Mercedes and BMW: Selling more cars to poorer buyers is bad for business

Hans · Sep 14, 2021 12:13 PM

Mercedes and BMW: Selling more cars to poorer buyers is bad for business 01

The last 10 years of Mercedes-Benz and BMW have been characterized by ever growing sales volume (and heavy discounting) as both marques vie for the title of the No.1 selling premium car brand.

Now, it appears that both German brands want to call for a truce as they have finally realize that flooding the market with more cars, at the expense of profit margins, is not what a premium brand should be doing.

Finance chiefs of both Mercedes-Benz and BMW have told the Financial Times that they intend to keep supply of their cars slightly below the market’s demand even after the current semiconductor shortage issue is resolved, and that they will pursue a strategy of maintaining high prices for their cars, instead of offering discounts to chase more customers.

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Mercedes and BMW: Selling more cars to poorer buyers is bad for business 01

“We will consciously undersupply demand level[s],” Harald Wilhelm, Daimler’s Chief Financial Officer told the Financial Times, “and at the same time we [will] shift gears towards the higher, the luxury end.”

Wilhelm’s counterpart, Nicolas Peter said BMW had “seen a significant improvement in pricing power in the last 24 months.” The arch rival of Mercedes said its plan is “clearly to maintain . . . the way we manage supply to maintain our pricing power on today’s level.”

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Because of semiconductor shortage, transaction prices of BMW and Mercedes-Benz models have been trending upwards, as dealers cut back on discounts and in highly competitive markets like USA and China, cars have been selling above the manufacturer’s recommended price.

Daimler’s Wilhelm said that while the chips shortage has artificially lifted prices, “one day or another the semis issue will be gone and we will carry on with the price, and the margin, and the mix focus.”

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BMW’s Peter said “customers are ready to wait three to four months, and this is helping our pricing power.”

“Of course the waiting time must not be too long, but if you buy a premium car like a BMW, it’s an emotional decision . . . to have a short waiting time is something, I believe, which makes the customer experience even greater and better,” he added.

Since his appointment as CEO in 2018, Ola Källenius, a Swedish national and the first non-German to lead Daimler, has said that Mercedes-Benz needs a minor course correction, as the ever increasing sales has not translated into improved profitability.

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Källenius is not looking to sell more cars to more people, but to preserve the brand's exclusivity and boost profit margins

“We will adjust the portfolio towards the highest pockets of profitability,” Källenius said in 2020, adding that Mercedes was “not going to chase volume” in lower-margin compact segments and that “we are prepared to eliminate models that we don’t think meet the profitability targets.”

Källenius says luxury is what Mercedes-Benz does best and it needs to act and think like one.

“We will build the world’s most desirable cars. That’s it. That’s the statement of intent, that’s what we want to deliver,” he said.

In Källenius' keynote address at Daimler’s ‘Strategy Update’ in October 2020, he told investors “A subtle course correction or maybe even a recalibration of what we have been thinking for the last few years is necessary.”

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CFO Wilhelm said, "We had fantastic growth, we had strong growth at Mercedes in the last decade, with great achievements great successes but maybe we went a bit too far to cover each and every space, in each and every segment, in particular when compact cars come to mind. We want to be in each and every market, for the benefit of volume. We want to be the No.1 in each and every market. We will now drive the market by contribution margin rather than unit sales. But let's be clear, volume matters in this industry. We are not giving up on volume, but we will drive it by absolute contribution margin and by the quality of the contribution margin or contribution margin ratio."

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Profit, price, volume - that's the order of priority

Daimler's very public announcement to say Mercedes-Benz will focus on high-end cars and will no longer chase for sales volume threw the ball back to BMW, leaving the pride of Munich with little choice but follow Mercedes-Benz’s lead, because to keep shouting its position as the world’s best-selling premium brand wouldn’t mean much anymore.

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Hans

Head of Content

Over 15 years of experience in automotive, from product planning, to market research, to print and digital media. Garages a 6-cylinder manual RWD but buses to work.

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