Toyota: Grand Highlander a retention opportunity

In his decades as an auto dealer, Steve Gates has served on a number of dealer councils and even did a stint as chairman of the American International Automobile Dealers Association, but he'd never served as a chairman of a brand council until he was tapped to lead the Toyota National Dealer Advisory Council.

Gates, 71, has three Toyota stores among the 11 rooftops of his Gates Auto Family: Toyota South in Richmond, Ky., as well as stores in Chattanooga and Muncie, Ind. He's an unabashed fan of the brand because of its history of working with and listening to its dealer partners, he says. So much so, in fact, that he wants to expand his auto empire by adding another Toyota store.

Gates spoke with Staff Reporter Larry P. Vellequette about the brand and its dealer network. Here are edited excerpts.

Q: What was 2022 like for Toyota dealers?

A: It was very good. I think the only complaint Toyota dealers had was that they would have liked to have a few more cars, but we sold everything that we received.

You've been a dealer for a long time. Did you ever think you could run on inventory that lean?

Absolutely not. I was absolutely certain, when this all started, I thought I needed to jump off a bridge because I didn't think that there was any way that we could survive with virtually no inventory.

Does it change your thinking about how to run a dealership long term?

This may be a function of age and history, but all of the blacktop still kind of bothers me. This is bizarre, but I'm more comfortable paying a lot of floorplan expense and seeing cars. It's completely irrational, and I recognize that. I don't think that any of us want to go back to the day where we had way too much inventory. If we could get back to 60 or 70 percent of what we used to have, that would be ideal.

It would be nice to be able to measure inventory in days supply again.

Yeah, instead of hours.

How has having such slim inventory changed your operations?

I didn't think we would ever be able to sell cars based on taking reservations, taking deposits, and people waiting sometimes six months or in some cases a year to get a vehicle. I didn't think people would wait that long for a car, but they have, and people have been very patient and very kind and very understanding, for the most part. At the beginning of the pandemic, I absolutely would have told you this will not work, we cannot survive. And thankfully, I was wrong.

It's interesting to me. My dad became a Toyota dealer in 1970, and this is the way we sold cars. As a senior in high school, I was selling Toyotas, and we would take reservations with pride, and with a $25 deposit, and then we'd wait for the car to come in. But there were no computers, obviously, so we didn't know when the car was going to arrive, and we really couldn't provide any information. I guess in this business, history always repeats itself.

Let's discuss product, starting with what's coming. Toyota will unveil its larger three-row Grand Highlander crossover in February in Chicago. What's that vehicle going to do for your dealership and your customers?

Well, it's going to give us the opportunity to retain some people whose families are growing. Our Highlander isn't big enough for so many families, and a Sequoia might not be right for everybody. Not everybody wants a truck.

I have three daughters — two of them have three kids each, and one has two — and I absolutely don't understand why they don't drive Sienna [minivans], and won't drive a Sienna. But they can't wait for Grand Highlander to arrive. And it's obviously not just my family. It's long overdue, and customers can't wait for it to get here.

What's been the response from your customers to the redesigned Tundra full-size pickup that arrived just over a year ago?

It's been received perfectly. Every one that we've been allocated has been sold before it arrived through reservations. We've never even had one on the lot. We've got one in our rental car program just so people could see it and drive it and really believe that such a vehicle existed. The response has been overwhelming, and again, surprisingly, it was a vehicle that people just waited for even though there are plenty of Rams out there, and Ford and GM's truck inventory has grown as well.

Have you been able to conquest with it?

Conquest has been very low, but I think that's a function largely of not having any inventory. By and large, we're taking in Toyotas on trade.

The Tacoma midsize pickup is due for a redesign this year, finally. Do you have any predictions on the consumer response?

Tacoma demand is still as hot as ever, and that defies logic. But it's a great vehicle, and that's what I drive often. They're unbelievable trucks, and I love driving the Tacoma. Fortunately, I'm not alone.

How did the launch and recall drama with the Toyota bZ4X play out for you and other dealers?

Well, it really didn't affect us. I mean, I'm in Indiana, Tennessee and Kentucky; and EVs in my part of the world is really not in many people's consciousness at this point, so it had no impact. We probably won't see one for a year. We get very few RAV4 Prime plug-in hybrids, which is a shame, because I could sell 50 RAV4 Primes a month if they were available. But full EVs are really a distant conversation in this part of the country right now.

Toyota has taken some grief for its hybrid philosophy from advocates for EV lineups. But what are you hearing from your customers? Are they asking about EVs? Or are they asking more about plug-in hybrids?

