Why the luster's off luxury brands

What's happened to the luxury car market? It seems everyone in the segment is having a "fire sale." Cadillac, Infiniti, Lincoln and even Lexus have announced price cuts on some of their 1997 models.

These luxury marques claim that their adjusted prices are now more in line with the actual transaction prices at which the cars sell. Infiniti, for example, has offered incentives worth up to $10,000 on the 1996 Q45.

This heavy discounting has been driven by a general malaise in the segment that now has lasted about three years. Although the percentage of all U.S. households making more than $100,000 annually has grown from 18% in 1990 to 21% in 1994, according to U.S. Census Bureau data, the status symbol of choice is now the leather-seated sport/utility vehicle (SUVs). Sales of SUVs priced above $25,000 have more than doubled since 1992. Drive through a random sample of upscale subdivisions. The number of folks who think they now need 4-wheel drive to get to the mall is absolutely frightening.

Is this the beginning of the end for the luxury car market? Or are many luxury brands just misreading the market? The answer is more likely the latter than the former. While some luxury brands are resorting to unprecedented price cuts to reverse a continuing sales decline, others are enjoying record sales.

BMW, for example, will sell upwards of 110,000 cars in 1996, eclipsing its previous U.S. best of 99,000 in 1986. Audi will boast its best year since 1987, while Mercedes-Benz is on track to its best year since 1988. Jaguar also sees better days ahead.

Some of the German revival can be traced to the introduction of several lower-priced models, such as BMW's 318ti, but higher-priced models have accounted for most of their sales resurgence. MercedesBenz's new E-Class continues to sell out as does BMW's 5-Series. Even BMW's two-year-old 7-Series, which ranges from $60,000 to $95,000, is selling briskly, with calendar-year 1996 sales expected to reach a record 17,000. Moreover, these cars are selling at or near sticker price without costly incentives.

Why are the Europeans thriving even as their Japanese and U.S. rivals struggle? Audi, BMW and Mercedes-Benz have embraced the four key elements that forge the success of any luxury brand: value, quality, pedigree and style. Most luxury brands have a sound grasp on value and quality, but they aren't always as in tune with pedigree and style.

Pedigree encompasses the history of the brand, its engineering and design philosophy, as well as its positioning and identity in the market. The element of style focuses on the "soul" of the product. This includes everything from the car's exterior and interior design to the overall "feel" and driving experience the car offers. The product must evoke a sense of passion that makes the owner feel that he or she is really driving something special.

European manufacturers built their initial American success in the 1980s on pedigree and style without focusing much on value and quality. If you had to ask the price, you couldn't afford it.

Such arrogance opened the door for Acura, Lexus and Infiniti, which took their early success directly out of the Europeans' hides.

Badly stung, BMW and Mercedes-Benz, particularly, quickly retooled their product lines and cut engineering and production costs to offer much more value and higher quality.

Unless they bolster their pedigree and style, the price cuts levied recently by Cadillac, Lincoln and Infiniti will make little difference.

Cadillac's Catera will provide a much needed entry-level competitor, and its starting price of $29,995 should be quite competitive, despite Lexus's bold move to start the new ES300 at $29,500. Still, convincing the discriminating customer that a car based on the chassis of an Opel Omega is as good as a BMW or Mercedes will be a stiff marketing challenge. Beyond that, Cadillac must move to narrowly define its position in the luxury car market and abandon its current practice of trying to cater to all demographic groups within the segment.

Ford needs to decide whether Lincoln or Jaguar will provide more brand-equity for its luxury cars of the 21st Century. Infiniti is still struggling to define its image more crisply.

This does not mean that all luxury brands need to be positioned like another BMW or Mercedes-Benz. But it does mean that for a luxury brand to be successful it needs to clearly define its image and market position. The brand needs to convey a cachet or prestige that can justify its higher price, and it must never compromise its image. Once you start down the rebate road, it is very hard to turn around.