critical ingredients to Toyota/Lexus’s recipe for success that everyone in the auto industry can learn from:

1. Partnership with Dealers  

Toyota has created a vast ocean of dealer trust by consistently doing the right thing and always striving to achieve win-win outcomes. Other franchised dealers often feel win-loss tension between themselves and their manufacturers. A great example of this is the monthly production ordering process. While many manufacturers build production plans with priority placed on their own gross margins, Toyota collects input from their dealers but ultimately decides what gets produced and shipped. The net result of this partnership is that Toyota typically has the fastest days to turn, rarely has any dead stock, and maximizes dealer margin by masterfully aligning supply with demand. Few dealer networks have this degree of trust with their manufacturer.

Toyota also subscribes to the philosophy of keeping things simple and not using force to drive dealer adoption of new initiatives. Activating digital retailing tools has been a big push across the industry with varied OEM approaches. Once again, Toyota collaborated with its dealers to develop its Smart Path platform. While many OEMs have required their dealers to use selected tools, Toyota dealer Smart Path participation is voluntary. It should come as no surprise that in the 2023 NADA Dealer Attitude survey, Lexus finished #1 and Toyota #2 in the industry, which has become a long-standing recognition. The Kerrigan Report also noted that 72% of Toyota dealers gave the highest trust rating of their manufacturer versus 20% for the industry average. 

2. Product Portfolio  

Toyota and Lexus continue to enjoy the benefits of sticking to their long-held convictions about their product strategy. Jim Press, the former US head of Toyota, recently wrote in Automotive News that in 1997, when he introduced the Prius at the LA Auto Show, the media and the Detroit Big Three “panned” him. Despite the backlash, Toyota remained firm in its belief and vision for hybrids. Fast forward to 2024, 50% of Toyota’s and Lexus’s #1 selling models, the RAV4 and RX, respectively, are hybrids. The 2025 Camry will have an expected combined 52 mpg (which exceeds the new EPA standard) and will ONLY be available in hybrid.

While many OEMs have invested billions in developing EVs, which are a challenging margin proposition, Toyota and Lexus dealers continue to ring the cash register selling hybrids. Despite Toyota not being a leader in EVs, only Tesla sold off more emissions credits than Toyota in 2023. I recently met an Uber driver in Washington, DC, who happily paid $10,000 over sticker for a 2023 Toyota Sienna hybrid and raved about only fueling up once a week. Toyota is the dominant volume player in four of the five largest segments in the industry. Even in the full-size truck segment, where they are not the volume leader, they still come out on top, with Tundra having the highest average dealer gross profit per unit. 

3. Customer Loyalty

Customers love Toyota and Lexus just as much as their dealers do. In the 2023 J.D. Power Automotive Brand Loyalty study, Toyota finished first for the second consecutive year. Toyota owners appreciate the great fuel efficiency and reliability, but they especially love their strong resale values.

In the Kelley Blue Book 2024 Best Resale Value Awards, Toyota and Lexus finished #1 in their class for the third consecutive year. Toyota has won this recognition from Kelley Blue Book eight times in the last ten years.

My favorite Toyota anecdote was during the unintended acceleration crisis they faced in 2008-2009. Toyota sent a check to every dealer with only one string attached: “Do the right thing for our customers.”  This is another example of Toyota putting their money where their mouth is.

Toyota/Lexus Playbook: Easy to See but Hard to Replicate

The U.S. auto Industry is a massive pie of revenue estimated to be $750 billion annually. Despite the immense competition for those dollars, Toyota and Lexus continue to run their offense and capture an oversized piece of the industry’s revenue and profit pie. Despite their hidden-in-plain-sight playbook of excellent dealer relations, thoughtful product planning and strong customer loyalty, the competition struggles to replicate their success. For these reasons, Toyota and Lexus remain the most valuable franchises in the industry.

As the golden era of easy money that dealers enjoyed during the COVID/microchip shortage becomes more distant in the rearview mirror, the Toyota/Lexus formula continues to show its strength. 

If I am ever lucky enough to receive a call from Toyota asking me to become a dealer, I would quickly respond with another great quote from Jerry Maguire, “You had me at hello.”

Brian Finkelmeyer

Senior Director of Enterprise Insights and Advisory

Brian Finkelmeyer is Senior Director of Enterprise Insights and Advisory at Cox Automotive. Brian leads a team dedicated to providing car companies with actionable business intelligence to drive their performance. Brian has spent his entire career in the auto industry, working at Nissan for nearly 20 years in various sales leadership positions. Upon joining Cox Automotive, Brian was responsible for the vAuto New Car Inventory solution – Conquest. Brian lives in Nashville, TN.