Toyota is putting Prius to the test

April 12, 2012: 11:17 AM ET

The Japanese giant is coming back from a bruising three year ride. Now, expanding the Prius brand name to multiple vehicles is a major part of its strategy.

By Doron Levin, contributor

toyota_priusFORTUNE -- The little-mentioned truth about many alternative-fuel vehicles, including gas-electric hybrids, is that savings from their improved fuel economy can often take years to recoup the additional up-front costs of their advanced technology. Purveyors of fancy new green cars are finding out that can take a bite out of sales.

What about the pioneer of the Prius hybrid, Toyota Motor (TM)? Not so much. First produced in 1997, the diminutive gas-sipper has weathered ups and downs but has also come to enjoy a generally positive reputation. The former No. 1 auto manufacturer in the world is regrouping from three difficult years that include an earthquake and tsunami in Japan, a devastating unintended acceleration scare in the U.S. and a strong yen that makes its vehicles costly to produce. Now, the Prius brand name has evolved into one of the company's most valuable assets.

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The brand has expanded to include four models. The latest version, the compact Prius c, starts at about $19,000. It has a combined fuel economy of 50 miles per gallon and is off to a very fast start in sales after introduction in the U.S. last month. "Now we're able to take advantage of what has become the iconic hybrid brand and expand into other demographics," explains John Hanson, a Toyota spokesman. Hanson says Toyota's priority is to keep the price of gas-electric hybrids as low as possible.

The Prius is on a remarkable run. It was the third best-selling car and the sixth-best selling light vehicle, with sales of 28,711 units, in March in the U.S. (Last month was also the best sales month ever for the model.) Through the first two months of the year, Prius sales were up 33% from a year earlier. New variants, such as the c and the larger v crossover, should make up for 15% and 18% of total Prius sales this year Toyota has claimed. Global sales to date have total more than 2.5 million units, nearly half of those rolling off American car lots.

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Still, there are challenges ahead. A study released Monday by the R.L. Polk automotive research firm shows that only 35% of hybrid owners — made by all manufacturers -- buy a second one. In contrast, 41% of Prius owners buy another hybrid. Polk said the relatively low repeat buyer rate reflects "an indication that consumers are continuing to seek alternative solutions to high fuel prices." A proliferation of inexpensive small cars, like the Ford (F) Fiesta and GM's (GM) Chevrolet Sonic, have made fuel efficiency much easier for consumers to obtain.

Comparing the Prius c with Honda (HMC) Fit, which is rated at a combined 30 miles per gallon and starts at $15,775, it would take about three years and two months to save enough in gasoline to compensate for the more expensive price of the car. Thus, Prius c owners who keep their cars longer than the 34-month payback period are saving gasoline and money, compared to the gasoline-powered Fit. "The biggest problem with hybrids is they don't make sense economically," said Michelle Krebs, an analyst with Edmunds.com. "Their biggest enemy is the fuel-efficient engine."

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Still, Toyota may have the strongest hybrid brand in the market. Over 15 years, its popularity grew as the brand became identified with the "green" energy movement. Hanson said the success of the Prius doesn't tempt Toyota to establish a separate franchise, as it did for luxury cars with Lexus and vehicles aimed at younger customers with Scion.

But that doesn't mean other changes aren't in the works. Toyota, which builds the Prius in Japan, is still considering the idea of building the vehicle at its Tupelo, Mississippi assembly plant. Building the Prius in dollars would lower the cost of the car even further. With lower costs, Toyota would have leverage to drive pricing lower -- and make the payback on the consumer's investment even shorter.

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