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Are Investors Overlooking the Potential of This Youth Brand?

By ICRA Online – Feb 26, 2014 at 6:30PM

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Don’t go by Scion’s sagging sales; it yet could prove to be Toyota’s underdog

When Toyota (TM -1.19%) envisioned its brand Scion in 2003, it was aimed at the youth of America. In CEO and president Akio Toyoda's words, Scion was supposed to do for the company what other Toyota cars could not. But recently there has been talk in air that the company should kill the Scion segment owing to steadily declining sales over the years. The fact that the company hasn't come out with any new 2014 Scion models has further fueled such speculations.

But Toyota has made it quite clear that it has no such plans and that Scion is an integral part of its company. It also hinted that new models are in the pipeline for future. By keeping the Scion alive, is Toyota being farsighted or foolish?

2013 FR-S. Source: Scion

Youth strategy
Carmakers have always clamored to appeal to youth, for that's when brand loyalty takes root. While automakers like Ford (F -2.49%) and General Motors (GM -2.67%) have designed models geared toward the youth market, Toyota has gone one step further to create a whole youth brand. If a first-car buyer chooses a Scion tC, there is a good chance for her to switch to a Camry next and maybe a Lexus model later.

In the U.S., Gen Y forms around 80 million customers. Around five years back, a good 14% of the cars sold were bought by the 18-34 age group. Recession hit the group hard as they became too cash-strapped to buy cars, but the trend is changing for the better as recent studies show that young buyers are looking at cheaper and greener high-tech cars. Auto companies are revving up their youth offerings and have taken to social media like never before to reach out to this audience.

Ford has worked toward  making high-tech cars that connect with drivers' smartphones. Ford's star-performer Fusion model, which has an EcoBoost engine, MyFord Touch, and active park assist, was the sixth-highest-selling car in the U.S. in 2013. GM partnered with MTV in order to reach out to the youth demographic, looking at everything through the Gen Y perspective (dealership, dashboard, office milieu). The Chevy Spark and Chevy Sonic are GM's small, entry-level cars loaded with high-tech infotainment amenities to target first-time buyers..

Against this backdrop, Toyota's decision to continue the Scion line with its ideology of providing cool, affordable cars to younger drivers becomes understandable.

2014 tC. Source: Scion

Sales can revive
Scion sales peaked in 2006 at 173,034 units, but since then the brand has hit a rough road. Sales sagged as Scion models carried the same looks for years -- the xB and xD models were last redesigned in 2007, and the tC in 2010. The iQ subcompact was introduced in the U.S. in 2011, after its launch in Japan and Europe. In 2013, Scion sold 4046 iQs, which is not even half of what was sold in 2012.

The brand saw a ray of hope in 2012 when Toyota launched the Scion FR-S -- a small, two-door sports car starting $24,930. Developed jointly with Subaru, the car has caught the right pulse. It's got rave reviews and won awards like "Best Sports Car for the Money". This past year, 18,327 units of the FR-S were sold and it was the only Scion model to improve on 2012 sales. All said and done, in 2013 just 68,321 Scions were sold, forming a meager 3.1% of Toyota's total U.S. sales.


But this needn't signal the end. Toyota has had more than enough on its plate, handling recession, massive recalls, and catastrophic natural calamities. Akio Toyoda has put the company on regrouping mode with a back-to-basics approach. The automaker would concentrate on fewer things rather than trying to do everything at once. Toyota's focus right now is investments in Lexus, fuel-efficient drive trains and trucks. Once the company sorts these out, it may decide to focus on the Scion.

Apart from new models, we could also see a new pricing strategy. The company has adopted "Toyota New Global Architecture", which will cut production cost as common parts will be used and engineering will be made more cutting-edge. This will enable Toyota to price its cars more competitively. If Scion cars get cheaper, sales could rise, for Gen Y gives a lot of importance to price in choosing a car.

Let's go by the scion's word
Akio Toyoda has told dealers that the company will continue with Scion, but they need to wait a few years for newer models. The company's focus is to offer better cars based on the needs of the consumers, possibly at lower price points. Understanding the needs of the Internet-savvy youngsters who don't get a kick out of cars the way the older generation did, is the key to selling cars to them. So, the strategy will most probably augur well for the brand. Here's taking one scion's word for the other Scion.

ICRA Online has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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