Toyota courts kids with Scion, gets thumbs-up verdict: The box rocks

Hip new brand created credibility with young buyers who didn't want their parents' Camry

Jim Lentz was perplexed and worried. Toyota's buyer base was getting gray hair, and the proposed solution was to start a brand that sold a car that looked like a refrigerator crate.

Lentz had spent his career jogging among sales, distribution, merchandising and field operations. But his new assignment was a stretch: Oversee an effort to lure young buyers who couldn't care less about Toyota. It was early 2000, and Lentz was on the spot to approve this weird, boxy car, and in essence, give his blessing to launching a brand.

Lentz knew he had to trust his subordinates telling him this ugly duckling would sell.

Still, he could not turn off the voice inside his head. "We're crazy," he thought to himself. "The kids are never going to go for this."

But he signed off on the car, doubts and all. Sometimes it's good to be wrong.

The box, known as the Scion xB, ended up doing wonders for generating youthful interest in Toyota through its subsidiary sales channel. But getting Toyota to that point involved four years of boardroom battles about the company's future.

Although Toyota had practice launching a separate brand with Lexus, this new youth brand would require a different approach.

"It was easy to forecast Lexus buyers, because we had been selling cars to them for years and years," says Lentz, now 52. "But Generation Y's average age was 14. We were chasing a new customer who had no history of buying cars. It was a real leap of faith that we were going in the right direction. That was a scary thing."

STORM WARNINGS

Toyota executives often refer to their corporate atmosphere as being injected with "healthy paranoia." But it takes a tsunami of bad news to make alarms go off.

That happened in the mid-1990s when Toyota's market research found that, while Toyota had done a bang-up job of attracting and keeping baby boomers, America's young people were ignoring the brand. Kids saw it as a Japanese equivalent of General Motors, with uninspired design, ordinary performance and staid marketing.

Internal research showed the median age of Toyota Division buyers was 45, and aging a year with every year that passed. Research from AutoPacific was even bleaker, showing Toyota buyers' median age as high as 48, compared with 43 for rival Honda. Only 30 percent of Toyota buyers belonged to the post-boomer Generation X, compared with 42 percent for Honda. Toyota was in danger of becoming the next Buick.

With those born after 1977 predicted to be buying 4 million cars a year by 2010, becoming irrelevant with kids was a dangerous trend for Toyota.

"We knew our age was going up, so we knew we had to do something," says Dave Illingworth, 64, Toyota Motor Sales U.S.A.'s chief planning and administrative officer. He recalled a previous marketing campaign that tried to attract young buyers to the Tercel. It had flopped.

THE KID SQUAD

In response, in mid-1998, Toyota collected a group of nine Young Turks 29 to 37 years old. Their task: Make Toyota as important to kids as it had been to the baby boomers.

The Genesis Youth Project, as it was called, didn't have great tools to work with. Toyota had three small cars in the wings: the subcompact Echo, Celica coupe and tiny MR-Spyder convertible. But those cars were mostly completed by the time they were assigned to Genesis' youth brigade. That meant Genesis could develop marketing plans and make minor alterations to paint colors and audio equipment, but they were hamstrung as far as changing the finished product was concerned.

"There were a lot of good ideas, but there were many frustrations," says Mark del Rosso, now 43, who was in charge of the original Genesis team. "There was no silver bullet, and we knew it would take time."

But the launch and early sales of the trio of vehicles were disappointing. Not only did the products miss their sales objectives, but the demographics still were skewing older. When desperate marketers tied the Echo to the girls' surf brand Roxy, the special edition drowned on dealership lots.

"We were not brave enough," says Yoshio Ishizaka, then Toyota's U.S. chief executive. "We limited ourselves to looking at dressing up existing models. We didn't give ourselves enough authorization to create a new franchise. But we needed some sort of process."

Running out of patience after barely 18 months, Toyota's brass scrubbed Genesis in early 2000.

Before he left Toyota for Chrysler recently, Jim Press, 61, talked about his decision to kill the project. It was among the first he made as executive vice president.

"If you have a bad habit, sometimes you have to hit bottom to have an epiphany. We knew that adding pinstripes and wheel covers did not make a car that young people wanted."

Del Rosso was transferred to a field office, as was anyone connected with sales and marketing. A skeleton staff of strategic planners remained to toil over how to market to youth, reporting to Brian Bolain, national manager of long-range planning.

Bolain quickly took the team under his wing and refused to let the project die.

After six months of research, in July 2000, the team pitched a gutsy idea to Toyota's youthful new U.S. chief, Yoshimi Inaba. Team members proposed creating an entirely separate brand that sold small, single trim-level cars that didn't overlap any other Toyota product. Dealers would adhere to one-price, no haggle sales tactics. Marketing would avoid mainstream media.

