With the introduction of the K900, Kia is making a big, bold statement. As a car company, Kia has been around for over 40 years. In the United States, however, it’s been selling vehicles for half that time. But what it has accomplished in those two decades has been impressive. Kia started life in the States as a purveyor of basic automobiles for budget-minded consumers. The focus was on reliable transportation at an exceptional value. If this sounds familiar, it should be. It’s the same path Honda and Toyota traveled when they first arrived on American shores.
Looking back, Honda started selling the N600 mini car in 1970, and 16 years later, introduced its second-channel, upscale division called Acura. Toyota soon followed with Lexus, and Nissan with Infiniti. So what Kia is doing is not unprecedented. The biggest difference is that Kia is keeping the same brand name as it moves up the ladder. Acura, Lexus and Infiniti marques were created to maintain a wide separation between their common and luxury cars so as to not confuse customers. To this day, there are still people who don’t realize that Acura is a division of Honda.
With Kia making this move, the questions are: should Kia have created a separate brand identity, or is it a smarter choice to build on its strengths and stay with the same name? Is it the right move to step up into much higher-priced, lower-volume vehicles? Will this climb up the ladder be longer and more difficult for Kia than it was for the Japanese brands that have preceded it, or easier because the road already has been paved?
According to Michael Sprague, Kia’s newly appointed executive VP of Sales and Marketing, the logic goes that, since the luxury manufacturers are moving down into other segments, why can’t Kia move up into their space? It makes perfect sense, but keep in mind a big fact in selling, whether it’s cars or burgers, the walk downhill is much easier than the ascent.
As a luxury brand, you can load up a vehicle with top-end features and technology, and tack a few more dollars onto the price. It’s expected in that segment. And you can get away with it, because a higher percentage of those vehicles are leased versus purchased. According to Automotive Leasing Guide (ALG), lease rates on luxury vehicles are about 45 percent, versus about 19 percent for mainstream vehicles. And while leasing is second nature for luxury brands like BMW and Mercedes-Benz because they’ve been in that segment all their lives, leasing is going to play a vital part to the success of the K900 and Kia’s position in the luxury segment. According to Larry Dominique, president of ALG, “Kia coming in with the K900 is a new positioning for Kia. We have seen with Hyundai both the transaction price and the demographic are lower for Genesis and Equus than the targeted competitors. Today we see about a one class lower comparison. For example: Equus/Genesis are more frequently compared to E-Class versus S-Class and 5-Series versus 7-Series. We believe Kia will have the same initial relationships. Over time we will be able to see the real market interaction. The K900 has a strong value proposition and will provide significant feature content at a value price. To truly compete with the luxury leaders and to move the brand up, leasing will be a critical component.”
Luxury car customers also are accustomed to being surrounded by high-quality materials, outstanding fit and finish, plus the personalized treatment at the dealership. Presenting those customers with the same values, but on a vehicle that’s smaller in both size and price, is easy to do and takes little convincing, which is why we are seeing BMW, Mercedes-Benz, Lexus and even Porsche venture into lower segments. Kia, on the other hand, mainly has catered to buyers looking for value and basic transportation, and who expecting nothing more from the dealership except a low price and a fair deal. A loyal Kia customer who goes into the dealership and sees the K900 can expect a major case of sticker shock, especially since the K900 is double the price of the Cadenza, which is double the price of the Soul.
Part of the reason Kia is moving up has to do with profit. We all know that, even in high volumes, there’s little margin on entry-priced vehicles. In order for the manufacturer and the dealers to make money, prices have to go up. Kia buyers have been conditioned to expect a nice list of features at a great value. But in order to make money, you have to build vehicles with a higher margin. For Kia, that means creating new, higher-priced vehicles. Being able to provide the most features at the best value is a winning strategy and, so far, Kia has been as — if not more — successful at this than its competitors. The perfect example of this is the Kia Soul. It slots in the subcompact segment alongside the likes of the Ford Fiesta, Nissan Versa, and Honda Fit, yet except for Versa (which has a high fleet sale number), continually outsells the competition. And it’s a good value, which fits perfectly with Kia’s strategy. However, at a price fully loaded under $30,000, it’s still in the attainable range. The new Cadenza sedan was Kia’s first foray into the over $30,000 segment, and has already sold close to 10,000 units in its short time on the market.