The Growing Difference Between Price And Value All Driven By The Brand

I had dinner with Johnny H on Sunday night, and he was telling me that he was in the process of selling his Beemer because it was about to hit a bit inflection point in terms of depreciation – 150,000kms. My Prius had its 140,000km service on Tuesday (yesterday) so I thought maybe I should check out its current valuation as a trade in while I was at the Toyota dealership.

It turned out that the trade in valuation on a new Prius (with a ticket price of about $45k) was going to be $12,500. Pretty dreadful as a trade in price, I thought, since you can always get about a couple of grand of the sticker price if you don't have a trade in. That would mean that the real value of the Prius right now is a shade less than $10k.

I told the sales guy that it was probably going to be cheaper for me to just keep driving the current vehicle. After all, it goes really well, and it looks pretty similar to the new model.

That led to me having a really interesting discussion with the sales guy about relative values and prices for a variety of vehicles and while this is purely anecdotal material it seems to have some quite far reaching implications for prices and values of consumer products generally.

First up, I was told that for any vehicle that was going to appeal to a youth market the magic number for major depreciation is 100,000 km. Back in the days when we measured in miles, he told me, it was 100,000 miles. Of course a kilometer is only five eighths of a  mile so that translates into 60,000 miles. And at the same time vehicles have become a lot more reliable. But there is magic in the zero it appears.

I was telling him about some of the cars that I had had over the years and the relative reliability and prices that I had paid. The car that I had prior to the Prius was a Hyundai Grandeur, I told Chris, the sales guy at Toyota, who was a crusty grey-haired and quietly spoken guy in his late 60's, I would figure. He told me that he had, in fact, owned the local Hyundai dealership and had sold out of it. I told him how incredibly reliable it had been and we talked a bit about how Hyundai had modeled its quality control strategy on Toyota's. And yet, we both agreed, the Hyundai brand seems to struggle with consumers in terms of perception of value.

Chris told me that in his opinion Toyota would soon have to compete with Hyundai's warranty program because it was hugely competitive in terms of new car sales. He also said that in general, and across all brands, it would be hard to find a bad vehicle. Occasionally a lemon slips through, but in general cars, these days, are pretty much all of good quality when they come out of the factory. They have to be because the competition is so fierce.

So that led me to conclude a couple of things:

1. That there is a massive disparity between price and quality when you put the ruler across multiple brands – but particularly when you do it in the second hand market.
2. That persuading a consumer as to the value of a brand is now the only thing that stands between success and failure for major car companies.

Now you may have already thought about this. But what is it that drives you (no pun intended) to decide on which car you are going to buy? Is it reviews in the papers or on line? Do you always buy a new car because you want a “virgin” vehicle? Do you really consider the price/value question – that subtle balance between what the functional use of the vehicle is and what the brand “says” about you?

Going back to the discussion with Chris: He told me that one of the Hyundai vehicles that depreciates the fastest is the 4-wheel drive Terracan. His view, as a motor car professional, was that virtually zero 4 wheel drive vehicles sold today (other than utes and other trade vehicles) were ever put through their paces off road. His view was that the perception from purchasers of second hand vehicles is that anyone who owns a 4-wheel drive must have done some off road driving and bashed the bejeesus out of the vehicle by the time it gets to 100,000k's but the reality is that it is just a car with a slightly bigger carbon footprint.

Chris told me that the problem of the Hyundai brand is well understood by the executives in Korea. As a result they have introduced a brand and product strategy that puts an “I” at the beginning of each product name – like the iLoad for their small van. They are trying to get a rub off from Apple, presumably, in using the letter “I”. But clearly they are trying to reduce the negative emotional resonance of the corporate name in identifying the products. That has got to be a really hard trick to pull off. But this is a company with huge resources, and they use agencies whose stock in trade is to get their clients to spend as much money as is feasible and can be backed up with credible research.

Now think about this. There is a company in India by the name of Tata. Over the last couple of years they have purchased a number of really big old UK brands. They bought Jaguar and Land Rover for starters. They also bought a company called Corus. That company used to be called British Steel. They are also the biggest manufacturer of cars in India, which is, along with China, the highest growth nation in the world as far as cars are concerned. In fact Tata is exporting cars into China!

Tata clearly has both the vision and the balance sheet to be a major force in the automotive sector. How will they deploy their brands and their ownership of other parts of the supply chain to competitively take on the major European and Japanese manufacturers. Time will tell.

In the mean time I have decided that I am not going to replace the Prius. It has the potential to do another 100,000 k's with ease. And during that time I am going to start looking for a bargain price second hand Hyundai as its replacement…

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