It used to be so simple. A decade ago there was only a handful of cars that most people couldn’t afford. They were called luxury models.
Today that handful has grown to a legion of luxury vehicles. And thanks to automakers allowing you 60 monthly payments before taking ownership or 24 monthly lease payments before you can turn the car back, more people can get their hands on one.
“There used to be a couple of us competing against each other, but today everyone has a $40,000 car to sell,” said Peter Gerosa, general sales manager for Cadillac in Detroit.
A market once dominated by U.S. and European automakers has been joined by the Japanese.
As independent Detroit analyst Arvid Jouppi noted: “It’s a matter of too many suitors trying to put the ring on the same girl.”
Having so many models to choose from causes some confusion. When confused, buyers generally sit back and wait it out. Still, the luxury segment is surviving the overall car market doldrums. Sales in the first five months of this year totaled 350,000, up from 338,000 a year earlier.
But the numbers don’t tell the entire story. There’s uncertainty about where the market is heading. When the Japanese luxury cars entered the fray, the doom and gloomers insisted Cadillac’s and Lincoln’s days were numbered. Just like in the economy car market, they said, the Japanese would be the luxury powerhouse in a few years. Didn’t happen.
The 10 percent luxury tax on the amount of the car’s price exceeding $30,000 also was going to spell the end of the luxury car market, with most rolling out the door for more than $30,000. The tax has hurt, but it hasn’t crippled the industry.
The recession, teamed with a change in administrations from the largely wealthy Republicans to the largely blue-collar Democrats, was supposed to make consumers shake in their Guccis (bought in the Reagan years) and force them to stop spending on such frills as $30,000 to $100,000 autos.
Well, two out of three isn’t bad.
The recession and the Clinton administration have given consumers pause in their spending patterns.
“The new president’s economic policy and just how it will affect the luxury-car buyer has certainly complicated the market,” said George Borst, general manager of Toyota’s Lexus division.
“There’s also the issue of health care. I don’t know about the other luxury-car makers, but at Lexus, (chief executives) and top management are our No. 1 and No. 2 buyers. Then come physicians, and they’re wondering what Hillary (Rodham Clinton) is going to do to health care and what Bill (Clinton) is going to do to salaries.”
Sales through the first five months of this year are a mixed bag. The only Cadillac model posting an increase in the period was the Allante, and it has been discontinued. Lincoln sales were up by 8,500, but only because sales of the Mark VIII, Lincoln’s lowest-volume car, were up by about 9,000 units.
Among the Japanese, sales at Lexus, Toyota’s luxury car division, are up about 1,000 units, thanks not to its top-of-the-line $50,000 LS400 but to its new $38,000 GS300. Sales at Infiniti, Nissan’s luxury car division, are up about 4,000 units, but again not because of the success of its $50,000 Q45, but because of its entry-level G20 at $21,000 and its mid-level J30 at $35,000. Acura, Honda’s luxury-car division that critics claim sells a dolled-up Accord at $30,000, reported sales were down 8,000 units.
Among the Europeans, BMW sales were up by 6,000 units as the automaker focused on its entry-level and lowest-priced 3 Series. Mercedes-Benz sales were down by 5,000 units. The replacement for its lowest-priced entry-level 190 series isn’t coming out until fall.
Those numbers would indicate that though consumers are buying luxury cars, the lowest-price offerings are the attraction. The nameplate is still important, but consumers are trying to get the cheapest car carrying the prestige company logo.
“It seems that $40,000 is the cutoff point for luxury sales now. Sales volume drops off sharply after prices reach $40,000,” said Cadillac’s Gerosa.
“Does anyone really need a $100,000 Mercedes?” asks David Cole, head of the office for the study of automotive transportation at the University of Michigan in Ann Arbor.
“Consumers are buying the entry-level BMW 3 series or Mercedes 190 series so that they can still say, `I drive a Bimmer’ but didn’t pay $80,000 or `I drive a Mercedes’ but didn’t pay $100,000,” Cole said.
“The trend is definitely toward value in a luxury car,” said Lexus’ Borst. “Anyone thinking people will pay a premium just for the esteem of a nameplate is making an error.”
“There’s a silent price revolt under way,” noted Jouppi. “The luxury buyer is laying low because of the general economy and uncertainty over Clinton’s tax plan and health-care program. Those who are buying are buying low-end luxury models, not top-of-the-line versions. And some have found they can buy a used luxury car instead of a new one. Cars have gotten so much better that even a 4- or 5-year-old car still looks new.”
