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Toyota's $1 billion sales incentive

By Chris Isidore, senior writer


NEW YORK (CNNMoney.com) -- Toyota is trying to buy back a lot of the sales it lost during the recall crisis earlier this year -- in the form of fat incentives for consumers.

But the aggressive incentive program from the Japanese automaker -- including zero-interest financing, subsidized leases and free maintenance for previous Toyota owners -- will come at a steep cost.

Experts estimate that Toyota will likely be stuck with the incentives programs for most of this model year, at a cost of more than $1 billion above what Toyota would typically have spent on incentives.

"Once an automaker offers a high level of incentives, it is very difficult to take it away on a model year without having a big drop in sales," said Jesse Toprak, vice president of industry trends for TrueCar.

Toprak estimates that will cost Toyota about $150 million or more per month above its typical level of incentive spending.

When March sales are reported next week, Toyota is expected to show a sharp rebound from the depressed levels of January and February. Sales tracker Edmunds.com estimates that Toyota's sales will nearly double from February's levels, pushing its market share to about 16% of industry-wide sales from only 12.8% in February.

TrueCar, another sales tracking site, estimates Toyota's share will rise to about 15.5%.

The experts attribute the boost to Toyota's aggressive incentives, which they'll have to maintain if they want to keep sales up. TrueCar estimates that average value of the automaker's incentive rose to about $2,300 per vehicle, up by about a third from February levels, and up 47% from year-ago offers.

Toyota spokeswoman Sona Iliffe-Moon said the company couldn't comment on sales projections for March or its incentive plans past the April 5 expiration date now in place for its program.

"We launched this program to expand the focus on our customers, and thank them for their loyalty," she said. "Toyota has always used incentives tactically and this program is no different."

Toyota's average incentive per vehicle is still behind the industry average of $2,800. But it's a major change for the carmaker, which has typically shied away from such aggressive incentives. And because Toyota is No. 2 in U.S. sales behind only General Motors, its total incentive spending is likely to exceed that of any company other than GM and maybe Ford Motor (F, Fortune 500).

Toyota also wouldn't comment on the cost of the incentive program. It's unlikely the additional incentive spending is included in Toyota's estimate of a $2 billion cost from the recalls, mostly from lost sales and repair costs.

Jessica Caldwell, director of pricing and industry analysis with Edmunds, said the $1 billion estimate for additional incentive spending is probably conservative. She expects the incentives won't be going away soon, even if the public-relations picture has improved for the automaker in recent weeks amid questions about some of those making claims about problems with their cars.

"The hoopla and the factor of being so scared to buy a Toyota has calmed down. It's not as bad as it was a month ago," she said. "I think that's helping the confidence in the brand."

But James Bell, executive market analyst at Kelley Blue Book, said that the strong sales bump Toyota achieved in March will start to hit sales going forward, since the automaker's offers pulled in buyers who might otherwise have been buying in subsequent months.

"Our view is these buyers are either Toyota loyalists or bargain hunters," he said. "Once those two audiences are satisfied, how do they appeal to those who feel Toyota no longer has their trust? It may be no amount of money that will bring these people back."

Bell said that it makes sense for a company with Toyota's resources to stay aggressive on incentives until it's put the recall problems more firmly behind it. And that's bad news for other automakers but good news for consumers of all brands, he said.

"Toyota is a very wealthy company. They can play this game longer than most," he said. "We are on the verge of a very, very competitive and deep buyer's market."

Money magazine is looking for Detroit families (including people who have recently moved away) who are willing to discuss their finances and are looking for financial advice. If interested, email your contact information to gmannes@moneymail.com.  To top of page

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