Editorial: Luxury Carmakers Hoisted by Their Own Petard

Robert Farago
by Robert Farago

Thanks to Uncle Sam’s Cash for Clunkers program, even the weakest of America’s mainstream automakers will live to die another day. Meanwhile, the so-called “mass luxury” brands are hurtin’ for certain. The falling tide of the global economic meltdown has left Audi, BMW, Cadillac, Lexus and Mercedes stranded, flopping around on the metaphorical beach, gasping for the oxygen of financial lubricity. It’s hard to feel sorry for any of them. The upmarket marques marked the last ten years or so by chasing volume sales with “entry level” models that cheapened and weakened their brands. Is it any surprise that the very customers that fueled their expansive profits have abandoned them in droves, as badge snobbery has kept pace with financial security (or lack thereof)? In other words, the fact that these “luxury” brands are “suddenly” in worse trouble than everyone else is their own damn fault.

Yesterday, the Wall Street Journal (WSJ) highlighted the fact that American luxury car sales fell “almost 21% last year — double the decline in overall car sales — and continue to slide this year.” It’s a bit odd that: tagging the tanking trend with last year’s annual stat and declaring that, in general, sales still suck. A snapshot of the last seven months via Automotive News shows that luxury car sales have gone from bad to hideous—keeping in mind (as we must) that the numbers are relative to last year’s fall from grace.

So far, Audi’s sales are down 18.9 percent. BMW’s are off by 27.6 percent. Cadillac clocks-in with a 45.4 percent tumble. Lexus is 41.9 percent off of last year’s pace. And Mercedes’ cha-chingery dropped by 33.6 percent.

And what of margins? It’s no secret that moving even this ever-declining number of units has required radical price reductions. “Take it or leave it” has become “make me an offer and I won’t refuse” (e.g., my kid’s doc got $25K off a brand new Audi S4). While new car inventories don’t appear disastrously high, turnover has slowed to a trickle. Meanwhile, pre-unloved 2010 models are heading for palatial, tumbleweed-strewn showrooms.

Bottom line: luxury car prices are about as firm about as a bowl of Jello in a Turkish steam bath. And the difference between MSRP and actual money tendered is coming out of the manufacturers’ hides.

Mass luxury automakers have painted themselves into a coroner [sic]. By expanding their model range into the mainstream, they’ve become addicted to volume. Their entire business model—from manufacturing through to the size of their dealer network—depends on moving a large amount of metal. But buyers at the lower, larger end of the spectrum are the first to abandon luxury makes when money’s too tight to mention. Ipso facto.

So what’s a luxury automaker to do? According to the WSJ, “Car companies aren’t taking chances. Some are preparing smaller, cheaper versions of their high-end nameplates. Others are tweaking their messages, emphasizing ‘sustainability’ and fuel economy in a market segment that for years competed on who had the highest horsepower and richest leather.” Yeah, that’s the ticket. When sales crater, accelerate the move downmarket, or sacrifice decades of upscale branding on the altar PC fashion.

To wit: Cadillac still swears it’s going to introduce a sub-CTS model called the ATS. Lexus is pushing ahead with plans to offer a luxury compact based on the hybrid Prius. Despite generating just 335 A3 sales in July, Audi’s introducing a diesel variant, reflecting the German brand’s re-branding as makers of oil import-reducing diesels.

Along the same lines, BMW’s US website leads off with a $4500 “Eco-Credit” (discount?) for their drug-on-the-market 3-Series and X-Series oil burners. “Responsibility” may have “never been so exhilarating,” but with three out of the five videos emphasizing fuel economy, the change in Bimmer’s brand emphasis is obvious. Meanwhile, Mercedes has introduced the sub-ML GLK.

There is an alternative: retrench. Reinvigorate the ailing luxury car brand by returning it to the stratosphere. Pare the number of models, adhere to the core brand promise and build a limited number of best-in-class vehicles. Earn a price premium through excellence and exclusivity, and charge the consumer full whack for the privilege of owning same.

It’s the slowest, most expensive, most painful, least likely, most difficult and most dangerous option. But it would work.

The economy will recover, eventually. Car buyers will be back. Some day, again, still, they’ll be an excellent market for exclusive automobiles. The best cars, the most desirable cars, will generate fabulous margins. Meanwhile, someone should remind these misguided automakers that Lincoln and Jaguar already died for their sins.

