U.S. Premium Brands at a Critical Crossroad

The New York Times proclaimed this month in a headline that “the age of electric cars is dawning ahead of schedule.” Premium brand managers in the U.S. must have rushed to click on the article for some good news, some hope for increasing sales.

Unfortunately, the writer then laid out reality: the battery-electric vehicle transformation was taking place in Europe; that’s where sales were increasing. The article also proclaimed lower battery prices would eliminate the need for government incentives, implying a reduction in retail prices.

Yeah, right. It’s not at all clear that the first thought of an automotive CFO is to pass along hard-fought cost reductions to the customer.

Higher interest in fuel economy among European consumers is logical. In the previous decade, Europeans’ preference for diesel engines in their vehicles was strong, a dramatic contrast to U.S. consumers. This difference in purchase preference will repeat itself with battery-electric vehicles (BEVs) in the coming decade.

The national regulatory structures and incentives of the two regions are just not comparable. This distinction presents a problem for all mainstream brands in the U.S. which are proliferating their portfolios with BEVs and looking for volume. Premium brands are not concerned with these pedestrian issues. Premium consumers want new choices and more of them — with lots of leather on the inside.

Premium brands delivered the increased choice that consumers were looking for. By 2019 there were 140 nameplates in the segment, up from 101 in 2007. Overall sales boomed as their portfolios expanded. Sales of premium models reached 2.3 million in 2019 after generating 1.6% annual growth since 2007. New CUV/SUV entries and leasing options boosted the segment’s share of light vehicles. 

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Mercedes, BMW, Audi and, to some extent, Lexus, maintained their dominant position in the segment by adding more models, some with similar car-truck platform architecture. Profit followed. Importantly, these dominant brands maintained model names that were familiar to the wealthy class, and this stability separated them from the rest of the pack. As expected, the proliferation resulted in fewer sales per nameplate entry — a kink in the profit armor.

Tesla, the upstart with electric-only vehicles, has become the darling among luxury customers and Wall Street. Tesla established an unorthodox sales and service process, went full tilt on electric only and became the benchmark for battery-electric vehicles. Its nameplates are not just entries in the BEV sub-segment; they are the segment, and more models are on the way (at lower prices).

Marketing gurus understand product proliferation is a double-edged sword. Beer producers recognize this as well. Increased customer choice has increased beer sales and production over the past 15 years, especially among premium craft brewers. Everybody seems to win when the market is growing.  Yet, beer sales have declined over the past two years, requiring producers to decide whether entries need to be dropped.

Premium vehicle producers also will need to evaluate their portfolio and marketing approach as more BEVs enter the showroom. Exotic brands with new BEVs, such as Karma and Aston Martin, will not have a problem with competitive price comparisons.

However, dominant premium brands and other market leaders will face a serious dilemma. Will they price-benchmark their BEVs against Tesla to generate volume, or price as a premium against their gasoline and hybrid models to generate a small level of profit? This is a serious strategic decision, a fork in the road. However, the choice is obvious.

Profit generation and image mean everything to these brands. These two important company goals will keep prices of premium BEVs high and volume low. The road taken will be that of profit — on both existing gasoline entries and BEVs. They will not risk the diversions from high-profit vehicles to BEVs generating losses by chasing Tesla on price.

The brands also need to generate profit now. A BEV-only vehicle architecture ultimately has the potential for significant reductions in manufacturing and parts costs. However, the current capital and engineering requirements for a BEV-only premium entry are enormous, and are a bit more difficult than putting new beer into existing cans and bottles. Premium brands have the margins to sustain this investment, at the higher price.

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Here are three reasons that will keep premium BEV entries exclusive in the luxury zone:

The premium segment is the “fashion” end of the business. Having the newest, fastest and highest technology vehicle motivates shoppers to buy. Likewise, the self-image of the buyer and the brand image of the product are intertwined. Brand image will determine shopping patterns. So BMW, Lexus, Audi and Mercedes have a distinct advantage for attracting customers to their BEV entries. Exclusivity reigns; fuel economy, not so much.

Note to designers and planners: Cancel your current e-product if it does not go fast and is significantly differentiated from gasoline versions in the portfolio.

Warren P. Browne is president of WP Browne Consulting and is a former General Motors executive.