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#35 – Finding Dealers

by | Sep 1, 2016

The Lexus dealer roll out was divided into three waves. Wave 1 consisted of 101 dealers in the major markets to open by September of 1989. Wave 2 consisted of 44 dealers and wave 3 would have 50 in smaller markets. The two later waves would happen after the wave 1 dealers were up and running and there was enough product availability.


TMC in Japan would start producing Lexus product in June of 1989 and had committed to ship 5,801 cars to the U.S. in August for sale in September. We forecasted that of the 101 dealers who would be awarded the Lexus franchise, 72 should be able to open for business by September of 1989. Each dealer would have an average of 80 new cars in stock to sell.


It all sounded neat and tidy, but there were two problems. We had no dealers, and we were running out of time.


All the wave 1 market studies to determine the number and locations of dealers for each major market had been completed and signed off on by senior management. Now for the hard part, finding the best dealer in each city who was willing to invest four to five million dollars on a new Japanese luxury franchise without seeing the car. The prospective dealers and the public were not aware of the legal matter surrounding the name and the possibility of us losing the Lexus name—yet.


NADA President Ron Tonkin openly questioned the wisdom of a dealer taking on Lexus when he asked, “Do I get into a new franchise like Lexus, or simply buy the established Ford store down the street? The latter is probably much more profitable.”


We were concerned about dealer profitability. After three years, it was rumored that 50 percent of the Acura dealers were still losing money. With the automobile market shrinking and questions growing about the viability of a Japanese luxury brand, we needed to demonstrate our concern for the dealer’s success as well as our own.


The Lexus approach to the applicants was to emphasize the need for them to have a good used car department for them to be profitable right from the start. Our working capital requirement was a reasonable $1 million, of which almost half was to be spent on pre-owned inventory. We also decided to not require the dealer to build a large service department area at the start, but to construct a service area that could be easily expanded later. In addition, we wanted to be conservative on the headcount, suggesting that as few as 10 people would be needed to open the dealership. We did not expect the dealers to make a lot of money in their first year of business. However, we didn’t expect them to lose money either.


The Lexus dealer agreement would be different from Toyota, with a heavy emphasis on customer satisfaction, dispute resolution, and required training for dealership personnel. The standard agreement would be six years, but the length of the agreements after the first six years would be dependent on meeting the customer satisfaction requirements.


We had received 509 applications and developed a grading system for evaluating each application. There were five areas to be graded, and each area was worth 10 points so the maximum score a dealer could receive was 50 points. The dealer candidates would be graded on:


   1. Dealer principal experience and reputation


   2. Net worth and financial capability of dealer


   3. Customer satisfaction record and reputation of dealer 


   4. New and used car sales efficiency of the dealer


   5. Location of the land and dealer agreement to build a facility to Lexus’ standards


There were some markets with several excellent choices and other markets with none. Some of the good, major-market Toyota dealers were not interested in Lexus, and others couldn’t meet the stringent customer satisfaction requirements. In those areas we had to scramble and reach out to non-Toyota dealers.


We would meet in the triangle room with Jim Perkins to review the finalists and their scores. If a non-Toyota dealer became a finalist, I would have to go and personally visit the dealer and review his site selection. After the Perkins reviews, the final selection process took place with Togo and McCurry.


There were bumps and bruises along the way. The dealer selection meetings in the triangle room always had a certain amount of tension and apprehension about them. Politics and friendships meant that there would be a lot of anger and hurt feelings if a friendly Toyota dealer did not get selected. You never knew which dealer had called behind the scenes to lobby for selection.


The scoring system helped take a lot of the emotion out of the process. There was spirited discussion but no quarreling or fighting among the senior executives. We all knew the stakes were high, and we needed the best dealers. A point changed here and there in the scoring, but those points never made enough difference to alter the final selection. It took an average score of 45 points out of 50 to get the franchise. 


Hard decisions had to be made and were. The Acura franchise was awarded to only Honda dealers and Infiniti to only Nissan dealers. Toyota dealers who wanted the franchise really wanted it and expected to get it. But of the first 81 dealers selected only 50 Toyota dealers qualified, and an unexpectedly high 31 (or almost 40%) non-Toyota dealers were awarded the franchise. This created further tension with the Toyota division who had to work with the very unhappy Toyota dealers who didn’t get Lexus.


Even in the face of hard decisions, I knew I had to rely on God’s plan for our team. He gave us strength when we had none. Read more about the hope He offers us in the God of Hope book.


“Avoiding a fight is a mark of honor; only fools insist on quarreling.” Proverbs 20:3 (NLT)




Selecting the dealer was only part of the challenge. Each dealer would have to build a new facility or renovate an old facility to Lexus’ standards in about 16 months to be ready by September of 1989. The Lexus Japan Staff Coordinator was insisting on all-new facilities because he believed the commitment being made by Toyota deserved the same commitment from our dealers. We needed a new facility guide and standards, but had none. Jim Perkins was lukewarm to the idea, and Bob McCurry was strongly against it. Perkins and McCurry were reluctant to get too involved in this part of the dealers’ business and dictate how the dealers should spend their money.


We hired an outside company to help us develop new facility guidelines, but all the plans they presented were rejected. I showed the latest idea from Miller-Zell based on the Palm Springs Racket Club to Jim Perkins. Jim knew the Japan staff involvement and simply told me he didn’t like it and couldn’t support me. He was sympathetic to my plight but told me I was “on my own.” McCurry was less sympathetic and threw me out of his office, growling that the facility looked like a “Kentucky Fried Chicken” store.


I went back to my office muttering to myself. I sat alone and said a silent prayer. “Dear God, I wish I knew what to do.” A surge of relief came over me. “I know. I’ll call my brother Curtis.”


(To be continued in “Finally Facilities”)