Kia's quest: Jump into mainstream
Pricier K900, SXL trim packages lead the charge
Lee: Kia is aiming for the luxury market.
SEOUL, South Korea -- There were plenty of skeptics when Kia said last fall that it would sell a $60,000, 5.0-liter V-8 BMW-fighting flagship packed with safety and luxury features.
Doubters said the leap upmarket was premature for a budget brand that long traded on cheap prices and equally cheap quality.
Furthermore, they said, there was no bridge between the near-luxury nameplate and Kia's more modest offerings.
But executives in Seoul say the top-shelf K900 sedan, which hit showrooms in March, is key to a grand plan to transform Kia into a mainstream brand on par with Volkswagen or Toyota by 2018.
In 2018, "we can reach mainstream and then, in another five years, we should be a leader in the market," Lee Soon-nam, Kia's overseas marketing chief, said in an interview.
Kia Motors Corp.'s audacious four-year goal of shedding its downmarket image reflects an internal obsession with going mainstream. Kia executives want to exit the shadow of big corporate sibling Hyundai. Meanwhile, they are increasingly under pressure from luxury rivals dipping into compact segments.
"Premium brands are downsizing," Lee said, citing the Mercedes-Benz B class, Audi A1 and BMW 1 series. "They are taking our territory. That's why we need some strategy."
Kia's counterattack will be to "penetrate the luxury market," Lee said. "We do not call it the premium market. The luxury market, for example the BMW 5, the BMW 7 market."
The Kia Optima SXL jumps in price.
Kia is riding great momentum, thanks to improved quality, competitive technology and eye-catching styling. But the K900 -- which shares the same platform as the $62,170 (including shipping) Hyundai Equus -- marks its most ambitious gambit in remaking its reputation.
"We have changed our position from follower to challenger," Lee said. "Our next goal will be being a mainstream brand. To be a mainstream brand, we need more profitable customers."
In his sights are VW and Toyota, the two brands Lee benchmarks most. But the K900's objective is to siphon customers in the $80,000 to $110,000 income bracket from brands such as Audi or BMW.
The move carries risks. Through April, Kia sold 365 K900s in the United States. While it is too soon to gauge customers' long-term reaction to a Kia that costs $60,400, including shipping, the pace is off the 5,000 annual units executives forecast to dealers last fall.
Volkswagen famously fumbled when it brought its top offering, the Phaeton, to the United States in 2003, only to pull the plug amid tepid sales. And Kia doesn't have the benefit of VW's brand image.
"They've had a reputation for inferior quality," said Eric Lyman, vice president of industry insights at TrueCar. "Now they are making great competitive products. But they are pushing up into new segments with the baggage of the previous reputation."
Last year, Kia's U.S. sales fell 4 percent to 535,179 units. Through April, however, they were up 7 percent to 186,682.
Lee says there is room to go higher:
"Our positioning is not the same as premium brands, but we have to maintain our own territory and at the same time, we can grow slightly into upper categories," he said. "It does not mean we can compete with premium brands, but just expand our footprint."
Kia's strategy: Condition buyers to higher-priced Kias through fully-loaded SXL top-trim packages with existing nameplates.
The first SXL was the Sorento crossover, offered in the summer of 2011. An SXL package for the Optima followed in 2012.
The Sorento SX-L starts at $40,795, a huge jump from the base version, at $24,995. Likewise, there is a lot of distance between the $36,100 Optima SXL and $22,300 entry model. Those prices all include shipping.
"We wanted to introduce the K900 to the USA, so we needed some bridge," Lee said. "Otherwise, the price gap is too high."
The SXL packages come with standard everything: heated, D-shaped steering wheels, drive mode select, HD radio, rearview camera, surround-sound speakers, rear spoiler, chrome accents, panoramic sunroof and LED head- and taillights, for starters.
Cho Sang-un, general manager for overseas product marketing, said the SXL packages have tapped a new customer base that is less dazzled by brand and more focused on content and value.
"People see now that luxury means a full, complete package of content, styling and value. Not just brand," Cho said.
Indeed, Consumer Reports' 2014 Car-Brand Perception Survey rank-ed Kia No. 4 among value brands, behind Toyota, Honda and Ford. Hyundai was No. 4 last year but didn't make 2014's top five.
Kia will extend SXL packaging to other nameplates above the Forte compact sedan and to markets outside the United States, Lee said. This year's redesigned Sedona minivan also gets SXL.
Kia did not say what percentage of customers opts for SXL trim. But the option has brought more affluent customers into the showrooms and helped boost transaction prices by 30 percent during the last five years, Kia spokesman Michael Choo said.
It may take awhile for Kia to gain traction, TrueCar's Lyman said. Case in point: The Kia Cadenza, a full-sized sedan between the Optima and K900. The Cadenza starts at $35,900 with shipping.
After it went on sale last year, Kia offered $2,000 in incentives and dealers had a 40-day supply, Lyman said. Now, Kia is doling out $3,750, and the Cadenza is backed up to 70 days.
"It can take three to five years to change perception," he said. "You need to reach a critical mass with a large number of consumers having a positive opinion of the brand. You need the vehicles to proliferate in both the new- and used-car markets."
Despite the addition of SXL trims and the Cadenza, Kia's average transaction price has dropped to about $22,170, from $23,199 two years ago, according to Kelley Blue Book. Meanwhile, incentive spending has risen to $2,188, from $1,666.
But over the past several years, Kia has seen a steady uptick in transaction prices, notes KBB senior analyst Alec Gutierrez.
"Prices have declined slightly in recent months due to increased competition in the compact and mid-size segments," he said. "However, the addition of a range-topping K900 should help to push overall transaction prices up slightly over time."
In the meantime, Kia's image is still tied to value. In April, for example, it won Kelley Blue Book's Brand Image Award for "Best Brand Value." Said KBB: "Kia vehicles are well-known for offering more features per dollar than most of the competition."
Cho said last year's 4 percent decline in U.S. sales reflected supply bottlenecks, not problems with brand perception.
For example, Kia still has to import part of its U.S. supply of Optimas from South Korea. But Korean output has to be rationed for all global markets, meaning the United States can't always get enough.
"We couldn't get enough supply. In the case of the Optima and Sportage, we still need more volume," Cho said.
Lee said Kia won't rush to add capacity. It added 300,000 units this year by opening a third plant in China. But other new output likely will come through streamlining existing operations.
When it comes time for a new factory, Lee suggested China would be first in line. China is expected to be Kia's fastest growing market through 2016, he said, and it will surpass the United States this year as the brand's biggest.
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