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Toyota’s quality problems—and aggressive pricing by Mercedes—have fueled market share losses at Lexus

Jennifer Haisha, of West Bloomfield, Mich., gave up her Infiniti two years ago for a black Mercedes E-Class with a monthly lease of only $416. “My payments were unbelievable,” says Haisha, 57, who works in retail. “I compared them to the [Cadillac] CTS and other cars. [Mercedes] gave me the best deal.”

Haisha’s good fortune is bad news for Lexus, the luxury car leader in the U.S. since 2000. Lexus has been tarnished by a string of much-publicized quality problems at its parent, Toyota Motor (TM). That’s helped pull the brand’s growth rate below the industry average, allowing German rivals Mercedes-Benz, a unit of Daimler (DAI), and BMW to gain ground, and—just maybe—grab the American luxury car sales crown.

Mercedes, after selling more vehicles than Lexus in the U.S. in September, finished the third quarter only about 2,700 sales shy of overtaking the Japanese brand. “The aspiration to own a Lexus has diminished, the aspiration to own a Mercedes has increased,” says Art Spinella, president of CNW Marketing Research, which surveys customers.

Restraining price hikes has helped Mercedes close the gap. The average price paid for a vehicle in the U.S. has risen 12 percent since 2006, according to Edmunds.com, an auto pricing website. Mercedes’ price inflation over the same period? A mere 1 percent. Explains Ernst Lieb, chief executive officer of Mercedes’ U.S. unit: “We still have a price premium over our competitors—we always will. [We’re] just closer” to their prices now.

The aggressive pricing is evident in Mercedes’ entry-level C-Class sedan, the only vehicle in its lineup with a list price less than $35,000. The average monthly lease payment for the C-Class (about the size of a Toyota Corolla) in September was $479, with some deals as low as $349, according to Edmunds. “That’s a very, very compelling argument,” says Bernie Moreno, a Mercedes dealer near Cleveland. “It’s not a lot more money to get a luxury car.”

For this year’s first nine months, Lexus’ U.S. sales rose 8.7 percent, to 162,438, vs. the same period a year earlier. Mercedes narrowed the gap, with deliveries rising 18 percent, to 159,729 cars and SUVs. U.S. sales for BMW, the world’s largest luxury carmaker, increased 9.2 percent, to 157,464. (Sales don’t include Daimler’s Smart and BMW’s Mini small cars or Mercedes Sprinter vans.)

“Clearly, the [Toyota] recalls had a lingering impact on the sales of Lexus,” says Jesse Toprak, vice-president of industry trends at researcher TrueCar.com. “I think what’s also happening is Benz has had aggressive lease deals this year.”

Mercedes also has benefited from new products, beginning in 2009 with the GLK, a small SUV, followed by the ninth-generation E-class midsize sedan. Over the last three years as it introduced new vehicles, Mercedes pushed dealers to invest $1.4 billion to update their stores.

The carmaker is getting better at keeping customers. It ranked highest in customer retention in J.D. Power & Associates’ (MHP) most recent study last year, up from fourth in 2008. Lexus, meanwhile, slipped to fourth from third. The German automaker also persuaded more Lexus owners to try Mercedes, Edmunds data show, while the number of Mercedes customers trading in for a Lexus fell.

BMW also expects momentum to grow next year because of added production of its X3 SUV and a redesigned 5-series sedan. Mercedes is “very aggressive this year,” says Jim O’Donnell, president of BMW’s North American unit. “I think they see this as their opportunity that won’t be available to them in the next few years because of product changes” at rivals.

Brian Smith, U.S. vice-president of Lexus brand sales, remains confident. “I don’t think we’re going to lose leadership this year, but time will tell.” To blunt the competition, analysts expect Toyota to ramp up yearend discounts. “We’ll probably see some pretty impressive incentives,” says Joe Barker, an analyst with IHS Automotive. “The month of December likely will be a wonderful time to buy a luxury automobile.”

By Tim Higgins

The bottom line: Toyota’s quality problems—and aggressive pricing by rival Mercedes—have fueled market share losses at Lexus.