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Last Updated: March 12, 2008: 9:48 AM EDT
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Feasting off Toyota: part two

How a pair of independent distributors profit from the automaker's success.

By Alex Taylor III, senior editor

toyota_logo_new.03.jpg

NEW YORK (Fortune) -- My recent column about the independent distributors who resell cars from Toyota to Toyota dealers brought a predictable official response: Despite the distributor profit, customers don't pay higher prices, so what's the worry? No harm, no foul.

Here was the comment from SouthEast Toyota: "Contrary to the article, the suggested retail price is exactly the same for all cars, trucks, parts, and accessories... There is no additional mark up to the consumer."

But a closer look at the extra charges billed to dealers shows that distributors are skimming off $1,000 per vehicle and more. The charges don't show up in the sticker price that customers see, but they are buried in the invoices paid by the dealers. Who pays the extra costs? Since dealers aren't charitable organizations, it is a good bet they are recouping the charges from customers, either in the form of higher transaction prices for new cars or lower trade-ins for used cars.

In addition to collecting cash from the dealers, the distributors are loading up the cars with high margin options of dubious value - $79 for a cargo net? $169 for floor mats? - that are embedded in the sticker price and thus foisted upon the customer. If the customer were given a choice - and he isn't - he could buy these accessories from an auto parts store for less money or do without them altogether.

To review, Toyota (TM) started using independent distributors in the late 1960s to help it get established in the United States. It gave the distributors enormous leeway in setting prices, determining product mix, dictating trim packages and creating marketing plans. The distributors even sold all the spare parts and created their own captive finance companies to make loans to consumers - two operations that can be even more profitable for dealers than selling new cars.

Two of the distributors remain in business today. One is SouthEast Toyota in Florida, which controls all Toyota sales in Florida, Georgia, Alabama, and North and South Carolina. The other is Gulf States Toyota of Houston, which runs all 150 dealers in Texas, Oklahoma, Louisiana, Arkansas and Mississippi. Both distributors enjoy a 100% monopoly. If you want to buy a Toyota in any of these states, you are buying from a dealer who buys it from them.

Since dealers have no choice, they pay what the distributors charge them. One 4-Runner SUV that arrived on a Georgia dealer's lot in December from Southeast Toyota carried extras like carpet mats, window tint, daytime running lights and a "value package," which added $873 to the sticker price On top of that, SouthEast Toyota billed the dealer for a $900 administrative fee.

Gulf States Toyota plays the game slightly differently, but the result is just the same. An FJ Cruiser it shipped to a Texas dealer recently was loaded up with a $2,251 "Extra Mile Option Package" that included such questionable features as a "door sill enhancement" and "custom tape stripe." Then came the "Vehicle Shield Package" at $349 with "lusterizing sealant," "sound shield," and "sealant cleaner." These are the kind of charges that give dealers a bad name. All of that helped jack up the price of the FJ Cruiser from a reasonable $24,135 to an exorbitant $32,873.

Says an executive at a big dealer group with outlets all over the country: "Clearly it is more expensive to retail vehicles in the areas served by the distributors."

With its lineup of durable, environmentally friendly vehicles, along with an unmatched record of sales success, Toyota enjoys an enviable reputation in the United States. It has single-handedly popularized hybrid gas-electric vehicles, for example. Why does it need middlemen in the South and Southeast to siphon off its profit? Since Toyota services the rest of the country without distributors, these two are clearly superfluous - especially for a company whose cars practically sell themselves.

Toyota executives often express puzzlement over puzzlement over the merely average sales satisfaction ratings that the automaker gets from J.D. Power and Associates. Could the additional pressure imposed on some dealers by the independent distributors have something to do with it? That's a question you'd expect a company like Toyota that believes in "customer first" to want to know the answer. To top of page

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