Subaru's growth formula: Keep tight focus on U.S.; price 'em smart; cater to the quirky

Diana T. Kurylko
Automotive News
September 2, 2013 - 12:01 am ET

Tom Doll, president of Subaru of America, wears rubber wristbands as a constant reminder of his 2013 sales goal. It's an American quirk not typical of Japanese management style, but it's a reflection of how Doll's cars, and his company, are succeeding with a tight focus on American tastes.

And that success is making the bands outdated. They say 365,000, the target set early this year, but Subaru is growing faster than projected. By midspring the target was upped to 385,000, and now it's 410,000 to 420,000.

The same thing has been happening every year since 2008, when Doll started handing out the bands to his lieutenants when he set the annual sales goal.

A year or so earlier, Subaru made two important decisions: Make interiors roomier and drop the price point below its Japanese competitors. That, coupled with unwavering dedication to a quirky, outdoorsy clientele that prizes function over high-tech glitz and plush interiors, kept Subaru growing even through the recession.

Subaru's success is the perfect combination of "the right cars, enough inventory and marketing," says Ernie Boch Jr., CEO of Subaru of New England, the largest of the remaining two privately owned Subaru distributors in the United States. "They have broadened their base. Even VW claims they are producing an Outback fighter, and other manufacturers are stealing Subaru management.

Volkswagen is considering a Jetta SportWagen crossover that would rival the Subaru Outback. Marketer Tim Mahoney moved from Subaru to VW before becoming Chevrolet's global chief marketing officer.

Then there's the brand's steadfast dedication to no-nonsense vehicles designed for loyal, upscale, active buyers who pride themselves on separating what counts from what's merely fashionable. Digital marketing is attracting a new young buyer base as well.

Jake Fisher, director of testing at Consumer Reports, said Subaru is where the German brands, particularly BMW, "were 10 years ago with no razzle-dazzle or gimmicks.

 "The engineers are in charge at Subaru. It is function first and form later. If you look at the Forester, it has the best visibility because they put glass everywhere. They are not concerned about a swoopy rear window."

Subaru is most frequently compared to Volkswagen, Volvo, and especially to defunct Saab because of its buyer base. "Both buyers are perceived as being upscale and above the mainstream and a little bit iconoclastic," said Tom Libby, head of North American forecasting for R.L. Polk and Co.

The formula has turned Subaru from a minor niche player into a steadily rising, recession-defying brand. This year the brand is No. 12 in U.S. sales through July, up from No. 22 in 2006. It has passed Ram, Chrysler, Mazda and Buick -- and it's a scant 1,980 units behind Volkswagen.

Subaru's U.S. sales have become the cash cow of parent company Fuji Heavy Industries, representing 57 percent of global sales last year, up from 39 percent in 2007.

Subaru grew through the 2008-09 downturn. Then, surprisingly, it kept growing, up 27 percent in the first seven months of this year, to 240,591 U.S. sales. It is outpacing two other hard-charging brands: Hyundai slowed to 2 percent growth, and Kia fell by 3 percent during the first seven months of this year.

Subaru evolved by making vehicles roomier, including some higher-tech features; expanding sales in the Sun Belt and Southern California; and pricing its cars and crossovers lower, closer to Asian competitors and Volkswagen. Subaru has broadened its buyer base and attracted younger consumers with digital media. And it has improved its loyalty rate by continuing to appeal to its traditional outdoorsy, active consumer.

"We always attracted a loyal core of owner base, we have all-wheel drive and a very strong identity," said Doll. "The new styling has allowed us to expand our base and the number of people we can attract to the brand -- 60 percent of our buyers are new to Subaru."

Subaru's rapid growth has allowed it to be choosier about who represents the brand - it has replaced 35 percent of dealers with stronger performers. Nearly all were buy/sell transactions, Subaru said.

Subaru added 12 dealers in the Sun Belt and Southern California, where sales have grown faster than in Subaru's traditional cold-climate markets, while keeping its dealer numbers steady in other markets. About 25 percent of Subaru's 620 dealerships are in the Sun Belt and Southern California.

With Subaru's growth has come spot vehicle shortages of key models such as the Forester and Outback crossovers. It had a 27-day vehicle supply on Aug. 1, well below the industry average of 56 days. High demand has meant low incentives: $509 per vehicle last month, compared with $1,470 for Toyota and $2,419 for Nissan, according to edmunds.com. (See box, at left.)

Eager to keep fueling U.S. sales, Fuji Heavy will invest $400 million in Subaru's factory in Lafayette, Ind., its only U.S. plant. Annual capacity will grow by 100,000 units, to 300,000, by 2016.

Conquesting Civic, Corolla

Making vehicles that are "right-sized for the U.S. market with a 20 percent average increase in interior volume" has drawn buyers from the competition, said Dean Evans, senior vice president of marketing. Toyota Corolla or Honda Civic owners or shoppers are now buying Impreza compacts and would-be Toyota RAV4 and Honda CR-V customers are instead buying the Forester crossover, he said.

"The demographics aren't necessarily changing," said Evans. "There are a lot of people drawn to our brand attributes of longevity, safety, versatility and adventure."