Amazingly, Inaba didn't throw the team out of his office. An aggressive thinker with a fondness for jazz, Inaba saw promise in an exclusive, underground brand, and asked for more research to back up the plan.

"There had been attempts to rejuvenate the customer profile at the Toyota brand," Inaba says. Genesis "showed that it was not a clear-cut solution."

With approval to move ahead, the team focused on developing a line of quirky cars brought from the Japanese domestic market that could be homologated to meet U.S. regulations. Equally important was creating the strategies for how to market and sell them.

On several research trips to Japan, the team discovered Toyota vehicles such as the Toyota Caldina, FunCargo and OpenDeck, as well as the Copens from Toyota's Daihatsu subsidiary. One serious candidate was the WiLL, Toyota's pumpkin-evoking youth vehicle in Japan. But when the WiLL and Japan-market bB were presented side-by-side to American kids, the response overwhelmingly favored the box. The xB was born.

Product planners also saw a promising computer simulation of what would become the xA hatchback, which they hoped would be volume leader for the brand.

Product planner Ed Ohlin says selling management on the cars was hard.

"People were scratching their heads," says Ohlin, now 56. "These cars didn't fit our normal mode in America. They would be odd Toyota products. But we knew if we were going to take this underground approach, we had to do it this way."

Press knew the xB would be a hit with kids as soon as he drove a prototype car around his neighborhood.

"I drove home a right-hand-drive version, and a friend asked me why I was driving an ambulance," Press said. "The xB as a 'countercar' was the appeal. It was a Matchbox toy, and I could see that for young people."

LOW-BUDGET LUXE

Once the cars were chosen, there were fights over how to equip them.

Many executives wanted the vehicles to compete against low-cost Korean entries. But research showed that low-budget cars weren't what young buyers wanted, says Chris Hostetter, now 52, vice president of advanced product strategy and product planning.

"Young people like versatility, but they get sick of driving an econobox. They don't want a cheap car," Hostetter says. "We also wanted a nice palette to accessorize, not designers going overboard and leaving nothing for the customer to personalize."

There even were battles over the proposed colors for the vehicles. The rice-rocket crowd was using screaming yellows and dazzling reds to accentuate their Honda Civics. But Scion planners saw a niche for muted colors from the luxury palette.

While planners and executives scrapped over the details, Inaba and Press made sure their solid support for a new brand was known to the troops.

"Inaba was as important to making Scion happen as Yuki Togo was to Lexus," Illingworth says.

SLIM DEALER MARGINS

The planners also needed to get dealers involved.

"We really needed to work with the dealer body because of the nonnegotiable price point. Nobody believed that they were going to keep the 6 percent margin," Bolain says.

But Lentz and newly assigned corporate manager Jim Farley pitched the dealers hard, and promised them big profits from accessory sales if they stuck to the plan. Dealers warily signed on. And one-price meant no haggling with customers, meaning deals could be closed on Internet-configured cars in as quickly as 45 minutes.

Even after agreeing on a one-price model, there were disagreements over where to sell the cars.

Some executives felt placing a mini- showroom inside a Toyota store would stick out like a henna tattoo on the face of a supermodel. They felt a youth dealership should be down the street, off auto row and next to Urban Outfitters.

Others felt consumers needed to make the connection that the stodgy company that built Camrys and Corollas could also make cool cars. It also would be easier for dealers to afford the new brand by carving out a section of an existing showroom, than having to create a new bricks-and-mortar store. The latter group won the argument, with metallic frameworks and black walls separating the youth vehicles from the rest of the Toyota store.

Not all Toyota dealers took up the brand — but most did, even those in areas without a significant youth market.

Toyota also needed to come up with a name for the brand. After testing more than 250 potential candidates, executives signed off on Scion. It carried internal symbolism in its meaning of "heir." But even the kids who didn't know the word's definition thought it sounded cool and high-tech, Lentz says. That was a good sign.

CALIFORNIA DREAMING

Toyota hedged its bets by launching the brand only in California, in summer 2003. If there were any errors in strategy, they would quickly appear in the most competitive, trend-savvy market in America.

On the eve of the California launch, Toyota moved up Lentz to run Toyota Division marketing, and promoted Farley to run Scion. At the time, Press joked that Lentz was too old to run Scion.

Farley, 40 years old and fresh from a stint in small-car-crazed Europe, had a raffish mien and enthusiasm that turned skeptics into true believers.

Within six months, Farley had constructed a gutsy launch plan that called for almost no TV advertising, well-equipped vehicles and a big push into port-installed accessories backed by a Toyota warranty.

