Late Incentives Mask Lux Segment Weakness

Late Incentives Mask Lux Segment Weakness

By Dale Buss November 10, 2011

While Mercedes-Benz gained some ground during October, BMW seems to be going all-out to nab the U.S. luxury-sales crown for 2011. And BMW has a little-understood advantage in the race: Its dealers have a much higher percentage of leftover 2011 models on their lots than do Mercedes dealers, so BMW executives are feeling the freedom – or maybe compulsion – to swamp Mercedes and all other rivals with the level of their incentives. The brands’ race has lots of interested observers across the industry because of the crucial nature of seasonal November and December sales to the luxury segment and how the BMW-Mercedes competition is affecting it. Other things that are factoring into the segment’s year-end sprint are lower sales of upscale models overall relative to the U.S. market as a whole and a bifurcation in trends between sales of entry-level luxury models and higher-priced ones.

BMW executives weren’t available for comment, and Mercedes executives are professing some disinterest in the final result for 2011 sales. “If we beat BMW, I’m not going to say I wouldn’t be happy, but it’s not our target to beat them,” Mike Slater, vice president of sales operations for Mercedes-Benz USA, told AutoObserver.com. “We don’t focus on that. If one day we happen to be Number One, that’d be nice.” Yet their competitors recognize a good ol’ sales donnybrook when they see one. “It’s an interesting squabble,” said C.J. O’Donnell, group marketing manager for Lincoln, which at this point remains way back in the luxury-marque pack. “I’m not sure it means much from a business point of view, but someone wants to be on top each year, and they work to do it.”

In any event, like a Major League Baseball team that is 15 games out of first place with 50 to play in the season, Lexus executives wisely have officially conceded that their brand doesn’t have a hope of catching up enough to add a 12th year to its 11 consecutive years of U.S. sales-volume leadership. Lexus notched only about 154,000 sales through October, while BMW led with 200,000 sales for the year to date, and Mercedes logged 193,000.  Yet Brian Smith, vice president of marketing for Lexus, was clear that the annual sales crown means more than just bragging rights for the victor. “Tangibly, it confirms that you’re doing a lot of things right, you have great products, and great customer satisfaction,” he said. “It’s a source of pride. It helps build momentum among dealers.” Added Kurt McNeil, vice president of GM’s Cadillac division: “At the end of the year, do they want the headline? Yes.”

Follow The Money
So the battle goes on. Mercedes did trim about 1,000 units off of BMW’s 8,000-vehicle lead at the end of September by posting its highest October sales on record. As always, new products goose auto sales more than anything else, and on that score both BMW and Mercedes have been giving showroom shoppers plenty to look at. BMW has its new 528i and the full lineup of its new 6 Series. Meanwhile, Mercedes touts an all-new C Class compact sedan and M Class midsize crossover vehicle, for example. “And if you go on way up in our product range, even our [$183,000-plus] SLS [Coupe] continues to be in very high demand,” Slater said. “It’s selling in the kinds of numbers that we weren’t used to seeing even before the recession.”

But some of the most important factors seem to be going BMW’s way as the two brands race to the finish line. For one thing, whether by design or circumstance, Mercedes is well ahead of BMW – and Lexus, for that matter – in its seasonal transition to new-model-year vehicles: About 75 percent of the vehicles on Mercedes dealer lots are 2012s, Edmunds.com calculated, compared with about half for BMW and Lexus. “That means BMW can offer more discounts and maybe come away with a [volume] win at the end of the year simply because they’re going to be able to sell more vehicles on a discount basis,” said Ivan Drury, a U.S.-industry analyst for Edmunds.com.

In fact, BMW’s True Cost of Incentives, measured by a proprietary Edmunds.com formula, was an average of about $3,700 per vehicle in October. That was down by about $200 from their level in September but remained highest of the three segment leaders by far in October. Meanwhile, Mercedes’ TCI dropped to $1,800 in October from $2,800 in September, when it along with rivals was still attempting to take advantage of Lexus’s paltry inventories and pick off former Lexus owners. Inventory-constrained Lexus dropped its October TCI to $1,700 from $2,100. “BMW out-spent us by anywhere from $1,000 to $1,500 a vehicle,” said Cadillac’s McNeil. “They’re being very aggressive.”

Low End Rises
Beyond the colorful Mercedes-BMW competition, however, luxury-segment performance continues to be underwhelming during this critical fourth quarter. Continuing the trend for the entire year to date, luxury sales increased by only about 8 percent in October compared with the overall industry’s 12-percent gain. “Luxury typically does better in the fourth quarter, but it’s not keeping pace with the overall market,” noted Lexus’s Smith. Of course, a continuing major reason for that lag in performance is the persistent effects of the supply disruptions for Lexus, Acura and Infiniti from the Japan natural disaster in March. Expect complications from the flooding in Thailand to cause more inventory problems. With those travails and “the stock market, world economy and lack of consumer confidence, they’re still impacting luxury more than the rest of the industry,” he said.

There are variations among segments within the luxury market. Sales of luxury crossovers are up about 9 percent for the year, “almost tracking with the overall market,” said Roger McCormack, Buick’s product-marketing director The Buick Enclave is one example of that trend. “Luxury consumers are being a lot more discriminating with their dollars and expect to get value even if they’re buying a luxury vehicle,” he said. Buick sales were 7 percent lower in October than a year earlier after the brand had put together an impressive run of nearly two years of monthly sales increases over the year-earlier periods. Stemming from the same dynamic is the fact that lower-end luxury sales in general have outperformed the upper end lately. “There’s a growing number of premium sales in the $30,000-to-$50,000 band, versus last year, especially,” said Lincoln’s O’Donnell. “And the more premium products, that sell in the $80,000 to $90,000 range, are diminishing.”

For 2012, said O’Donnell, “We’ll see some of these trends reversed late in the year, and into 2013. I see not only absolute growth in the category but also as a percent of the retail industry. [Luxury] could grow again to closer to 14 or 14.5 percent of the retail industry versus only 11 to 12 percent last month.” Agreed Mercedes-Benz’s Slater, “I wouldn’t be surprised to see the luxury segment again growing a little faster than the mainstream market. There seems to be a bit of a resurgence in purchasing luxury goods, and there’s a good probability that those buyes could be entering the market at a little stronger pace in 2012.”

Dale Buss:  is a frequent contributor to AutoObserver.com.