Subaru spends 25 percent of its marketing budget on digital. Since Evans joined the company in September 2011, the number of Internet leads and the closing ratio have jumped. About 15 percent of people who respond to a lead buy a car, said Evans. The industry average is about 10 percent.

Subaru also lowered prices to make them more competitive with other Japanese brands and key rivals such as Volkswagen. Until 2006, Subaru's prices were 5 to 10 percent higher than those of its Japanese competition. For example, a base-level Legacy sedan listed at $24,795 in January 2006, including shipping, compared to a $18,225 starting price for the Honda Accord.

Today the Legacy has a base price of $21,365, including shipping, and the Accord starts at $22,470.

"People do not perceive Subaru as a premium-type vehicle. It is more of a utilitarian vehicle," said Doll. "It does not have the interiors that you will find in an Acura or a Volvo or a Lexus. We are who we are."

Although Subaru only has seven models, it is well positioned, says Libby, the Polk analyst.

"They are in the good segments," he said. "Their portfolio is in the heart of the nonluxury segments, and they have no exposure in large SUVs or large cars."

Most important, the Japanese are listening more than they ever have, said Boch, whose family acquired the Subaru distributorship in 1971 for $25,000. "The respect that Tom Doll has in Japan is the highest that any American running SOA has ever had. And the Japanese understand the American market more than they ever had."

That's a change from 2005 and 2006, when it faced stalled sales and was battling a financial crisis, said Doll, a 31-year veteran of Subaru.

"Our situation forced us to look at what we have to do better and to get better," said Doll. "Our cars now have value. They are sized better, they are appointed better, and they do well in crash tests and Consumer Reports rankings."

Boch said in the past three to four years dealers have had unprecedented say in vehicle design and features such as sleeker bodies, more comfortable seats and increased interior room.

"They let the dealer advisory board and the distributors sit in cars when they were still in clay and comment," he said.

Boch recalled telling Subaru engineers the air conditioning controls on one clay model were clunky. When the production vehicle came out, that problem was solved, he said. "I have never seen a manufacturer embrace the dealer council the way Fuji Heavy Industries and Subaru of America has."

Doll said it's because of dealer input that Subarus now have navigation systems and Bluetooth connections, and why the EV Crosstrek Hybrid, which goes on sale this fall, was developed.

Jon Osborn, research director at J.D. Power and Associates, said all-wheel drive was cited by 84 percent of buyers as the top reason for purchasing a Subaru, compared with 20 percent of those who cited that reason for buying other brands. Reliability was cited by 63 percent of buyers, compared with 49 percent of the competitive segment, and safety was 62 percent, compared with 41 percent for rival brands, he said.

All-wheel drive can sell even in California, said Shaun Del Grande, owner of Capitol Subaru in San Jose, Calif. "People like having awd. It is not an obtrusive feature; there are safety factors. We have a lot of people going to the mountains, athletes and active lifestyle people in the Bay Area of northern California."

Sales in the Sun Belt and Southern California are growing -- especially in Los Angeles, where Subaru was up 57 percent through July.

Phil Porter, owner of Center Subaru in Torrington, Conn., and Subaru of Jacksonville, Fla., says Subaru is marketing awd as a safety and performance feature in its Sun Belt ads. Sales at his Florida store are growing rapidly. Last year he sold 724 cars in New England and 431 in Florida. This year the Connecticut store is on track to sell 820 units, and the Jacksonville store is expected to sell 650 vehicles, he said.

Porter is the only Subaru dealer with stores in both northern and southern states. Porter has stuck with Subaru since 1994 and says he did so because of "confidence in the brand and leadership of the factory."

He adds: "But this growth does amaze me. Impreza has exceeded everybody's expectations. The prior generation just didn't compete in the Corolla/Sentra segment, but performance and styling is improved, and the gas mileage has gone north of 30 mpg."

Don't underestimate the importance of loyalty, said Doug Waikem, who has owned Waikem Subaru in Massillon, Ohio, since 1985. The Waikem family also owns Nissan, Ford, Hyundai, Honda, Kia and Mitsubishi dealerships in Canton and Massillon, Ohio.

"Subaru is still that shining star on the hill, even compared to Hyundai and Kia," Waikem said. "The Subaru customers are just so loyal to the brand."

Subaru wants to get bigger, but its ambitions are not as lofty as VW brand's U.S. sales target of 800,000 vehicles by 2018.

"How big can Subaru grow? Five hundred thousand is a pretty good guess," said Doll, who was named president this year -- a title bestowed on only one other American, George Muller, in 1993.

Doll said the brand would hit the target by 2020, but insiders say Subaru will reach 500,000 sooner.

To grow beyond 500,000, Subaru executives and dealers say the brand needs to increase sales in the compact sedan segment, where the Legacy competes against the Toyota Camry and the Honda Accord. Legacy sales fell 4 percent to 26,550 through July. Another weakness is the slow-selling Tribeca mid-sized SUV, which has been criticized for its lack of rear-seat space. Through July, Tribeca sales fell 20 percent to 994.

"Of course, we realize we will have to be a better sedan seller going forward," said Evans. "And a seven-passenger -- we will be ready with that as well."

Del Grande sees Subaru's plans as "quiet and more understated growth by doing the basics great. They are focused on digital marketing, the quality of their cars and their dealer advertising program."