Mass luxury: As automakers push cheaper models, they risk endangering brand value
With the X-Type, Jaguar was the first luxury maker to move down-market with a vehicle designed for big volumes.
By MARK RECHTIN
LOS ANGELES -- Mike O'Driscoll calls it the "democratization of luxury," the notion that luxury need no longer be exclusive.
If that sounds counter-intuitive, it is. But as president of the Aston Martin Jaguar Land Rover North America grouping within Ford Motor Co.'s Premier Automotive Group, O'Driscoll is charged with making the evident contradiction work as a viable business case.
With the Jaguar X-Type sedan, which starts at under $30,000, and the Land Rover Freelander, at $25,600, O'Driscoll is the point man for Ford's multi-billion-dollar gamble that a luxury brand can be extended downward without diminishing its inherent value.
At stake for O'Driscoll and other chiefs moving downmarket: Whether premium pricing - and premium profits - can be maintained for the rest of the lineup.
"Ten, 15 years ago, you didn't see BMW, Mercedes-Benz, Porsche, Jaguar badges on driveways in many small towns in America. Now it's almost commonplace," O'Driscoll said in an interview earlier this year at PAG headquarters in suburban Irvine, Calif.
"We're no longer simply aspirational. We're a lot more accessible. Our products are appealing to younger people. Nine out of 10 X-Type customers are new to the Jaguar brand. We're democratizing luxury."
Jaguar and O'Driscoll are not alone. In a quest to bring younger drivers into the tent - hopefully for life - and to build higher volumes, Mercedes-Benz, BMW, Audi and Volvo either have introduced models priced under $30,000 or have them in the pipeline.
On one level, the X-Type seems to be doing its job by igniting Jaguar's U.S. fortunes. Through May, Jaguar's U.S. sales are up 62 percent from the year-ago period to 27,246 units, and the company expects to top 75,000 for the year, up from about 44,500 last year.
But the X-Type accounts for 16,171 units, or 59 percent, of the total through May, while sales of its siblings have fallen. For example, the S-Type is off 45.9 percent, to 5,820 units.
That erosion of higher-priced sales underscores the folly of trying to democratize luxury, analysts and academic experts say.
"Jaguar sees quick money to be made in diluting the brand, and they don't see the long-term problem," warns Jim Twitchell, a University of Florida professor of English and advertising, and a specialist in luxury branding.
"The promise of luxury is that you cannot go above it, which is why you don't want to go down-market. They are taking a great brand story and (squandering) it away."
In a study of the X-Type's cost to Jaguar, FutureBrand, an international brand con******cy in New York, estimates that the car has erased $637 million, or 17.5 percent, of the $3.635 billion in Jaguar brand value that existed before its launch last year.
FutureBrand quantifies brand values by calculating dollar values for three variables: its forecast of the brand's financial performance; its assessment of the role of the brand in driving profit or cash flow; and its assessment of the strength and stability of the brand vs. brands in the same class.
In its analysis, FutureBrand said X-Type's cannibalizing of higher-margin sales by resorting to incentives has damaged the Jaguar brand, perhaps irreparably.
"To do proper brand management, you have to do the product right," said Steve Saxty, executive director of the automotive practice at FutureBrand.
"Clearly, people are getting it wrong. The world has turned against Jaguar because the product doesn't deliver," he said. "There is no excitement about the X-Type."
The measure should be an eye-opener for other luxury brands seeking to bolster their sales volumes with down-market offerings, analysts warn.
"Anyone telling you that consumer demand is driving luxury downward is a liar," said Eric Noble, president of The Car Lab con******cy in Santa Ana, Calif. "They are all chasing volume. No consumer wants BMW or Jaguar to make a lesser car. They just wish they made more money."
Not everyone feels that the X-Type is tarnishing Jaguar's brand halo.
In its most recent Barometer of Automotive Awareness and Imagery Study, a semi-annual polling of vehicle-purchase intenders, Allison-Fisher International of Southfield, Mich., found that consumer ratings of Jaguar's prestige have remained rock solid since 1996, compared with other luxury players. The study was done in late December from responses from 300 luxury intenders.
That timeline includes the launch of the more expensive S-Type sedan. Just like the X-Type, the S-Type is built from a shared Ford platform and was priced sharply lower than other Jaguars.
Vic Doolan, who was executive director of the Premier Automotive Group before being named president of Volvo Cars of North America Inc. this month, contends that the X-Type reflects Jaguar's core values and is positioned "where it should be."
But he warned that too much volume at the lower end of the luxury scale can undermine a brand.
"You have to be careful not to overexpose the car. There is a point of diminishing returns, where the car becomes less than special," he said. "The industry is flirting with that point right now."
Twitchell contends that Jaguar already has reached that point. He calls it "bending over a dollar to pick up a dime."
"Those old Cadillac ads talked about 'the penalty of leadership,' because people were going to see you differently in that car," he said.