I know: BMW was down market before it went up market. Mercedes builds taxis in Europe. Audi’s already moving in the right direction. Lexus didn’t get where it is today by ignoring the value-for-money equation. And Cadillac doesn’t have a clue, really. But all of these brands lost their halo/mojo in the headlong pursuit of profit. They must either begin the long trek back to genuine brand cachet or continue their inexorable slide into mundane mass market mediocrity and correspondingly slim margins.

The thing of it is, as we’ve pointed out before the economy went south, these luxury brands should have never dallied down market in the first place. If they’d stayed small and tightly focused, they could have hunkered down and weathered the storm, ready for the recovery. As it is, there’s no guarantee that any of them will emerge from the current downturn with their brand untainted by the stench of massive discounts and how-low-can-you-go financing. And when it comes to the long term future of any luxury product, branding isn’t everything. It’s the only thing.

Robert Farago
Robert Farago

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  • Carsinamerica Carsinamerica on Aug 28, 2009

    @The Comedian: In your 1,175 words you never bothered to mention inflation. What cost $24,975 in 1995 would cost $35,291 in 2009. Perhaps you should get new reading glasses: "...and its price growth exceeds inflation by $1,300 (the increase of Camry prices is well behind inflation, by about $4,500)." Although I didn't list the price adjusted for inflation, I thought that anyone with an ounce of math skills could make the leap if they so chose. As wsn noted, car prices tend to stay somewhat behind inflation. In 2002, for another example, a Camry LE cost less than a 1995 Camry LE, despite more feature content, more space, and more power. The 318ti was not a sedan, it was a hatchback/coupe. Its closest current U.S. analogue is the 128i, which has a base price of $29,400, about $6,000 dollars less that the inflation adjusted base price on the ‘95 ti. Again, learn to read. I wasn't talking about the 318ti 2-door hatchback, I was talking about the 318i sedan. If you want to compare apples to apples, you stick with base sedans (since they remain the core of the 3-Series range), and the 318i sedan was the best comparison to the 328i sedan. This is why I said, "In 1995, a BMW 318i sedan (the cheapest 3-Series sedan model)," repeating sedan twice in one sentence, rather than say "a BMW 318i sedan (the cheapest 3-Series model)." I considered discussing the 318ti, but my response was already long enough. The 318ti was the 3-Series Kompact, and it was somewhat akin to the 1-Series today, being on a modified 3-Series platform (which, actually, is a counterargument that companies aren't going further downmarket today than they did in the past). However, the ti was offered for only a few years, and it was widely panned. It also was not anywhere near as well-equipped as a 128i today, and so is a much iffier comparison.

  • The Car Guy The Car Guy on Aug 30, 2009

    I couldn't agree more. Auto makers today have put themselves in their own troubles. I have never been a fan of new automobiles at all. Sure, there are plenty of gorgeous luxury cars rolling around out there right now, but as mentioned above some manufacturers have nothing else on their mind but to keep increasing sales. Manufacturers such as Mercedes-Benz had their Golden Age during the 1980's and dramatically went down hill in the 1990's including build quality and design. For those of you who are true automobile enthusiasts such as myself and appreciate these types of vehicles, but clearly can't afford brand new models let me make a suggestion. Visit the website I have designed as well as the book I have spent over two years working on about older affordable luxury cars. I am a recent college graduate and I guarantee if you are at the level of car craziness I am you will not be disappointed. Thanking you in advance.

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  • ToolGuy I agree with everyone here. Of course there are exceptions to what I just said, don't take everything so literally. The important thing is that I weighed in with my opinion, which is helping to move things forward. I believe we can all agree that I make an important contribution (some will differ, that is their prerogative). A stitch in time saves nine. Life isn't fair, you know. I have more to say but will continue at our next meeting. You can count on that, for I am a man of my word. We will make it happen. There might be challenges. I mean, it is what it is. This too shall pass. All we can do is all we can do. These meetings are never really long enough for me to completely express all the greatness within me, are they? Let's meet to discuss. All in a day's work. After all, Rome wasn't built in a day. At the end of the day, I must say I agree with you. I think you will agree. When all is said and done, there is more said than done. But of course that is just one man's opinion. You are free to disagree. As I like to say...(I am working on my middle management skills -- how am I doing?)
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