Luxury Brands Gut Out Downturn, Along With Their Customers
September 08, 2008
By Dale Buss
Sales of automotive luxury brands are struggling just like the overall U.S. market is.
Collectively, so far this year, upscale marques have only managed to hold on to their 11 percent share of the market from 2007. And some of the loftiest brands in the American auto business have been demonstrating some of the least resiliency.
Lexus, for example, is off 15 percent in 2008 sales through the end of August, and BMW brand has suffered a decline of 7 percent. Among domestic luxury makes, Cadillac has plunged 13 percent for the year, while Lincoln has eased by 19 percent.
Even luxury brands with strong new-product stories are struggling this year, such as Audi, which has managed only a 4-percent sales decline so far in 2008. "There's sort of a re-set button being hit by a fair number of [luxury] consumers," said Scott Keogh, chief marketing officer of Audi of America.
And a brand that is arguably the luxury-segment flagship, Porsche, has suffered its own 17-percent decline year-to-date, with a 45-percent decline in August concentrated in the brand's important sports-car segment. The company called it "partly the result of the somber consumer sentiment about the economy that continues to affect sales of luxury goods such as sports cars."
Added Mark Schirmer, a spokesman for Ford's Lincoln brand: "The luxury market is down overall like the rest of the market, and we don't expect the luxury segment to buck the trend anytime soon. It will continue to struggle a bit in line with the overall market."
Even worse, some auto executives worry that the luxury segment actually could begin slipping below the industry's overall sales trend as America's general economic malaise - and, specifically, the credit crunch - transmit the pain even among well-to-do consumers.
"I personally think we're going to see an even greater return to minimalism in the U.S. market," said one Big Three sales executive. "With all the [economic] pressures on households, we may see luxury sales giving ground to the rest of the industry."
On the other hand, online consideration of luxury vehicles has snapped back at least somewhat since June's huge sales slide rocked the industry.
Consumer visits to new-vehicle detail pages for entry-level luxury vehicles (still under $40,000 apiece) on Edmunds.com increased by 4 percent for the week ended August 17, according to Edmunds.com research, compared with June, and by 1 percent compared with December 2007.
Meanwhile, consideration of mid-luxury vehicles increased by 13 percent for that mid-August week compared with June but was still 14 percent below the level of last December. And for premium-luxury vehicles, priced at more than $60,000, Edmunds.com research showed a consideration boost for that week of more than 23 percent over June - though it was still 22 percent below December 2007 consideration levels.
Lap of Luxury
The fact that luxury sales so far have fallen apace of the overall market - and the real prospects that they could do still worse on a relative basis - are testing the broad dynamic that has undergirded a huge expansion in upscale automotive brands, products and sales over the last decade or so.
Time was when seeing a Mercedes or a Lexus on the road was a rarity in much of the nation. But over the last 15 years, the American rich have gotten richer -- and a broader swath of the public also have demonstrated their aspirations to wealth by the goods and brands that they stretch to purchase. Investment income and housing values ballooned, enabling this surge, while the expansion of the SUV market to luxury models tapped into a whole new vein of products.
These trends greatly benefited the expansion of upscale automotive sales overall and created a boom for luxury and near-luxury brands. This was the picture that Ford saw, for example, when it shelled out billions of dollars to collect top-shelf brands including Jaguar and Land Rover several years ago (before jettisoning most of them lately).
Between 1970 and 1995, luxury vehicles regularly accounted for only between 4 percent and 6 percent of annual industry sales, according to George Pipas, director of U.S. sales analysis for Ford. But beginning in the mid-Nineties, that share doubled to about 11 percent, where it has persisted to this day.
Hanging on by French Fingernails
As the economic unevenness of 2007 evolved into this year's full-blown stagnation, luxury brands of all sorts have been trying to hold on to their gains of the previous several years. As they do so, their biggest challenge by far is the huge deterioration in personal wealth and resources of well-off Americans, because investment markets have turned down and because credit is much tighter. Higher gasoline prices have exacerbated those problems.
The truly wealthy for the most part continue to ride above the storm. Big-spending American consumers, for example, keep on snapping up yachts, Louis Vuitton leather goods, Hermes silk scarves, Swiss watches and other expensive items, many of them considered "investment-grade" luxury fare. Last year, sales of luxury goods in North America accounted for about one-third of worldwide luxury sales of about $233 billion, according to consulting firm Bain & Co.
