At Hyundai, luxury lives with low-end
Single-brand, single-store strategy pays off, execs say
The next-generation Hyundai Genesis starting to arrive in showrooms to take on the likes of the BMW 5 series features taut, stately sheet metal that wraps a leather-bathed interior trimmed in matte-finished real wood, and a sticker price topping $51,000 for the 420-hp V-8 edition.
And it's taking its place barely a car length away from the entry-est of entry-level vehicles, a $15,000 Hyundai Accent, with cloth seats, a CD player and 1.6-liter four-banger.
What's wrong with this picture? Nothing, Hyundai executives say.
In fact, they say selling the Genesis and the $60,000-plus Equus luxo-yacht under the same brand and from the same showrooms as economy cars such as the Accent and Elantra is paying dividends for the brand in a few different ways.
The industry's obsession with brand positioning has long enforced a strict separation between luxury vehicles and the mass market, cleaving Acura from Honda, Infiniti from Nissan and Lexus from Toyota. BMW won't put its cars in the same showroom as a Mini. Mercedes-Benz and Smart live separate lives. Volkswagen's Phaeton flop stands out as a cautionary tale.
But at Hyundai, executives say, they have found a way for luxury and mainstream offerings to peacefully coexist, vindicating a strategy that was tested out with the introduction of the previous Genesis and the Equus in Hyundai showrooms.
Dave Zuchowski, CEO of Hyundai Motor America, says forgoing a separate luxury channel eliminated the substantial capital investment required to launch a new brand and the burden of generating enough volume to justify it. Customer service initiatives to pamper luxury buyers have broadly improved customer satisfaction for the whole brand, he says.
Zuchowski admits there are downsides for the brand but says the strategy is the right one for Hyundai. "We looked at it, we acknowledged it, we accepted it and felt the pros far outweighed the cons."
One major challenge: Simply getting into the conversation about luxury vehicles. Without a distinct luxury badge, and the cachet that comes with it, Hyundai will be hard-pressed to reach the many luxury customers who demand exclusivity.
"There are some people that we're never going to get, and we accept that," Zuchowski said.
The Genesis Lounge at Burns Hyundai in Marlton, N.J., features leather chairs and a flat-screen TV.
Hyundai has historically sold its mainstream vehicles at a discount to rival brands. That gap stood at about 6.5 percent when compared with Toyota vehicles in 2010, Zuchowski said.
And while that gap has closed considerably since, the gap for its premium vehicles "is larger, and the closure of that gap will be slower," Zuchowski acknowledged.
For example, the sticker price of a 2015 Genesis Signature, nearly $43,000 including shipping, represents a discount of more than $11,000 from a comparably equipped Lexus GS 350, and more than $17,000 against a Mercedes E350 with similar options.
The single-brand approach also affects Hyundai's product planning strategy by limiting the segments in which it can compete. Hyundai encountered this conundrum when it recently considered an eight-passenger "people mover" with a premium execution, but it couldn't make the business case pencil out.
"The problem with us, unlike Honda Pilot and Acura MDX, or Lexus RX and Toyota Highlander, is that they can build the same vehicle on the same production line ... with some minor sheet metal changes and badging changes, and they can charge a premium for that because it's offered in a separate showroom," Zuchowski said. "We would have a more difficult time doing that."
Despite those challenges, the benefits of the single store and brand are myriad and compelling, Zuchowski says.
For one, selling premium vehicles through a mainstream showroom has helped Hyundai both retain existing customers and attract new ones to the brand. About 45 percent of Hyundai's Genesis sales, for example, are to current Hyundai owners who were looking to graduate to a more upscale vehicle, Zuchowski says.
Without the Genesis to move up to, he said, "we would have lost those consumers."
Meanwhile, about 55 percent are conquest sales. Nearly three quarters of that comes from buyers moving into the luxury segment for the first time from another mainstream brand that Hyundai was able to intercept with the Genesis. The rest are conquests from bona fide luxury brands such as Lexus or Mercedes-Benz, he said.
The same-store strategy has also had a big influence on Hyundai's dealer network, emerging as a big factor behind the 470 Hyundai dealerships that have been renovated or have all-new facilities since 2010.
Those improvements were often prompted by the Equus, Hyundai says. About 300 of Hyundai's roughly 820 dealerships in the United States are authorized to sell the flagship Equus sedan. Those dealers must invest in what Hyundai calls "a showroom within a showroom" for the Equus: special signs, displays and other elements that cost thousands of dollars.
"In the course of doing that, they freshened their entire dealership," Zuchowski said. "It didn't make sense to clean up one corner of the store. We've had a tremendous amount of facility actions."
Customer satisfaction has also improved. According to J.D. Power and Associates, Hyundai customers' satisfaction with the dealership sales process improved from sixth-worst in the industry in 2009 to No. 5 overall among mainstream brands in 2013.
Zuchowski says dealers have embraced the customer service programs initially created to pamper the luxury customer and applied some of those lessons to all customers. Some dealers have gone beyond Hyundai's recommendations to create a more distinct experience for premium buyers.
Genesis and Equus customers at Burns Hyundai in Marlton, N.J., for example, use a six-digit pass code to access the dealership's Genesis Lounge, a waiting room with leather chairs, fresh fruit and a flat-screen TV that the dealership provides as a perk to its Genesis and Equus owners.
The dealership also invites its Genesis and Equus owners to exclusive events such as wine tastings and dinners at upscale restaurants, and it provides other niceties to pamper those guests, such as handwritten notes from their service advisers and Godiva chocolate cookies left in cars after they are serviced.
Peter Lanzavecchia, president of Burns, says the extra effort is an essential part of convincing customers that they don't need a premium badge to have a premium experience.
"We're the new kid on the premium block," Lanzavecchia said. "We don't have 20 years of Lexus' phenomenal sales under our belt. We don't have BMW's sales leadership in premium. We have to prove we belong here."
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