How Audi , BMW, Mercedes boost Europe share while protecting premium-ness

Audi cars parked at a dealer in Eching, near Munich. Audi is Europe’s top-selling premium brand and, like BMW and Mercedes, consistently outsells some mass-market rivals such as Fiat, Citroen and Toyota in the region.

Audi, BMW or Mercedes-Benz is more likely to be bought each month in Europe than a Citroen, Fiat or Toyota. The three German premium brands have increased their combined share of the European market to 17 percent from 10 percent two decades ago. They have succeeded in “democratizing” luxury and have boosted volume without sacrificing their high profit margins. They have done this by launching smaller models targeted at customers who typically had driven mass-market brands, as well as by creating new segments with vehicles such as the BMW X6 coupe-styled SUV and the Mercedes CLA coupe-like four-door sedan.

“People’s aspirations are much higher these days, which combined with the recent recovery in economic performance, means the premium car segment is much more resilient,” BMW brand sales chief Ian Robertson told Automotive News Europe.

But does an increasing presence mean that a premium brand risks damaging its image? No, says Mercedes sales chief Ola Kaellenius. “If you deliver a very authentic Mercedes experience in every segment then we are absolutely fine in terms of fulfilling our brand promise. We have just a little over 2 percent of the global car market, so we’re not worried about exclusiveness of the brand,” Kaellenius told ANE.

Blurred definition

Market watchers say that the definition of luxury is becoming increasingly blurred. In the past, exclusivity may have been one attribute associated with a luxury brand, but this was largely the consequence of an expensive pricetag.

What is critical, experts say, is protecting a brand’s equity, which remains one of the most important assets for German premium carmakers. Mercedes and BMW are estimated to be the second and third most valuable car brands in the world after Toyota. Millward Brown, a leading market research firm that publishes annual rankings, estimates that BMW is worth $26.3 billion and Mercedes is worth $21.8 billion.

If either of these figures actually reflected in the brands’ accounts, it would dwarf any other individual asset. (According to International Financial Reporting Standards, brands are only recognized on the balance sheet in the event of a disposal, since the value can easily be determined via the goodwill embedded in an acquisition price.)

For the moment, there appears to be no evidence that customer demand is waning as all three German premium carmakers continue to have operating profit margins around 10 percent.

Shrinking middle

There are several factors driving the German trio’s expansion, which include CO2 targets, unique products as well as a “shrinking middle.” Nowadays managers often talk about how many customers trade in a midsize car built by a volume brand in favor of a smaller compact-class vehicle that has a premium badge on the hood. Luca De Meo, Audi’s sales and marketing chief, remembers reading about Michael Porter’s “stuck in the middle” phenomenon 25 years ago during his time in college. Now he sees it happening in real time. “Premium brands are benefiting globally as demand polarizes between the top and bottom categories,” he told ANE. This is part of a broader cultural trend. “We see the same happening in the fashion industry, consumer goods, even in food,” he said.

This trend is reinforced by the shrinking middle class in many parts of the developed world. Stagnant median disposable incomes combined with a rising share of wealth generated by more affluent segments of the population force many households that might have been Fiat or Citroen buyers to switch to lower-cost Dacias or Kias.

Additionally, the German brands have been able to serve customers with segment-busting models such as the X6 and the Audi A7 Sportback, which have encountered little to no competition from volume brands. “We created products that generated demand,” De Meo said. These products attract “a completely different customer base, people ready to pay for something unique,” he said.

Impact of CO2, fleets

Another factor behind the growth of the German premium brands is Europe’s tough emissions targets. To reduce the CO2 of their fleets, the German premium brands had to expand their small-car portfolios, which put additional pressure on volume automakers. Mercedes forecast that its compact family, which has grown from two to five models in the last five years, will account for 42 percent of its global sales in 2025, up from 33 percent last year. BMW’s Robertson said that, including Mini, small cars account for about 40 percent of the automaker’s global volume.

Moreover, there are some unique market conditions in Europe that skew demand in favor of German premium brands. Figures are significantly influenced by the region’s two largest markets – Germany and the UK – both of which have an above average penetration of premium cars, in part due to professionalized sales networks catering to fleet managers. “In fleets, the monthly rate covers mainly the vehicle depreciation and premium cars, because of their success, have a higher residual value, meaning reasonable monthly rates,” Audi’s De Meo said.

Changing tastes

For the moment, luxury brand customers continue to pay the hefty premium so coveted by the industry, but tastes are changing. While upscale brands once offered superior interiors, more reliable mechanics and more powerful engines, the gap in build quality between premium and volume cars has shrunk dramatically.

While it helps to be innovative and design beautiful cars manufactured with the finest materials – in some cases even handcrafted – premium brands have to tell a story that differentiates them in an increasingly commoditized world. “In order to be successful, a brand ideally has to exhibit a combination of being meaningful, different and salient,” said Bernd Buechner, managing director of Millward Brown in Germany.

Red Bull, for example, fulfills a unique demand rather than trying to copy Coca-Cola or other similar carbonated beverages, just as Tesla satisfies a different customer group from Mercedes. High-end German carmakers achieve this in varying ways by staging a premium experience for the customer when they pick up the keys to their new car, often in conjunction with a visit to their own museums that serve as de facto cathedrals to their brands.

Tougher competition

Germany’s premium brands will face tougher competition from upscale brands that are undergoing revivals such as Volvo and Jaguar Land Rover, and from Alfa Romeo. Fiat Chrysler Automobiles is investing 5 billion euros into Alfa in a bid to boost its annual sales to 400,000 by 2018 from 68,000 in 2014. Fiat Chrysler CEO Sergio Marchionne says the new Alfa Romeo Giulia is better than its German rivals. He expects Alfa to recover fast in Europe once its product offensive gets fully underway.

Minimizing the risk

Overall, BMW Group’s Peter Schwarzenbauer may have given the subject of volume vs. exclusivity more consideration than any other vehicle executive in Europe. The former Porsche North America CEO and Audi board member for sales is now in charge of the Mini and Rolls-Royce brands. He said that with the right strategy the rewards outweigh the risks.

“I often get the question whether the German manufacturers risk diluting their premium image. If you set a goal to sell so many thousands of Rolls-Royce cars over the next five years, for example, then you would be making a mistake because the direction of the entire company will then be focused solely on simply achieving that volume in the time allotted,” he said. “That doesn’t mean you cannot grow — the natural result of offering a desirable product in an expanding market should indeed be higher sales, but that difference is the key. Were a luxury brand to target volume only, then yes, I do believe this would be a dangerous strategy to pursue.”

AUTOMOTIVE NEWS EUROPE E-MAGAZINE This story is from the current issue of the Automotive News Europe monthly e-magazine, which is also available to read on our iPhone and iPad apps.You can download the new issue as well as past issues by clicking here.

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