"It used to be that buying a Cadillac changed who you are. But you don't change who you are when you buy a Jaguar X-Type. You own a cheap version of what's already out there," Twitchell added.
Garel Rhys, director of the Center for Automotive Industry Research at Cardiff Business School in Wales, points out that consumer perception is the bedrock under a marque that allows it to charge premium prices.
For instance, he says, at 500,000 units last year, the BMW 3 series is produced in numbers matched only by the Opel Astra and VW Golf in its segment. Although that clearly makes it a mass-market car, he observes, the BMW brand is so strong that the automaker can charge a premium for a vehicle that clearly outsells many smaller-volume, non-luxury models.
The danger, Rhys noted, is if BMW loses its premium status, it will have to play by mass-market rules and profit margins.
He said the X-Type represents a return to Jaguar's roots as a mainstream manufacturer. The only thing that can really hurt the brand is if they "build it up stupidly and greedily, and push up (volume) too fast," he said.
Jaguar is the first luxury maker to move down-market with a vehicle designed for big volumes, but it has company.
Mercedes-Benz has introduced the C230 Kompressor Sports Coupe, which at $25,615 is priced nearly $6,000 less than the next Mercedes model. But unlike Jaguar's target of 100,000 X-Type sales a year worldwide, Mercedes intends to sell only 18,000 C230s a year, a volume too low to have a dilution effect on the brand.
"The C230 has done what we expected it to do, not only for volume but in bringing new customers to the brand," said Dave Schembri, vice president of marketing for Mercedes- Benz of North America Inc.
"For us, if we stay true to our core values and maintain our objective as an aspirational brand, we can enter any segment," he said.
BMW has flirted with lesser-segment vehicles before, such as with the 318ti hatchback, but that is nothing compared to the $16,850 Mini now in BMW dealerships and the sub-$20,000 1 series expected in 2004.
BMW of North America Inc. spokeswoman Martha McKinley said BMW's goal is to be "a premium manufacturer for various niches," rather than a pure luxury player.
"The Mini and 1 series are products to round out the individual portfolios and expand the garages of BMW owners. A 7-series owner (seeing a 1 series at the dealership) can realistically say, 'Here's a product I can buy for someone else in my family and which would fit their needs well,' " McKinley said.
Susan Jacobs, president of auto con******cy Jacobs & Associates in Rutherford, N.J., said luxury brands must offer lower-priced cars to lure younger buyers, a shrinking demographic trailing the baby boomers.
"If they just move with the boomers as they age, they could turn into Cadillac and find out they don't have a connection with younger buyers," Jacobs said. "They need to apply the same brand principles in a way that appeals to a younger audience with different lifestyle needs."
Those elite brands can effectively move downmarket if the cheaper products still occupy a premium position in the new segments they enter, Jacobs contends. But Jaguar is not doing that.
"Jaguar is smothering their cars with incentives to get the products moving. That hurts the brand more than the vehicles themselves," Jacobs said. "If they move down-market by moving content out, to move the price down, they undermine the brand."
Luxury automakers risk alienating their existing high-end customer base by placating these new buyers, said The Car Lab's Noble. Do the 7-series gentry really want to share a showroom, service bay or stoplight with a kid out of college in a 1 series, he asked. "Where is the exclusivity in that?"
What hurts Jaguar most is that it is a brand without a strong set of loyal buyers, said David Martin, president of the InterBrand con******cy in New York.
"When Mercedes launches an automobile, it's relative to a large pool of goodwill, so it doesn't degrade the franchise that much," Martin said. "But a brand in flux like Jaguar can be savaged by one bad move."
Lexus Division General Manager Denny Clements said Lexus might actually have an easier time moving downmarket than its German rivals, but it won't.
"When we ask other brands' owners about their buying motivations for Mercedes-Benz or Jaguar, they talk about buying the exclusivity of the badge," Clements said. "But if those cars become available to the neighbor's teen-ager, that's a disconnect."
Infiniti already knows the experience of trying to sell cheap luxury cars. While trying hard to compete with Lexus in its infancy, Infiniti Division was saddled with the underperforming G20 sedan being priced against the Toyota Corolla.
"You don't make a premium brand by discounting, whether it's with a G20 or with a top-line car," said Jack Collins, Nissan North America Inc. vice president of product planning.
Collins noted that haggling on the G20 extended up to the flagship Q45, weighing down the brand. But with Infiniti killing the G20 and telling dealers to hold the line on price elsewhere in the lineup, transaction prices on the redesigned Q45 are up $11,000 over its predecessor product, he said.
O'Driscoll argues that the difference with Jaguar is that it's not selling a "cheap" car, even at $30,000, so the aura of exclusivity will remain intact. "It all depends on execution," he said.
"If you look at an X-Type from 100 yards, you know it's a Jaguar. It's exactly what you'd expect in a Jaguar. We haven't taken features away to hit a price point."
Staff Reporters Jim Henry in New York and Joe Kohn in Los Angeles contributed to this report
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My next Ford.....