But even that optimistic picture is dimming somewhat. Bain noted that luxury-sales growth in North America had slowed to 2 percent already last year, while fast-emerging Asia-Pacific economies increased luxury spending by 18 percent, and even the mature European market boosted luxury outlays by 12 percent. Another factor underlying U.S. growth in luxury sales actually has been spending here by foreign tourists taking advantage of the weak dollar; but the strengthening greenback of late is draining some of that demand.
By far the biggest concern for carmakers and other luxury-goods manufacturers is that many marginal customers -- who were willing to stretch financially to afford luxury autos and other goods when the economic horizon was bright -- now are pulling back.
"It's people who've stretched so far - now they may be moving down from a luxury car to a more entry-level car," said John Howell, Cadillac's global product director. "It's not so much a function of gas prices or income directly, but: Is this a good time to be out buying a new car in the face of the economic and even political uncertainty right now? These people are holding back a little bit."
Three-Headed Monster
Automakers are experiencing this trouble in at least three ways: tanking sales of pricey SUVs, the necessity to offer record-high sales incentives, and tremendous pressure on the leasing business.
It's no coincidence that some of the most ostentatious lines of SUVs are taking some of the biggest hits in the current downturn. Hummer sales, for example, were down 46 percent through August; and, of course, General Motors is seeking to ditch a brand that has become an icon for conspicuous consumption. Lexus has seen sales of its lineup of three SUVs fall off by 10 percent. And Land Rover's sales have dropped by a disastrous 30 percent-plus.
Only part of the cratering of the luxury-SUV segment is explained by skyrocketing gasoline prices; after all, the wealthy can much more easily afford to pay more to fill the tank than average consumers. Probably a bigger factor is the radical shift in perspective that many Americans - of every economic class - have adopted toward gas-guzzling vehicles in the wake of the surge in gasoline prices and also as a result of global-warming concerns. More of the rich simply have grown concerned about looking like heels by driving around in big rigs.
Partly as a result, luxury brands are having to shell out record amounts of sales incentives in order to attract both consumers who remain easily capable of buying their vehicles as well as those who would have to stretch anyway.
Porsche's Total Cost of Incentives, for example, was $2,500 per vehicle through July, the first time the figure has ever been over $2,000, according to a proprietary formula used by Edmunds.com to calculate the entire plate of incentive offers for a vehicle combining both factory and dealer lures.
Meanwhile, Lexus's incentive spending has increased by 37 percent over last year while its market share has dipped to the lowest level since 2005. And Acura's incentive spending, as measured by Edmunds.com Total Cost of Incentives formula, has increased by 45 percent compared with last year.
Land of Lost Leases
Some domestic auto executives - long the biggest wielders of incentive dollars, and even today offering many thousands of dollars in lures on their pickup trucks and large SUVs - are amazed that European luxury manufacturers are as generous as they have become. "There's upwards of $8,000 per vehicle that some of them are throwing at the problem to keep sales where they are, and not all of it is incentives per se - much of it is under the table," asserted one Big Three sales executive.
And while Mercedes-Benz is alone among major luxury brands with a sales increase for the year to date - a mere 0.5-percent gain through August -- the German luxury leader is doing so only by making available the highest overall incentives among all manufacturers, according to Edmunds.com calculations. And Ford's Pipas calculated that Mercedes-Benz's
incentive spending amounted to about $8,000 per unit in July.
"There's nearly $2,000 in incentives on the C-Class, for example, which is the most since its redesign," said Jessica Caldwell, U.S. industry analyst for Santa Monica, Calif.-based Edmunds.com.
Of course, Mercedes-Benz believes other positive factors are at work as well. "A large part of our gain is the payoff of our strategy about choice and a diverse offering in the luxury segment," said Drew Slaven, marketing general manager for Mercedes-Benz USA. "Other manufacturers just don't have that."
In any event, higher incentive spending also is tied in with the third major symptom of the luxury-auto malaise: huge cutbacks in leasing activity necessitated as a ripple effect of the credit crunch in the U.S. economy. This has undercut upscale sales in major ways, because leasing accounts for about half of the near-luxury and luxury market, according to figures supplied by Hyundai USA.
"Lease payment became a main area of competition between luxury manufacturers in many respects," said Cadillac's Howell. "It wasn't around brand image and features and content as it should have been. This induced many people to stretch into a luxury car. And with the tightening of credit options going forward, you'll see that augment the general effect of people not being able to stretch financially the way they used to - and you'll see a reduction in overall volume as a result."
