Luxury's new look: Smaller and more practical

Five years ago, you knew what a luxury vehicle was.

It might have been a Mercedes-Benz S600 with a V-12 under the hood, or a Porsche Carrera S boasting 355 horsepower, or a massive, bling-dripping Cadillac Escalade ESV Platinum.

Different as they were, those vehicles all displayed look-at-me styling, maximum horsepower, and a sense of self-reward. Fuel economy was an afterthought. The overall rating on the Escalade, for instance, was 13 mpg.

But a deflated economy and rising green consciousness are changing the definition of luxury. In the new era of inconspicuous consumption, rational factors play a greater role in purchasing decisions, brand executives say.

Luxury brands need new selling points to bring hesitant buyers into showrooms--and social correctness is a big factor. Johan de Nysschen, president of Audi of America, says sales of high-end luxury cars such as the Audi A8, BMW 7 series, and Mercedes-Benz S class have been hit especially hard.

For example, sales of the Lexus LS fell 44 percent in 2009. The Mercedes S class dropped 37 percent. BMW's 7 series and Audi's A8/S8 also posted big declines. "Those customers are the very people who are heading up corporations and small businesses, who are having to make tough decisions," de Nysschen says. "They might have the means, but it's just socially not the right time."

New approach

In response, luxury brands are:
-- Emphasizing warranties.
-- Relying less on leasing.
-- Adjusting product lineups.

Bryan Nesbitt, Cadillac's general manager, says the XTS concept car, shown last month at the Detroit auto show, was a direct response to those luxury concerns.

The XTS is a preview of Cadillac's next full-sized sedan, which will replace the STS and DTS. It is powered by a hybrid drivetrain that teams a 3.2-liter V-6 with an electric motor.

Nesbitt admits GM is concerned about whether the drivetrain will satisfy buyers accustomed to V-8s.

"Is the luxury market ready for it? Is technology going to trump displacement in the luxury space?" Nesbitt asks. "That's a little bit of a test well."

But Nesbitt says the hybrid--along with restrained styling and an emphasis on practical features such as digital connectivity--aims to match the new mood of customers.

"The customers are very clear," Nesbitt says. "They want to be respected for being smart. They want their peers to validate them and say, 'You made a really smart choice.' And they get a lot of respect from their peer groups when they prioritize efficiency."

Other luxury automakers are likewise stepping--however gingerly--into the new environment. Jack Pitney, BMW of North America's vice president for marketing, says monthly surveys of BMW customers over the past year show that "everyone's watching their dollars right now."

Says Pitney: "There's definitely a more rational approach that has come into everyone's mind-set. Value becomes all the more important."

Perk: Free maintenance

BMW has responded by emphasizing its 4-year/50,000-mile maintenance program, which is included in the purchase price. Currently, 30 percent of BMW buyers cite the plan as a major reason for purchase, up from less than 10 percent two years ago, Pitney says.

The maintenance plan, he says, is one of "the little things that allow you to rationalize a luxury purchase to your neighbor."

Also, Pitney says, BMW has found customers less inclined to lease. Leases accounted for 54 percent of BMW's retail sales in 2009, down from 65 percent in 2008, he says. Leasing will drop even lower this year, he adds.

"There is a real desire in this economy to own the asset," Pitney says. "There is a comfort in that."

Luxury brands are adjusting product lineups. Audi, for instance, will introduce smaller engines and is likely to make the next generation of its entry-luxury A3 a sedan, targeting U.S. buyers, says de Nysschen.

Toshio Furutani, the global head of Lexus, recently said the brand would add "smaller, more fuel-efficient cars, lower sticker prices ... and more hybrids." Acura has abandoned plans for V-8s and rear-drive vehicles but will add hybrids, executives said this month.

In their quest for fuel efficiency, luxury makers will offer more models with four-cylinder engines. But luxury brands doing so must walk a fine line, says Doug Scott, managing director of GfK Automotive, a market researcher.

Consumers could perceive luxury-branded vehicles with four-bangers as similar to mainstream vehicles, he says. As volume brands offer more of the information services, entertainment, and safety features found on today's luxury vehicles, brand images could converge.

"The more that a Honda Accord has all of the features of a [BMW] 3 series, that's going to be a whole new world for them," Scott says. "There are already more people who are cross-shopping luxury and nonluxury brands than a few years ago."

Jim Hossack, senior consultant and vice president of the AutoPacific research firm, cautions that buying a luxury vehicle never will be completely rational.

"If you were strictly logical and rational, you wouldn't buy a new car--you'd buy used," Hossack says.

Luxury buyers are "buying pride and prestige," he adds. They want their car to reflect positively on them and to have distinctive, if not outrageous, design.

"People want it all--they really do," Hossack says.

"It's difficult to move them from where they naturally gravitate without there being a big change, like a big change in the price and availability of fuel."

(Source: Automotive News)