Global Pandemic May Hit Luxury Brands the Hardest
Mercedes-Benz got out in front of BMW while automotive sales languish in the gutter, though neither company finds itself resting comfortably upon a bed of roses. The global pandemic has made sure of that; no segment has gone unaffected by social distancing measures, but it may be the luxury divisions that have it the hardest moving forward.
Up until recently, premium nameplates had done rather well — scooping up an increasing share of the total auto market for years. While the Great Recession momentarily suppressed their ascension in 2008 and 2009, it was a temporary setback.
Luxury brands have had a good decade overall, with any rough years being offset by expansions in their lineup (chiefly crossover vehicles). Now they’re trying to move downmarket to capitalize on younger customers with a bit more pocket money. It might have been a good strategy, were it not for the coronavirus outbreak and subsequent economic downturn.
According to Automotive News, luxury sales (excluding Jaguar Land Rover) dropped 13 percent in the first quarter of 2020. While the outlet cited the impact of the coronavirus as a contributing factor, these figures are only a preamble for what will undoubtedly be a grim second quarter. We’ve already covered how bad COVID-19 has been for sales in general — with the takeaway being that the situation doesn’t come into focus until you look at the tail end of March.
Last month represented a 41-percent decline in U.S. auto sales overall, with things pitching sharply downward through the last few weeks. That’s when local and state governments began issuing lockdowns orders and non-essential businesses were forced to turn out the lights. But the regions most affected tend to be coastal and urban — the sort of places you’d expect to find the highest concentration of luxury buyers. As a result, J.D. Power estimates the premium sector has lost 2.7 percent of the new car market before the virus even has a chance to warm up.
The week ending March 29th saw U.S. retail sales down 79 percent, year over year. By the week of April 5th, sales were down 84 percent from the previous annum. Those figures aren’t likely to rebound even a little until rampant isolation subsides, factories flip on the lights, and dealerships reopen their doors. Yet this could be harder in metropolitan hubs, where leaders are more concerned about containing viral outbreaks than restarting the economy. New York has extended its shutdown until the end of April, while Northern California extended its shelter-in-place requirements through May 3rd.
That means Mercedes’ 67,746 domestic sales (down 4.8 percent from a year ago) for Q1, and BMW’s 59,455 (down 15 percent), are about to get a lot worse come Q2. Meanwhile, Lexus and Audi posted Q1 declines of about 16 percent — Cadillac lost 14 percent; Acura lost 19 percent; Infiniti lost 25 percent; Porsche lost 20 percent; Volvo lost 12 percent. While Lincoln bucked the trend by posting a first-quarter increase of 2.3 percent, it was an outlier. The general trend among luxury nameplates shows them fairing slightly worse than mainstream brands overall. And there are growing concerns that urban centers will continue being disproportionately affected by COVID-19, suppressing the take rate of premium automobiles more than their conventional counterparts.
Sam Fiorani, vice president at AutoForecast Solutions, surmises that a weakening stock market will frighten some premium buyers out of purchasing a new vehicle… or encourage them to visit a less fancy dealership.
“A 10 percent or 15 percent drop in the Dow is like Punxsutawney Phil seeing his shadow on Groundhog Day,” he said. “It will scare those dollar bills right back into their wallet.”
Automotive News did offer a silver lining, however:
Leasing accounts for a majority of luxury transactions — 57 percent in 2019, said Tyson Jominy, vice president of the Power Information Network at J.D. Power
“Lessees may extend their current payments for a month or two, but they can’t stay out of the market indefinitely,” Jominy said. “Will we have a blowout Memorial Day, or will it be Fourth of July? It’s too soon to know, but it’s coming.”
That’s sure to get customers celebrating. Extending your lease payments through a period where you probably aren’t going to be doing much driving and couldn’t take the car back to the dealership anyway? We’re sure auto brands will soon be overwhelmed with touching thank-you letters from grateful customers.
[Image: Daimler AG]
A staunch consumer advocate tracking industry trends and regulation. Before joining TTAC, Matt spent a decade working for marketing and research firms based in NYC. Clients included several of the world’s largest automakers, global tire brands, and aftermarket part suppliers. Dissatisfied with the corporate world and resentful of having to wear suits everyday, he pivoted to writing about cars. Since then, that man has become an ardent supporter of the right-to-repair movement, been interviewed on the auto industry by national radio broadcasts, driven more rental cars than anyone ever should, participated in amateur rallying events, and received the requisite minimum training as sanctioned by the SCCA. Handy with a wrench, Matt grew up surrounded by Detroit auto workers and managed to get a pizza delivery job before he was legally eligible. He later found himself driving box trucks through Manhattan, guaranteeing future sympathy for actual truckers. He continues to conduct research pertaining to the automotive sector as an independent contractor and has since moved back to his native Michigan, closer to where the cars are born. A contrarian, Matt claims to prefer understeer — stating that front and all-wheel drive vehicles cater best to his driving style.
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If your money in the stock market is going to depreciate at the same or greater rate than a car, why not buy the car? (sort of sarcasm)
Nobody needs a luxury car, so when times are tight sales crash big time. The great extinction of high end automotive brands in the 1930s gives you an idea of how extreme such a trend can be.