German Dependence
Especially caught in the leasing trap are German makers, who rely on leases for as much as two-thirds or three-fourths of U.S. sales - compared with about one-half to 60 percent for Cadillac, for example. "BMW leases an awful lot of 3 Series cars," said Howell. "It's been a good thing for them, but it can come back to bite you a bit in terms of volumes going forward if the cost of leasing rises dramatically."
Pipas, of Ford, said that BMW recently also "has quietly begun offering 0.9 and zero-percent financing to try to drive people into low monthly payments through financing" and away from leases. BMW executives weren't available for comment for this story.
"There were an awful lot of aggressive tactics out there to push volume - an overaggressiveness into leasing - and I think what you're seeing is normalcy coming into the marketplace," said Audi's Keogh.
As for the Japanese luxury brands - Lexus by Toyota, Acura by Honda, and Infiniti by Nissan - historically they haven't delved heavily into leasing. "They've had low-priced cars in relation to competitors and haven't gotten into aggressive leasing, so it's kept their business relatively sound," observed one competing sales executive. "But now when competitors have been offering aggressive lease deals, they've been responding. We'll see if they go further down the slippery slope."
No executives of the Japanese-owned luxury brands would comment for this story.
Strategies for Success
Of course, none of the luxury makes are standing still as calamity befalls them.
Audi, for example, is touting new powertrains, including diesel options, and new product offerings to keep its head above water. "We're launching our new A4 and getting new volume and increased production with the A5, so we're feeling good about where volume is going for the year," Keogh said. "We feel confident that it's our moment in time as consumers hit the reset button. Historically, we haven't gotten considered enough, and this will give us more opportunity to be considered."
Meanwhile, Mercedes-Benz also has been stepping up its pace of product introductions. And in particular, it will begin emphasizing the availability of a clean-diesel option on some of its SUVs in all 50 states beginning this fall.
"So there's no sacrifice in fuel economy, and it will be packaged in products that are state-of-the art," said Slaven. "So they're not only a solution to high gasoline prices but there's also a lot of torque," unlike with some hybrid powertrains. Slaven also believes that luxury consumers will continue to increase their preoccupation with "buying green - the downturn hasn't tempered that."
Cadillac already has had some recent new-product successes, including its redesigned CTS sedan, and Howell believes that the new Escalade Hybrid will rank as another. Cadillac began shipping Escalade Hybrids in August, with a $3,600 higher pricetag than for a conventional Escalade.
"They're a little more expensive," Howell allowed, "but they've got all the luxury features and content one wants in any Escalade, so you don't give up anything there - and of course you don't give up anything in fuel economy." Escalade Hybrid is manufactured along with the new Chevrolet Tahoe and GMC Yukon Hybrids. And while demand hasn't yet ramped up to a point where capacity is a problem, Howell noted that the Escalade "has the advantage within GM of having first-line status for the capacity that is available. So if people want them, they're going to have them."
And Howell fully expects Cadillac's luxury consumers to begin checking out the Escalade Hybrid. "It's easy to live with, and it can provide the image that people want," he said. "They want comfort and features - but they don't want criticism" about their vehicle's fuel economy.
For its part, Lincoln is counting on a continuing overhaul of its previous product line to
increase its share of a down luxury market, Schirmer said. Its MKX crossover and MKZ sedan already have been widely hailed, and now Lincoln has brought out its new MKS sedan. Among the tough decisions Ford made about MKS, he said, was to make it available only in a six-cylinder - no V-8.
"People said that was a V8 segment," Schirmer recalled. "But now that the car is in the market and the market is the way it is, these same people are saying, 'Maybe you guys knew what you were doing.' Having a six-cylinder doesn't seem to be detrimental."
Photos by manufacturers
1 - 2009 Lexus LS460
2 - 2008 Porsche Boxster
3- 2009 Mercedes-Benz C-Class
4 - 2009 Audi A4
5 - 2009 Cadillac Escalade Hybrid
6 - 2009 Lincoln MKS
Posted by Michelle Krebs at 3:59 AM under Analysis , Companies , Featured , Ford , GM , Toyota | Comments (1) | digg this | Seed Newsvine
It should be noted that much of the luxury market has been dominated by SUVs. I think that aspect is downplayed a bit here.
Posted by: estreka | September 08, 2008 at 4:47 PM