The Blurring Line between Mainstream and Premium Automakers

by Nicholas Wu

Prior to the financial crisis of 2008, consumers were faced with two distinct groups of cars: the mainstream Toyotas, Fords, Hondas, and Chevys that seldom surpassed the $30,000 mark and the premium BMWs, Mercedes, and Audis that always nearly began at $40,000. There was no overlap at all between mainstream and premium automakers. Premium automakers were largely the definition of extravagant wealth and mainstream automakers the choice of the pragmatic; they were mutually exclusive.

However, after the economy gradually recovered from the Great Recession in 2011, premium automakers began a new trend of, what industry experts labeled, filling “white space.” (For the purpose of this article, we will mainly be focusing on BMW, Mercedes, and Audi as the core premium automakers, since they hold the vast majority of the market share compared to other premium automakers such as Lexus, Infiniti, and Cadillac). In layman terms, premium automakers are filling every niche in the market with new products in a diversification strategy, offering increasingly cheaper cars in an industry-wide down-market shift. Because of this down-market shift, consumers now see a lot more overlap between models offered by mainstream (regular) and premium (luxury) automakers, as exemplified below.

There are a few important reasons for this down-market shift, many of which are due to government regulations. For example, the Obama administration implemented a new MPG mandate that required each automakers to achieve an average fuel economy of 54.5 MPG among its models. Premium automakers responded by offering smaller and lighter models with decreased engine power that were more fuel efficient, and made them cheaper. Examples of such models are the Mercedes CLA and the BMW 2-Series.

The introduction of cheaper and more fuel-efficient models in reaction to government regulations makes financial sense because the company can save hundreds of millions on research and development, and continue to produce gas-guzzling luxury behemoths such as the S-Class and the 7-Series.

In addition, government regulations now require mainstream automakers to also include safety features such as the blind-spot warning, automatic emergency braking, and 360-degree cameras that were previously only found in premium makes. Due to this increased competition from mainstream automakers, premium automakers decided to slash prices — and quality — rather than invest more on new technology.

And there’s other reasons for the increasing competitiveness stemming from mainstream automakers. Due to a better economy in recent years, consumers have more wealth and confidence, and there are lower levels of personal debt. Compounded by depressed fuel prices in recent months, mainstream brands are moving up-market, pushing the average price of new cars to an unprecedented $33,500. Even Hyundai, the Korean automaker traditionally regarded as the poster child of extremely cheap, low-cost cars, pushed its base-model Accent up more than $3000 to include more amenities.

Therefore, as a result of the down-market shift seen in premium automakers and the up-market shift seen in mainstream automakers, the line between premium and mainstream, as well as their respective markets, are increasingly blurred. As shown in their down-market shift, premium automakers are ultimately competing with their exclusive brand image rather than with additional amenities. Their argument lies on the tenet that consumers will opt to purchase the bare-bones CLA rather than the fully-loaded Camry for the same price of $32,000.

A different reason for the down-market shift in premium makes is the premium automakers’ emphasis on a stronger base of brand loyalty. They hope that, by offering cheaper models, they can lure a broader base of new generation of entry-level luxury customers who will remain loyal to the brand for years to come. In other words, premium automakers are attempting to make the point of entry into their brand a lot easier than before. They hope that these new customers will remain loyal to the brand and eventually shell out big-bucks for a top-of-the-line model from them. A prominent successful example in the market is the Mercedes CLA. The conquest rate (an industry measure of new buyers coming from mainstream brands) of the CLA is 75%, which is drastically higher than any other Benz model, many of whom are much younger than traditional Mercedes buyers.

However, there are many potential shortfalls to the down-market shift as well. An increased sales volume may lead to a dilution of brand and a loss of premium status and prestige, resulting in decreased sales of high-end models and the loss of upscale, older, and more traditional consumers. Financially, a down-market shift may not be the smartest move, as the investment the premium automakers are necessitated to make in research and development, dealer education, and marketing may be disproportional to gains in market share.

The benefits of the down-market shift is that premium automakers are able to drastically increase market share, resulting in unprecedented annual sales volume, as shown in the graph to the right.

• Primary goal is to increase market share