Luxury carmakers face growing competition

David Shepardson
Detroit News Washington Bureau

Luxury automakers face a growing market but increasing competition in 2015, auto industry analysts said at a forum on Sunday ahead of the North American International Auto Show in Detroit.

Tom Libby, an auto analyst at IHS Automotive, said he thinks the luxury share of 2015 U.S. auto sales will rise to above 12 percent — especially because of the influx of new luxury models, including many starting around $40,000. Buyers can now opt to buy an entry-level Mercedes-Benz for much less than the $40,000 or more that a fully loaded larger Toyota Avalon or Ford Taurus can cost.

Libby said he thinks more buyers will move up to luxury models. “The luxury product coming in crossovers, and subcompact is extraordinary,” he said.

Luxury car sales rose 4.5 percent in 2014, while as non-luxury car sales were basically flat. Car sales made up the lowest percentage of total sales since 2005. The biggest growth segment for luxury vehicles was in small luxury-crossover/SUV sales, which were up 19 percent, said Kelley Blue Book.

Across the industry, luxury brands reported strong sales in 2014. Four German luxury brands reported all-time record sales in 2014. They were led by BMW, which sold 2.1 million vehicles — up 7.9 percent from the prior year. BMW retained the title of global luxury auto sales leader in 2014, a distinction is it has held since 2005.

Audi AG, a unit of Volkswagen AG, saw its sales rise 10.5 percent to 1.74 million vehicles, and again topped Mercedes-Benz in 2014. The three brands — along with VW’s Porsche unit — all reported strong sales.

BMW topped Daimler’s Mercedes-Benz unit in the United States by about 10,000 vehicles to 339,000 vehicles last year.

Toyota Motor Corp.’s luxury unit Lexus was up 14 percent to more than 311,000. Lexus opted not to sell an entry-level sedan starting at below $30,000 in the United States as some of its German rivals have done in recent years. Lexus held the title of best-selling U.S. luxury brand for 11 years until 2011 after supply disruptions stemming from Asian natural disasters.

But two U.S. luxury brands still face challenges. Cadillac was the worst-performing of GM’s four brands in the United States in 2014, falling 6.5 percent, while retail sales fell 6.1 percent. All of GM’s other brands had solid sales increases in 2014.

Ford Motor Co.’s Lincoln unit — which reported its best sales year since 2008 — saw sales rise 15.6 percent to 94,474. But that was still much less than Cadillac’s 170,000 U.S. sales last year.

Luxury sales have been fueled by low interest rates and generous leasing terms. Leasing in the luxury sector is about twice what it is in the automaker as a whole.

“Luxury is about the brand — not about the price,” said Brian Bolain, corporate marketing manager at Lexus. He noted that luxury used to be simple: big cars bought by baby boomers. “It made it very easy.”

Now automakers are racing to meet the demands of younger buyers, including luxury buyers who want premium vehicles ranging from compacts to SUVs.

People buy luxury vehicles “because it says something about them,” Bolain said.

There are now 86 million millennials, compared with 80 million baby boomers. “They are going to be makers and shakers and buyers of luxury cars,” said Greg Furman, president of the luxury marketing council.

He said 90 percent of major wealth among baby boomers is because of hard work and entrepreneurship, not inheritance or “celebrity,” he said. Many of them are too focused on career to think about luxury items like luxury cars, he said.

The goal of luxury automakers should be to “educate customers that great things are worth the price,” Furman said. “It’s not about conspicuous consumption. It’s about value.”

Bolain said luxury automakers can learn from jeweler Tiffany & Co., which is able to sell jewelry at $150, $15,000 and $150,000 price points because of the experience all customers receive. Young buyers have the belief that they “expect no matter how much I spend, I expect you to treat me the same.”

Bolain noted that 61 percent of buyers with $250,000 or more in household income don’t own a luxury car. But millennials are more interested in a luxury lifestyle than boomers or generation X members. And he noted that younger buyers are interested in luxury items that aren’t necessarily flashy.

Andrew Smith, executive director of design at Cadillac and Buick, said luxury cars need to make a promise to buyers and have an emotional connection.

The promise, Smith says, allows buyers to explain that they purchased a luxury vehicle “because I fell in love with it.”