Acura Has Future, But as Niche Brand
By Phil Villegas
A client and I recently debated the pros and cons of building a new, exclusive Acura dealership.
While this multi-brand client has enjoyed success selling Acuras, I nevertheless advised him to consider either retro-fitting an existing facility or selling off the franchise.
Why? Because no matter how much we crunched the numbers, we could not find enough meaningful data to support major investments in the long-term prospects of Acura.
Rather, all of our data points indicate the brand will struggle for survival in the years to come as it faces heightened competition from luxury heavyweights such as Mercedes-Benz and BMW, brands that are expanding their lineups to fight in the lower-premium segment.
Honda launched Acura as a luxury brand in 1986, following the Japanese government-imposed export restraints on mainstream vehicles.
At that time, the brand targeted a more profitable vehicle segment that was not being properly addressed by other automakers: the near-luxury segment. Near-luxury filled the gap at the time between the top Japanese brands (Toyota, Honda, and Nissan) and the top German luxury brands (Mercedes and BMW).
When Acura debuted, Cadillac and Lincoln were languishing with stale and non-innovative products, making the environment ripe for an alternative luxury concept.
Much like other brands, Acura has shown year-over-growth since the end of the recession. But it’s important to note it has not bounced back at the same level as other luxury automakers.
Acura, much like Nissan’s Infiniti, hit its respective sales peak in 2005 and has since lost market share. Last year, Acura sold 165,436 units last year compared with 156,216 the year before, according to WardsAuto data. Acura ranks No.5 in the U.S. luxury market, ahead of Infiniti and behind Cadillac.
German Luxury Brands Expand
We anticipate erosion of Acura’s share. This is primarily attributable to the growth of Audi, BMW, and Mercedes as well as those three brands expanding lineups to include new lower-luxury models.
On the other end of the spectrum, although Honda was the first of the Japanese manufacturers to launch a second channel in the U.S., Acura has struggled to distinguish itself as a true luxury brand.
Through the 1990s and early 2000s, Acura didn’t need to be a true luxury brand to succeed. Its positioning as a near-luxury brand filled an important gap in many upwardly mobile consumers’ ascent into the realm of more refined cars.
But now, the top luxury manufacturers are keen on conquering aspirational customers. Whether it’s Mercedes with the CLA, BMW with the 2-Series, or Audi with the A3, many automakers are banking on these lower-priced entries in a growth segment.
Only a few months after its market debut, the CLA is outselling Acura’s top-volume car, the TL. In the first three months of 2014, the CLA outpaced the TL by 26%.
Some Acura dealers in the U.S. are encouraged by the impending return of the NSX sports car. While the NSX promises to be a remarkable vehicle, it is unlikely to supercharge.
The NSX does not represent a high-volume model that will deliver sustained profitability for dealers. Some dealers may even face losses with the likes of the NSX.
Yes, they’ll have several high-grossing units, but after 25% commissions and $100,000 invested in special tools and training, what actually drops to the bottom line may not be worth the price of admission.
Halo cars are great. They can do wonders for a brand. But much like playing pool, if you’re not considering where to leave the cue ball after taking the shot, the competition has the advantage.
Sinking a ball after a nifty bank shot is impressive, but it makes little impact if you can’t follow it up. The same holds true for Acura. Without a series of timely and exciting models, the NSX will do little more than serve as a development prototype for the next Honda S200.
Destined to Niche Brand Status
I’ve often quipped about Acura’s prospects being like Brazil’s. It’s the country of the future, and always will be.
Rather than seeming poised to expand its lineup and growth outlook, Acura seems to be settling for niche-brand status, like Volvo.
Any dealer who’s considering investing millions of dollars in a new Acura facility, buying the franchise from another dealer or applying for an open point would do well to evaluate the proposition carefully.
Unlike an evaluation of other brands that are poised to grow, an analysis consideration for Acura must be based on the assumption of stagnant sales and compressed grosses.
Blue sky or goodwill considerations for the Acura franchise based on normalized earnings should be at a three multiple, with a possible four times earnings in a strategically motivated acquisition.
Unquestionably, Acura delivers great product as well as value. But in the current market environment, value is not a rarity. It doesn’t offer the point-of-difference advantages it once did.
Acura has a future in the U.S. market, but as a niche brand. Dealers should remember that.
Phil Villegas is a principal at Axiom Advisors, a boutique automotive dealership consulting firm specializing in Mergers & Acquisitions, Enterprise Management and Litigation Support. He can be reached at email@example.com or 786-472-2800.