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McLEAN, Va. — Analysts from NADA Used Car Guide attempted to find some clarity in both the wholesale and retail markets in connection with the ongoing Toyota turmoil.

Though part of the analysis still was inconclusive, it did reveal some above average softness in wholesale prices on newer Toyota units from the 2008 and 2009 model years.

NADA analysts also indicated that auction volume for Toyota units dropped about 23 percent on a week-over-week comparison. They attributed much of that decrease to the recommendation of the National Automobile Auction Association to keep certain Toyota units out of the lanes.

Looking from a retail perspective, analysts detected some price softness with Toyota vehicles there as well. They spotted not only a retail price drop of a little more than 3 percent for Toyota vehicles, but also a slight increase in retail prices for Honda units.

"Toyota must act quickly and create a confident and consistent message to consumers to mitigate the long term damage to the brand," stressed Jonathan Banks, senior director of editorial and data services for NADA Used Car Guide.

"From a resale perspective this will be imperative since Toyota models hold a strong price premium to substitute models with comparable actual quality — i.e. Chevrolet, Ford, and Hyundai," Banks went on to say.

"If Toyota's perception is permanently damaged, this premium significantly increases their downside risk in resale performance," he continued. "Toyota's recall is expected to prompt consumers to become more familiar with the quality of other brands that perhaps were not previously cross-shopped with Toyota models."

"This will drive down the price premium that was driven by consumer's perception that the actual quality of Toyota models is significantly better than competitive products," he added.

Banks said that he's not anticipating a crisis in resale performance for Toyota. However, he did indicate that he's incorporated downward adjustments in March forecasts. The adjustments point values toward the lower end of the range of auction prices already witnessed on Toyota products.

Toyota Loses Some Ground to Honda

NADA Used Car Guide asserted that Toyota has been losing ground compared to Honda since 2008. Banks attributed the brand strength decline to higher new-vehicle incentives and consistent quality concerns, especially with the Sienna and Tundra.

Nonetheless, Banks stressed that Toyota should continued to hold a prominent position when comparing auction performance against manufacturers such as Honda, Ford, General Motors and Nissan.

But the ongoing recall matter Toyota is facing could erode some of the strength the OEM has enjoyed for years.

"Considering an environment where Toyota's actual quality is at parity with domestic manufacturers — using IQS as a benchmark — it is unlikely that consumers will continue to pay the premiums for Toyota based on perception since this incident will have a negative effect on the perception of the Toyota brand," Banks explained.

"This is expected to have negative implications over time, but we do not expect Toyota values to fall off a cliff at this point," he continued.

"Prices for Toyotas are expected to show above average declines compared to stability on prices for direct substitutes," Banks added.

Varying Supplies of Used Toyotas

Analysts fully expect dealers to focus on used Toyota models not affected by the recall. They said that should stabilize wholesale prices even with a demand shift away from Toyota's brand.

Banks suspects this is a very short-term impact, not a sustained blow on resale performance. 

Because of NAAA's recommendations, he also projects an imbalance in used supply and demand as vehicles that are currently sidelined at the auctions are released for sale. That occurrence should add to the supply of vehicles just entering the remarketing channel. 

"Both scenarios are expected to have a nominal impact on long-term prices; however, if we see an increase in trade-ins from Toyota owners, much like the scenario witnessed for large SUVs when fuel prices increased, there could be a longer term downward impact on Toyota prices from a sustained increase in used supply," Banks explained.

Flashback to Mercedes-Benz Price Erosion, Audi Issues

To put some perspective on what's happening with Toyota vehicles, Banks shared some anecdotes about when Mercedes-Benz merged with Chrysler back in 1997. He attributed the wholesale price declines to a change in strategy.

According to Banks, Mercedes-Benz had enjoyed strong premiums in the used market that deteriorated over time. He said the company began to shift to a sales-volume-oriented plan and lost focus on quality

"What occurred is Mercedes began to lose its dominance in regards to used price performance, and fell more in line with key competitors — BMW and Lexus," Banks pointed out.

"The Mercedes-Benz case suggests that even brands with apparently bulletproof perception can experience substantial declines when perceptions for the brand changes," he added.

Banks also recounted another instance involving a foreign nameplate. In the 1980s, Audi went through vehicle problems that were connected to accelerators. However, Banks believes that's when the comparison between the two situations should stop.

"Although availability of resale data from the Audi problems of the 1980s is limited, there clearly were severe downward impacts on demand for both new and used Audis that lasted for over 15 years," Banks explained.

"The similarities between the Audi quality situation in the 1980s and Toyota's situation today stop with the fact that both were related to an unintended acceleration issue," he stressed. "Audi at that time was a low-volume, niche brand with consumer awareness and loyalty dramatically different than Toyota's brand image in this era.

"However, it does provide an example showing how dramatic consumer demand shifts may be when negative news is incorporated in purchase decisions," he conceded.

Impact of Negative Recall on Ford Explorer

Again trying to put perspective on what's happening to Toyota, Banks also remembered the most recent, highly visible recall that dominated the industry headlines. He noted how in August 2000 more than 14.4 million Firestone tires were recalled on Ford Explorer models.

Banks cited AuctionNet data that clearly showed a correlation between a decline in prices for the Ford Explorer and the recall information, highlighting a shift in values between the Explorer and Jeep Grand Cherokee. The adjustment went from a premium of $500 to $1,000 for the Explorer eroding down to a $2,500 discount in late 2001.

"The Explorer did not recover and sustain its premium position until 2007, even though a redesigned model was introduced in 2001, which should have shifted Explorer prices above Grand Cherokee much earlier," Banks asserted.

What Toyota's Future Could Be

Banks said the NADA Used Car Guide will evaluate whether the market reacts sharply to a flood of negative Toyota news when the company receives a full week of AuctionNet data that incorporates the recall information.

"If we see significant downward movement in Toyota's prices next week, it will be incorporated in NADA values since we expect the downward shift to last until the recall issue is completely resolved," he said.

Meanwhile, Banks didn't rule out that the affected Toyota vehicles could see an extreme drop in values like those sustained by the Ford Explorer in the early 2000s. However, he made a differentiation from recent price dips connected with Chrysler and GM vehicles.

"Toyota's situation differs from the shocks the industry expected in the market for drop-offs in prices for Chrysler or GM in that Toyota is currently in a strong position from a resale standpoint while GM and Chrysler values already had the uncertainty of their brands baked into their used-vehicle prices when the negative news of bankruptcy came to the forefront," Banks explained.

What he and other industry analysts, as well as dealers nationwide, are eager to learn more about is how Toyota responds to the recall and what kind of message the automaker sends to consumers. Over the weekend, Toyota ran advertisements in several media outlets, including a display ad that includes an open letter from Jim Lentz, president and chief operating officer.

"The swift delivery of parts to fix the issue, compensation for overtime and other dealer expenses being compensated by Toyota, and the promise that a diligent communication process will be implemented to contact owners has created positive dealer sentiment, which should mitigate long-term erosion in Toyota values," Banks explained.

"Toyota is doing the right thing," NADA chairman John McEleney interjected.

"The safety of the customer is of paramount concern. Toyota has a reputation for resolving problems quickly," McEleney went on to say.

"We certainly hope that's the case in this situation as well," he added.

In discussing Toyota during the release of the latest Manheim Used Vehicle Value Index, economist Tom Webb remained cautious about making profound predictions.

"The recall and halting of sales by Toyota in the last week of January introduced uncertainty into the market," Webb noted.

"But, from a residual standpoint, this is a story yet to be written," Webb concluded.