Wealthy Drivers Are Trading Down to Cheaper Autos

It's hard to forsake luxury, but recession-pinched buyers are discovering that tight credit and dim prospects mean less expensive cars

Trading down is becoming chic. The word "frugalista" has crept into the lexicon. McDonald's (MCD) McCafé sales are up, while Starbuck's (SBUX) are down. Subaru and Hyundai are hotter brands than BMW and Mercedes-Benz. The recession, flirting with becoming a full-on Depression, is reshaping consumer buying habits, as well as the product plans of companies ranging from Ford (F) to Mercedes-Benz, Burberry (BBRYF), and Coach (COH).

But in the world of automobiles, consumers still find it hard to trade down from luxury brands, which after all represent status that was attained through financial success. "Many people equate the kind of car they can afford to buy with their station in life," says independent marketing consultant Dennis Keene. "They wear vehicles like wardrobes…for many they are what they drive—as superficial as that sounds."

Still, there are signs that auto buyers are making adjustments. In January and February, when U.S. auto sales reached 28-year lows, there was considerable trading-down at dealerships. Consider that, according to a sample of buyers taken by auto research Web site Edmunds.com, 72% of Mercedes-Benz patrons who bought or leased a new vehicle traded out of the German automaker to another brand rather than acquire another Mercedes. Of those who bought or leased a new vehicle, only 28% stuck with Mercedes, 26% went to another luxury brand, and the remaining 46% traded down to a mass-market brand.

Luxe sales still outpace the industry

Only 39% of Cadillac owners who bought or leased a new vehicle in January or February stayed with Cadillac or another luxury brand, while 61% opted to trade down to a mass-market brand. And at BMW, 51% of Bimmer owners getting new wheels went for a mass market brand.

Sales of many luxe car brands are down less than figures for the industry as a whole. Overall U.S. car sales are down 39.4% through the first two months of the year, while BMW was down 28.5%, Mercedes-Benz (DAI) fell 33%, Porsche 26%, Lexus 33%, and Lincoln 33%. The big luxury loser was General Motors (GM), whose Cadillac brand dropped 47%. GM's Hummer sales plunged 64%, and Saab sank 52%. One factor, no doubt, was the constant buzz of possible bankruptcy around GM and the likely sale or closure of Hummer and Saab. Ford's Volvo unit, which is also up for sale, was off 60%.

There is considerably more "down shopping" going on this year than last, says Jesse Toprak, executive director of industry analysis at Edmunds.com. "There are large numbers of car owners who went into luxury brands tapping home equity or from bonuses, and those resources simply aren't there for a significant number of people right now," says Toprak.

For some, that means holding on to a car they might ordinarily trade in for a newer model. Reid Jajko of Ann Arbor, Mich., has a BMW 5 Series he bought off lease three years ago. Usually, he would be ready to flip his now six-year-old Bimmer for another, but Jajko says he's going to finish off the payments and hang on to it: "If I were buying a new car, I'd definitely be scaling down."

a shift to "desperational" spending

Margaret Babbish, who lives in Edison, N.J., already has taken the plunge back into the mass market by surrendering the Audi A4 her husband leased for the purchase of a used Scion xB. "Our retirement investment portfolio is in tatters, and we are making all sorts of changes to put more money into it to beef up our principal for when the market hopefully rebounds," she says.

A recent report from Goldman Sachs (GS) calls the broader trend a shift from "aspirational spending to desperational spending." Over the past decade in particular, consumers were empowered to spend beyond their means as home values skyrocketed and access to credit appeared limitless. As a result, there was little price resistance as the taste for luxury products seeped beyond typical demographics.

"A greater swath of consumers cared less about price when it came to their choice of restaurant, apparel, handbag, shoes, hair care, supermarket, and vacation, giving way to a burgeoning array of better and best alternatives catering to this more aspirational crowd," the Goldman report continued. "Customers that once were levering up for their Saks shopping sprees are now proud of their Wal-Mart discounts."

How long will it last? That question is crucial for car companies, because they must decide today what products they will sell to the public four and five years from now. Says Mercedes-Benz spokeswoman Donna Boland: "There is a lot of research work being done right now to get a handle on just how big we can expect the traditional luxury market to be when the economy bounces back, and how baby boomers in particular will behave toward luxury brands."

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