There's very little conversation around EVs at all, but what conversation there is is more concern that everything is going to have to go EV, and how am I going to do that? So the conversation is really more fear-based, frankly.

Toyota's philosophy is the right one, in my opinion. I think that some of the manufacturers that have gone all-in on EVs probably wish they hadn't. No one would ever admit that, but maybe it's been way too much, a little too soon.

But EVs are going to be right for some people at some point. The plug-in hybrid makes a lot more sense for most customers, and hybrid is still a viable alternative. And you know, personally I've been excited for years about hydrogen and its potential. I still think that's the ultimate future.

Toyota is one of the last full-line brands remaining in the market. In your opinion, are there still holes that need to be filled, perhaps exclusive of the Grand Highlander?

Well, they filled that need, and the other one that they just filled was the GR Corolla. We really needed a hot hatch, something to compete with the Honda Civic Type R and the VW Type R and GTI hot hatches.

I think we're committed to the sedan for the long term, and to me, that was another great decision, and probably one that was difficult for Toyota to make because it certainly looked like sedans were just going to go away. And we already talked about the Sienna, and the brand still having a minivan when so many other brands have left that market altogether.

If there's a hole left, it's probably a Ford Maverick competitor: a small pickup, maybe off the Corolla or even body-on-frame. The question is whether we can do it at a competitive price point. But if they would make it very basic, without a lot of trims and maybe in just four colors, it could really work.

Who's still buying sedans? Customers buying on price?

We sell quite a few Camrys, and it's hard to pinpoint the demographic. It probably skews younger rather than older for us at least. But they're still in demand. It's just like everything else right now — we're selling every Camry that we can get and doing so without incentives. And some of our competitors are offering pretty substantial incentives on their sedans. So far, we haven't had to do that. I think it is partially price and efficiency, fuel economy and safety that sells them. It's a great package and a pretty affordable package.

How has the collapse in leasing impacted your dealerships?

It hasn't affected us much because we are not in a strong leasing market in any of the places where we are. But it's certainly had a profound effect in some areas of the country. We're all going to be anxious to see great leasing rates return at some point. And so, hopefully within the first few months of this year, we'll see something there. I'm hopeful.

How has your certified pre-owned business been?

The problem with CPO, obviously, is acquisition of cars, but we had the best CPO year in our history, and without being able to buy cars from rental car companies and getting lease returns. I mean, we really had to work hard to source vehicles, but our CPO business has been fantastic.

What's the state of dealers' relations with Toyota Financial Services? Are there things they want to see from the captive lender?

Of course, the leasing component is just one, but for me, and I think this is industrywide, I'm hoping that TFS will become much more competitive with the banks in terms of capital loans and being able to purchase blue sky.

I want to expand. Even at my advanced age, I want another Toyota store. But it's tough; the cost of these things is ridiculous, so finding lenders and getting a lender to understand the concept of blue sky is tough. I mean, I understand. If I was a lender, I'd have the same issue. But you can find lenders that will maybe lend as much as 100 percent of blue sky, and TFS is a little more conservative. So just on a personal level, I'm hoping that they become much more aggressive in that space.

Let's discuss SmartPath, Toyota's in-house digital retailing system. Are your stores on it? What's been your experience?

I don't know that it's necessarily been transformational, but it's been helpful. It's been another component to our success. At this point, we still have fewer people than I would have thought that want to conduct the purchase process all the way through online. They start with SmartPath and ultimately, they want to be here at the dealership to finish, which is absolutely not what I thought would happen. We really are looking forward to SmartPath for service. I think that will be a great addition.

Has it impacted your profits or affected average transaction prices?

I'm not sure because as we started down the road with SmartPath, the whole industry changed, so I don't know yet. Clearly, all customers, everywhere in retail, every customer wants transparency. That's clear, and that hasn't changed, and SmartPath offers that.

I'm all about transparency. I've always showed our price online. I was never one of those dealers who wanted a customer to "call for price" or "click here for price." That's bad business, in my opinion, and it's always been bad business. Even when we just advertised in the newspaper, I still advertised price. So I love that our industry is moving down that road. I don't care if all of us have the same price. I'm going to offer better service, and I'm still going to get my share of our retail business. But all dealers need to offer that commitment to transparency, and SmartPath makes that pretty simple.

How have your fixed operations performed the last couple of years?

Our service departments at all three Toyota stores just had their best year in history. That's saying something because Capital Toyota in Chattanooga has been in business since 1966, and so to have the best year ever, that's a pretty big deal. We really didn't change anything. Our pricing didn't change; we just saw more people. People had to hang onto their cars longer, so I suppose that's why we were writing more [repair orders].