"We took half the dealer margin and put it into standard equipment, like alloy wheels and a Pioneer stereo," said Farley, who left Toyota recently for a job at Ford Motor Co. "We got an iPod connection, even though Lexus didn't have one yet.

The interior graining was better than other budget cars. When a car is fully equipped, it's harder for the customer to negotiate."

The recipe worked. California kids clamored for the car. Young buyers from Kentucky and Ohio flew to California to buy the cars ahead of the national launch.

GOING NATIONWIDE

After a one-year trial run, Scion went nationwide in June 2004. The two hatchbacks in the lineup were joined by the tC coupe. Its message was that of a budget Audi or BMW, rather than Honda Civic coupe competitor. Unlike the other Scion cars, the tC was a homegrown product designed and developed by U.S. planners.

"We wanted a killer (standard) spec list that included a glass roof," Farley said. "The chief engineer kept saying we can't put $3,000 worth of options on a $16,000 car, but we did it."

To get the attention of college students, Scion dabbled in traditional advertising media such as college football and MTV. But once Scion had a modicum of awareness, it quickly moved away from the mainstream. The marketing budget went almost entirely to sponsoring underground hip-hop musicians, student filmmakers and street artists. Scion even started its own record label. The idea was to build Scion's credibility with young buyers by intentionally avoiding the mainstream.

Not that there weren't concerns.

"Toyota already had made efforts to market to young men. There was a lot of concern about the notion of viral marketing, and framing a campaign around hip-hop. There was a huge amount of skepticism," Bolain says.

But Farley demanded cutting-edge marketing. He felt Scion should appeal to the Gen Y tastemakers who seek out the hottest new product, rather than the mainstream buyer who waits to be told what the hot product is. In fact, sales volumes were intentionally suppressed to ensure there always was one car too few, rather than one too many.

"If we got average buyers, then the xB would become more mainstream over the succeeding generations of product. We would self-extinguish the brand," Farley said. "There would be no difference between the Toyota and Scion brands."

STUMBLING BLOCKS

Not that everything went swimmingly. Executives were dumbstruck when the xB turned into a volume leader and the more mainstream xA stumbled.

"We had built a lot of xAs, but the dealers didn't panic," says Bolain, who now does Lexus marketing. "The dealers helped us parse out vehicles to make sure we weren't underwater. We knew the minute we stepped off the Scion business model, it would be hard to get back on."

The dealer experience was still troubling on some fronts. Many owners complained that, after the smooth one-price sales process, the trip into the F&I office was a nightmare. While Scion salespeople were trained for a low-pressure environment, the F&I department tended to stick to notorious "hot box" tactics that scared off young buyers. Toyota is still wrestling with that problem today.

The other tough dealer task: Staying disciplined on selling to the core target market. The budget-minded, space-efficient Scions also proved a hit with senior citizens. That meant an xB rolling down the freeway could just as easily be driven by a bespectacled septuagenarian as a pierced collegian. Obviously, dealers couldn't be told they couldn't sell a car to certain buyers, but they could be taught to steer Gramps toward a Corolla or RAV4.

Despite this double-humped demographic chart, Scion still managed to attract the youngest median age of any brand.

In Scion's first year, the median age of Scion owners was 34, far younger than targets such as Mazda, Mitsubishi and Volkswagen. Internally, Toyota tracked the age of Scion drivers — rather than the cars' owners — and found the age even younger.

Scion's popularity with trendsetters also meant it grew faster than expected. Though hoping for an annual sales rate of 100,000 units, Scion quickly blew past that to top 150,000. When sales neared 175,000, Scion dialed back production to keep demand high rather than cranking up overtime to satisfy all its customers.

The edgy marketing sometimes stumbled. Scion incurred a public backlash when one of its online cartoon characters had peyote-induced hallucinations. A move into indie-rock shows drew crowds of parents, rather than kids, and was quickly scrapped.

Most executives and analysts agree that Scion has been a success. Scion owners have formed clubs nationwide and show a willingness to socialize with their fellow owners not seen since the early days of Saturn. Purchase loyalty from Scion buyers, either sticking with another Scion or moving into Toyota or Lexus, has been high.

Inaba, who moved on to run Toyota's China operations and has retired from the company, is proud of his baby. "It has exceeded my expectations," says Inaba, 61. "Not only in terms of sales volume, but also as a business model and a customer profile."

In hindsight, Farley said he was amazed that Scion was born, let alone survived.

"Fifty percent of companies wouldn't have made it at all. Thirty percent would have neutered it," Farley said. "Some could have launched it right, but killed it in sustainment mode. It's a very sensitive business model. ... We were the little engine that could."

You can reach Mark Rechtin at mrechtin@crain.com. -- Follow Mark on