U.S. consumers are getting better deals on luxury cars and sport-utility vehicles this year as the top brands clear out old models and race to be No. 1 in sales.
Toyota Motor Corp. (7203)’s Lexus has led the rise in customer incentives. Lexus boosted discounts on its cars by 54 percent this year and its SUVs by 60 percent, according to researcher Autodata Corp. Daimler AG (DAI)’s Mercedes-Benz increased incentives 11 percent and Bayerische Motoren Werke AG (BMW) by 6.9 percent, compared with a 2.2 percent gain in industry-wide promotions.
“You have these three brands that are all very close to one another and that’s going to put incredible pressure on pricing,” Tom Libby, lead North American analyst for R.L. Polk & Co., said in a phone interview. “That’s going to cause incentive wars. ”
Lexus was the top-selling luxury-auto brand in the U.S. for 11 years, until BMW took the crown last year. Mercedes leads BMW by fewer than 2,000 vehicles through May and Lexus by more than 18,000. All have increased deliveries faster than the total U.S. light-vehicle market’s 13 percent gain.
Lexus sees little chance of winning the U.S. sales race this year, Mark Templin, Toyota’s U.S. Lexus chief, said in a phone interview. The brand’s goal is for 250,000 U.S. sales this year, less than 1 percent more than BMW’s 2011 results. BMW sales are up 14 percent so far this year. Regaining the sales title would be a goal “if possible,” Kazuo Ohara, senior managing officer for Lexus, told reporters in February.
“Spending is up this year because last year we didn’t have anything to sell,” Templin said. “If you go a year from now, in terms of incentives, you won’t see big growth.”
The brand will offer smaller incentives over the course of the year, he said, as new versions of its most popular models reach dealerships.
“ES and RX have both been in sell-down mode, so there was some increase there,” Templin said. “We had the buildout of 2012 RX, but the new RX just hit this month, and we added the new ES recently, so you’ll see that change.”
Lexus has historically spent the least in the industry on incentives, said Eric Lyman, vice president of residual value solutions at ALG Inc. in Santa Barbara, California.
ALG sees “significant compression” between companies that have historically been the most aggressive discounters, such as General Motors Co. (GM) and Chrysler Group LLC, and those that have been thriftier, such as Toyota, Honda Motor Co. (7267) and the German luxury brands, including Volkswagen AG (VOW)’s Audi.
“Those brands that have had discipline in the past have started to increase their spending,” said Lyman, whose company publishes a benchmark guidebook used by the industry to set residual values, or projected resale values that determine buyers’ monthly lease payments.
Residual values are particularly important for the luxury market because leasing accounts for as much as half of sales transactions, Polk’s Libby said.
Discounts baked into lease contracts aren’t as expensive as they may appear, said Jesse Toprak, an industry analyst with TrueCar.com.
“It’s not money out-of-pocket today,” he said.
Mercedes sales for this year through May increased 18 percent to 106,364, while BMW gained 14 percent to 104,779 and Lexus rose 14 percent to 88,110. The results exclude Daimler’s Sprinter vans and Smart cars and BMW’s Mini brand, which aren’t luxury vehicles.
Lexus spent $3,734 on incentives per SUV sold in May and $2,855 per car, according to Woodcliff Lake, New Jersey-based Autodata Corp. The average vehicle last month sold with $2,545 in discounts, up 11 percent from a year earlier, Autodata said.
The brand has been coaxed into using discounts as models such as the RX SUV, its only North America-built vehicle, get older and rivals roll out competing vehicles, ALG’s Lyman said. Mercedes started selling a refreshed M-Class last year. GM’s Cadillac SRX and even mainstream brands such as Chrysler Group LLC’s Jeep, which offers versions of its Grand Cherokee SUVs that can sell for more than $50,000, are challengers to the RX.
“Lexus is at the tail end of their life cycle for a lot of their volume products, and the competitive landscape has changed,” Lyman said.
Daimler, based in Stuttgart, Germany, boosted incentive spending by 28 percent in May to $3,990 per Mercedes car, and by 23 percent to $3,473 per SUV, according to Autodata.
The Mercedes E-Class has consistently been the most heavily incentivized model in the mid-size luxury segment and S-Class promotions “continue to trend upwards, Stuart Pearson, a London-based analyst at Morgan Stanley, wrote in a June 6 research note.
That’s to be expected from a model at the end of its run, said Steve Cannon, head of Mercedes U.S. sales, noting that a new S-Class will go on sale next year.
“Your flagship when it’s at the end of its life cycle struggles, but that’s not particular to us,” he said in a telephone interview. “It’s the same for any of our key competitors.”
The flip side is the opportunity to cut discounts on popular redesigned models.
“The best success this store is having is based on new- product releases, such as the new 3-Series,” said Jeff Gerken, general manager of BMW South County near San Diego. “It is not being incentivized, but yet it’s selling very well.”
Total U.S. incentive spending for Munich-based BMW, including its Mini brand, climbed 4.1 percent in May to $3,613 per vehicle, as promotions on cars increased 10 percent to $4,218. The company pared discounts on SUVs by 9.4 percent from a year earlier to an average of $2,286.
BMW has approached its incentive strategy “scientifically and strategically,” Gerken said. So-called loyalty offers that give current BMW owners $1,500 to $2,000 rebates have “done a lot to help us sell cars,” he said.
“They’re not just putting thousands of dollars in the trunks,” Gerken said in a telephone interview. “You almost need your ouija board to put a car deal together today. They’re pulling all the strings that they possibly can.”
BMW and Mercedes are also in a global luxury race with VW’s Audi brand. Its U.S. sales this year through May rose 14 percent to 52,494, topping GM’s Cadillac, as the premium unit of Wolfsburg, Germany-based VW has set sales records for 17 consecutive months.
Audi increased incentives on cars by 18 percent to $3,553 per car and by 23 percent to $2,261 per SUV in May, according to Autodata. Audi aims to increase U.S. sales to 200,000 vehicles annually by 2018 from 117,561 last year.
Incentives in the luxury market have been “targeted” and “fairly modest,” said Greg Goodwin, CEO of Kuni Automotive which operates 14 premium-brand dealerships in California, Oregon, Colorado and Washington. Loyalty deals often involve customers trading their previous car in for a new one, which is helping rebuild used-car supplies that have been crimped by slow sales during the recession, he said.
“I expect that we will see incentives continue for the foreseeable future, but I also expect that they’ll be more effective and more impactful,” said Goodwin, whose company in Vancouver, Washington, operates BMW, Lexus and Audi stores. Momentum from new-product introductions should “enable manufacturers to continue to manage incentives more carefully and cautiously than they have in past years.”
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