There are several factors driving the German trio’s expansion, which include CO2 targets, unique products as well as a “shrinking middle.” Nowadays managers often talk about how many customers trade in a midsize car built by a volume brand in favor of a smaller compact-class vehicle that has a premium badge on the hood. Luca De Meo, Audi’s sales and marketing chief, remembers reading about Michael Porter’s “stuck in the middle” phenomenon 25 years ago during his time in college. Now he sees it happening in real time. “Premium brands are benefiting globally as demand polarizes between the top and bottom categories,” he told ANE. This is part of a broader cultural trend. “We see the same happening in the fashion industry, consumer goods, even in food,” he said.
This trend is reinforced by the shrinking middle class in many parts of the developed world. Stagnant median disposable incomes combined with a rising share of wealth generated by more affluent segments of the population force many households that might have been Fiat or Citroen buyers to switch to lower-cost Dacias or Kias.
Additionally, the German brands have been able to serve customers with segment-busting models such as the X6 and the Audi A7 Sportback, which have encountered little to no competition from volume brands. “We created products that generated demand,” De Meo said. These products attract “a completely different customer base, people ready to pay for something unique,” he said.
Impact of CO2, fleets
Another factor behind the growth of the German premium brands is Europe’s tough emissions targets. To reduce the CO2 of their fleets, the German premium brands had to expand their small-car portfolios, which put additional pressure on volume automakers. Mercedes forecast that its compact family, which has grown from two to five models in the last five years, will account for 42 percent of its global sales in 2025, up from 33 percent last year. BMW’s Robertson said that, including Mini, small cars account for about 40 percent of the automaker’s global volume.
Moreover, there are some unique market conditions in Europe that skew demand in favor of German premium brands. Figures are significantly influenced by the region’s two largest markets – Germany and the UK – both of which have an above average penetration of premium cars, in part due to professionalized sales networks catering to fleet managers. “In fleets, the monthly rate covers mainly the vehicle depreciation and premium cars, because of their success, have a higher residual value, meaning reasonable monthly rates,” Audi’s De Meo said.
For the moment, luxury brand customers continue to pay the hefty premium so coveted by the industry, but tastes are changing. While upscale brands once offered superior interiors, more reliable mechanics and more powerful engines, the gap in build quality between premium and volume cars has shrunk dramatically.
While it helps to be innovative and design beautiful cars manufactured with the finest materials – in some cases even handcrafted – premium brands have to tell a story that differentiates them in an increasingly commoditized world. “In order to be successful, a brand ideally has to exhibit a combination of being meaningful, different and salient,” said Bernd Buechner, managing director of Millward Brown in Germany.
Red Bull, for example, fulfills a unique demand rather than trying to copy Coca-Cola or other similar carbonated beverages, just as Tesla satisfies a different customer group from Mercedes. High-end German carmakers achieve this in varying ways by staging a premium experience for the customer when they pick up the keys to their new car, often in conjunction with a visit to their own museums that serve as de facto cathedrals to their brands.
Germany’s premium brands will face tougher competition from upscale brands that are undergoing revivals such as Volvo and Jaguar Land Rover, and from Alfa Romeo. Fiat Chrysler Automobiles is investing 5 billion euros into Alfa in a bid to boost its annual sales to 400,000 by 2018 from 68,000 in 2014. Fiat Chrysler CEO Sergio Marchionne says the new Alfa Romeo Giulia is better than its German rivals. He expects Alfa to recover fast in Europe once its product offensive gets fully underway.