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Luxury Giants’ Fall From Grace: Why BMW and Mercedes’ Budget Cars Flopped

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Luxury on a Budget: Are Cheaper Models Diluting Prestige Brands?

Luxury carmakers are known for their high prices and opulent features, but in recent years, they’ve been venturing into more affordable territory. While this move aims to attract a wider range of customers, some industry experts worry that it could be diluting the allure of these once exclusive brands.

The shift towards offering lower-priced models dates back to the 1990s, with BMW’s failed 318ti and Mercedes’ C-Class SportCoupé illustrating the initial struggles. Jaguar’s X-Type, shared with a Ford model, also failed to impress critics and buyers alike. However, with Mercedes’ entry of the CLA in 2014, starting at under $30,000, the strategy gained renewed traction.

While initially marketed as an entry point to the brand, Mercedes’ CLA now sits at a starting price of around $36,650, and the newly released A-class sedan, starting at $32,800, claims the title of the most affordable Mercedes sold in the US. These models tap into a younger demographic and those who haven’t yet reached the point of buying a higher-priced model.

Mercedes-Benz told CNBC that 70% of CLA buyers come from other brands, many of them non-luxury, and are eleven years younger than the typical Mercedes buyer. Similarly, 54% of A-class buyers in 2019 came from other brands, primarily Toyota, Honda, and Lexus.

However, some industry critics remain skeptical. They argue that offering lower-priced models risks diluting the exclusivity associated with luxury brands, making them feel less special. “Brand power is always important,” said one industry observer. “You can saturate your own market and start to feel a little bit run of the mill.”

Mercedes, however, asserts that they don’t believe these models devalue the brand, highlighting the clear distinction between its $33,000 A-class and the $94,000 S-Class.

The trend towards diversification goes beyond lower prices. Brands like BMW and Mercedes have expanded their product lines to include a wider range of SUVs, appealing to consumer preferences. But this diversification has led to a concern that the market might be becoming oversaturated.

Ultimately, luxury brands are navigating a delicate balancing act. While they must secure new customers and grow their market share, they also need to protect their image and maintain the prestige that sets them apart. As one expert put it, “Survival is a numbers game.” Time will tell whether the pursuit of volume will come at the cost of brand power for these luxury players.

Luxury Automakers: The Perils of Price Wars

Luxury cars are typically meant to symbolize prestige, wealth, and even excess, but sometimes they can come pretty cheap. Every so often premium automakers push out cars with starting prices well below the market average. While many consumers see a car as a largely rational purchase, a means of transportation, perhaps a tool for work, and maybe a way to have some fun, luxury buyers are generally willing to pay for a few extras a person may not exactly need. Buttery leather seats, real wood dash panels, and premium sound systems. However, in their quest for ever greater volumes, some premium automakers are trying to see if they can get a few more buyers down at the lower end of the price range. While there are some advantages to going down market, there are also some perils. Sometimes it doesn’t work out.

Key Takeaways:

  • Luxury brands are increasingly offering lower-priced vehicles to reach a wider customer base.
  • This strategy has had mixed results, with some models finding success and others failing to capture the market.
  • There are concerns that offering cheaper models could dilute brand exclusivity and damage the perception of luxury.
  • The success of this strategy hinges on the ability to offer vehicles that are both affordable and embody the core values of the brand.

The Downward Trajectory

The average new car price in the United States in 2019 was around $33,600 including incentives and dealer discounts, according to J.D. Power. That is for all cars, not just luxury. About 40% of all premium vehicles sold in the US cost less than $40,000, according to J.D. Power. BMW, Audi, Mercedes, the three largest luxury brands by volume in the United States, are some of the biggest sellers of luxury vehicles at any price, including the lower end.

One very notable example of a luxury car at the lower end of the price range came from BMW in 1994, the BMW 3 series compact, officially known as the BMW 318ti. The car was BMW’s mid-1990’s shot at widening its highly successful 3 Series range of sports sedans, which the company had debuted in 1975. But the three-door hatchback sold poorly in the United States and was discontinued in North America after just four years on the market. It enjoyed more success elsewhere in the world though, and stayed in production through 2004.

A few years after the 318ti, Mercedes-Benz also tried its hand at selling a cheaper model for the masses. The Mercedes C-Class Sport Coupe or SportCoupé was a three-door hatchback or liftback car sold in the US beginning in 2001. The SportCoupé had a starting price at the time of $25,575. A pretty low price for a Mercedes. For a few thousand more, buyers could opt for a bigger engine and some other features. However, at least in its basic form, the car lacked many of the basic elements buyers would expect in a Mercedes such as leather seats and a CD player. The SportCoupé failed to make a sustained impression with customers, and eventually went the way of the BMW 318ti. The model was eventually discontinued in the US.

However, the Germans aren’t the only ones who try their hand at selling a cheaper car that can appeal to a different kind of buyer. Jaguar, while under the ownership of the Ford Motor Company, also tried reaching out to less well-heeled customers with the X-Type, a mid-sized sedan. It started at $30,000. The car shared underpinnings with a Ford model sold in Europe called the Mondeo. It was not considered a bad car, reviewers simply didn’t feel it was good enough to be a Jaguar. And again, sales were lackluster. Ford would eventually sell the entire Jaguar brand to India’s Tata Motors, the automotive arm of the Tata conglomerate.

