Luxury Brands to Drive Sales Growth

Auto analysts see prestige brands such as Mercedes, BMW, Lexus, Jaguar and Cadillac as the engine that will power automotive sales growth in the years ahead.

But there's a danger that the proliferation of luxury models will rub some of the luster off prestige brand badging, one industry observer notes.

Ward's data show there will be 108 luxury vehicles on the U.S. market in the '08 model year, up from 82 in '03 and more than double the number 10 years ago.

Heading into '03, prestige vehicles now make up 32% of the number of models offered by the U.S. Big Three (including their import brands), up from 17% in '93.

Worldwide, deliveries of prestige vehicles have increased 42% since 1997, according to Global Insight Inc. (formerly DRI-WEFA). That compares with a paltry 4% rise in sales of volume brands — such as Ford, Chevrolet, Fiat, Honda and Opel.

That trend will continue, says Global Insight, which projects worldwide luxury brand sales to grow 23% between now and 2007, compared with a 13% gain for the volume brands.

Sales of all prestige vehicles in North America will hit 2.4 million in 2007, up from 1.9 million in 2002, says Global Insight. In Europe, sales will reach 3.3 million units annually by 2007, compared with 2.8 million today. The rest of the world will see modest growth, to 560,000 units from about 390,000 at present.

Penetration will increase most rapidly in North America and Europe, where share will rise to 12% and 22%, respectively, by 2007. Currently, luxury brands account for 10% of North American sales and 19% of deliveries in Europe, Global Insight says.

Growth in Asia will be less pronounced because of the presence of more developing markets, where sales of volume brands are expected to increase at a faster rate.

So what's driving this movement? Trucks and the need to feel special. As consumers trade in their cars for SUVs, they have spearheaded the movement upscale. Five years ago, SUVs made up just 3.7% of prestige brand sales, according to Global Insight.

Today they make up 10%, and by 2007 they'll account for 13%. In Europe, one of every two SUV sales is expected to involve a prestige brand five years from now, up from less than one in five today. In the U.S., luxury marque share of the SUV sector will grow to 13%, from about 10% in 2002.

And despite the economic bumps, consumers overall are more affluent — and apparently, they need to show it.

“Buying a prestige brand car tells the neighbors you're doing well,” says Ulf Nord, Global Insight executive managing director. “It's not necessarily a reliable indication, but people still like to do it.”

In addition, there simply are more prestige vehicles on the market today, and luxury vehicle manufacturers are using attractive pricing to lure buyers.

“We used to say, Mercedes didn't sell cars, they delivered them,” Nord says. But with the new competition, “they've had to get more aggressive.”

But as prestige brands become more commonplace, do they remain prestigious? When everyone on the block has one, is an Audi or BMW still a status symbol?

As volumes increase, pricing will come down, “and that could dilute the perceived exclusivity” of the brands, Nord notes. The BMW 3-Series has become the best seller in its segment in Europe, he adds. “Obviously, that's good news for BMW, but there's a risk in the car becoming a commodity.”