The consumer’s mood also has changed, and that has affected luxury-car buying.
“In the ’90s we’re not seeing a repeat of the euphoria we had in the ’80s when there was a sense of prosperity among consumers,” said Susan Jacobs, president of Jacobs & Associates of Little Falls, N.J., a forecasting and strategic planning firm that specializes in the auto industry.
“In the ’80s people felt wealthy and were willing to spend money on luxury cars that went beyond their practical needs,” she added. “We don’t have an economic environment with a sense of prosperity now. A lot of consumers feel we haven’t come out of the recession yet and so they aren’t willing to restoke the optimism that caused the splurge of the ’80s.
“There’s also been a change in consumer attitudes,” Jacobs said. “They aren’t as willing to pay a premium for a car purely for the status of the name badge. Instead, they’re choosing more practical and functional traits in a vehicle. Safety, handling and interior space are now more important than the logo on the hood. You see more ads about luxury cars holding the road in the rain and stopping in time when a tree falls in front of them than you do luxury cars parked at the polo field.”
As for the Japanese, for the first few years that Lexus, Infiniti and Acura were on the market, they were on everyone’s shopping list. Frequent and large price increases, led in part by the rising value of the yen against the dollar and in part by political considerations to ease anti-Japan sentiment by creating a wide price gap versus the domestics, have caused that market to soften.
“They aren’t as appealing at $50,000 as they were at $38,000,” Jacobs noted.
The Japanese enjoyed a distinct price advantage over the Europeans as Mercedes, BMW and Jaguar took the approach that the true luxury aficionado was not only willing but eager to pay extremely high prices for the privilege of driving one of their cars. The tack backfired.
“Mercedes believed the buyer wouldn’t defect to the Japanese, the same mistake the U.S. automakers once made,” Jacobs said.
While luxury cars are experiencing some woes, a segment of the luxury market-one that few would have considered in the same breath as luxury vehicles a few years ago-is going gangbusters.
“Sport-utility vehicles have added a new dimension to the luxury market,” said Larry Binser, Chrysler Corp. planning chief of the LH-car program, of the new luxury entries.
“(Sport-utilities) are clearly an alternative to luxury cars and represent incremental business. This is why you see so many Jeeps in (former) Mercedes-Benz and BMW driveways. Do you spend $40,000 on a car or $30,000 on a Jeep? People are spending $30,000 on a Jeep and putting $10,000 back in their pocket. They see a $30,000 Jeep as an alternative to spending money,” Brinser said.
“People who have taken a hit in their income during the recession feel they can move from Mercedes into a (sport-utility) and save money while not losing any prestige or status,” said Borst. “If you were to move out of a Mercedes and into a Taurus, people would ask you what happened, but if you move from a Mercedes to a Ford Explorer, nobody says a word.
“The (sport-utility) market is attracting a million buyers a year, and those million units had to come from somebody and it’s from upscale buyers who had been purchasing luxury cars. The (sport-utility) is less expensive but it’s still exciting,” Borst said.
Joel Pitcoff, research and marketing analyst at Ford Motor Co., said in the first five months of this year sport-utility vehicle sales totaled 452,286, up from 369,115 a year earlier. So sport-utilities have outsold luxury cars by 102,000 units.
“The sport-utility vehicle provides prestige without the stigma of conspicuous consumption,” Pitcoff said. “With people starving in Somalia and the number of homeless growing here, not all people want to be seen in a luxury car that they spent lots of money for.”
The U. of M.’s Cole agreed, adding that luxury-car buyers have become socially conscious.
“It’s not as fashionable to drive that $50,000 car when you can spend $30,000 on a utility and still be fashionable-and socially correct,” he said.
“With a sport-utility a person can maintain the upscale lifestyle and keep the status while getting function at the same time. This is one reason Mercedes-Benz has decided to come here with a utility of its own,” Jacobs said.
Mercedes plans to start building a luxury sport-utility in the U.S. in 1995 for the 1997 model year.
“The luxury market has expanded, and the Jeep Grand Cherokee and the Ford Explorer are now members,” said Cole. “You can drive them without your peers thinking you’ve had to come down from your luxury car. It’s not conspicuous consumption like the president getting a $200 haircut. Is $30,000 still luxury? If you’re coming out of a Yugo, $18,000 is luxury.”