Seeking Out New Customers

Despite failures, luxury automakers have continued to see the promise in dipping into the mainstream market. Mercedes Benz released the CLA in the U.S. for the 2014 model year. It was basically a sporty compact sedan with a starting price of just under $30,000. To save money, Mercedes built the CLA on a chassis shared with another model and assembled the car in low-cost Hungary. But some reviewers at the time commented that the car lacked the rich feel of other Mercedes-Benz models. A reviewer at car blog Jalopnik said the CLA is an economy car dressed in a fancy suit, but underneath the dapper garb lies a compromised Benz. This doesn’t mean it was a bad car. Reviewers still complimented the CLA’s outer design and interiors and said the car drove well, but the $29,900 dollar starting price did not last, the CLA 250 now slots in at a starting price of around $36,650 as of 2020.

Mercedes-Benz’s cheapest car in the US is now the A-Class sedan, which starts at around $32,800. That is nearly $10,000 cheaper than the next larger class of sedans, the C-Class, which start at around $41,400. Mercedes still considers the CLA an entry into the brand, it is just that the newer CLA offers a bit more than the A-Class and a lot more than the original CLA, which was regarded as pretty barebones for a Mercedes at the sub $30,000 starting price.

Auto industry insiders note that BMW and Mercedes brands don’t really have mass market brands like many of their competitors. So if they want to increase volume, they have little choice other than offering a wide range of products under the same brand. This does offer customers a wide array of options, which helps the brands cover a broader slice of the market.

Throughout much of their history, both German automakers specialized in selling top-shelf versions of traditional passenger cars that boasted luxury and high performance. But since the 1990s, U.S. consumers have increasingly sought out sport utilities, and Mercedes-Benz and BMW have responded. The largest portion of each brand’s sales growth in the US in recent years has come from SUVs. But both companies have sold cheaper cars in part because they give each brand a chance to attract new buyers, especially younger ones who might not yet have the cash for one of the classic mid or full-sized models.

"[If] you have somebody buy one at 25, even if their next car isn’t necessarily an Audi or Mercedes, maybe they come back a little bit later on. If you can catch somebody that young and get them interested into your brand, it maybe later in their life that they come back, but you still have a better opportunity of getting them to come back. It’s easier sometimes than to get them in fresh," says a car industry executive.

Mercedes told CNBC that 70% of CLA buyers come from other brands and the majority of those are coming from non-luxury brands. On average, these customers are eleven years younger than the typical Mercedes Benz buyer. 54% of A-Class buyers in 2019 came from other brands as well. And those customers most frequently had owned Toyotas, Hondas, and Lexus vehicles prior to switching over, Mercedes said.

The Stakes of Luxury

Some industry observers are skeptical that luxury brands are going to be able to convert a considerable share of the market by simply offering a lower priced vehicle when so many of their other models are going to be simply out of reach for many customers. But Mercedes told CNBC that two-thirds of CLA buyers have gone on to buy another Mercedes-Benz vehicle.

There is another risk to all this, of course. Industry observers warn that as with fashion or similar industries, high-end brands risk diluting or losing the exclusivity associated with their names if they go too far downmarket or simply become too common. "Brand power is always important and yes, there can be a point where you saturate your own market and you then start to feel a little bit run of the mill and that’s a risk. And I think that for the most part BMW and Mercedes have defended it pretty well."

In the days of the C230, Mercedes did take some criticism for broader quality issues that industry watchers said threatened the brand’s premium reputation. Mercedes told CNBC that it doesn’t think the mere existence of more affordable models will devalue the brand and that customers can see the difference between a $33,000 A-Class and a $94,000 S-Class.

Mercedes is actually doubling, or even tripling down on its strategy, you could say. The three-pointed star has an SUV counterpart to the CLA called the GLA. It also released an all-new model, the GLB in 2019. Mercedes hopes these new entry models will continue to draw new buyers into the brand.

Expanding Options

Over the last 20 years, the range of models available from companies such as BMW, Mercedes, and others has widened in many ways, not just in terms of price. In 1999, for example, BMW sold six lines of models: the 3 Series, 5 Series, and 7 Series sedans, the Z Line of Roadsters, and for the first year in history, BMW’s new sport utility vehicle, the X5. It also made high-performance versions of its 3 and 5 Series sedans, the M3 and M5. As of March 2020, BMW’s USA lineup consisted of a 2, 3, 4, 5, 7, and 8 series of sedans and coupes, a full X Line of sport activity vehicles ranging from the X1 to the X7, the Z4 Roadster, the electrified i3 and i8 models, and BMW’s high-performance M badged line. It is much the same for Mercedes. Audi likewise has a pretty robust selection of vehicles in many different forms and for many different prices.

"The luxury brands were trying to grow their volumes so aggressively right? They came out with cheaper vehicles when the times were a bit tighter, smaller vehicles that cost less. Now they’re coming out with SUVs, but also swooped back more SUVs that are kind of more coupe-like. And I think the problem is that there’s so many now. And whenever there’s too many of anything, I feel like it devalues the brand. I mean, that’s true with just about anything in life right?"

Regardless of the risks, carmakers do need to sell lots of cars. All of them have to make massive investments in technologies and businesses that are unlikely to bring any profit in the near future. Survival is a numbers game.

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Alex Kim
Alex Kim
Alex Kim is a financial analyst with expertise in evaluating and interpreting analyst ratings on various stocks.

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