Steve Berger, a 59-year-old from Massachusetts, never owned a Mercedes before picking up a black CLA with a tan interior earlier this month. He’d considered Chevrolets and Lincolns, until he was awed by the styling and handling of the German sedan, which has a starting price of $29,900. “It hit me right away, like ‘Bang!’ ” says the television ad salesman, who paid about $37,000. “It’s a bargain price for the car.”
Germany’s high-end automakers are vying for buyers like Berger, who typically might consider mass-market models such as Ford Motor’s (F) $26,780 Taurus and Chrysler Group’s (F:IM) $30,545 Chrysler 300. By offering models with price tags less than half those of their flagship cars, Audi (NSU:GR), BMW (BMW:GR), and Mercedes-Benz (DAI:GR) are aiming to lure a broader base of entry-level luxury customers who will remain loyal for years to come.
Audi presented its A3 sedan at the Detroit auto show in January. Going on sale in the spring for $29,900, it will match the sticker price of the CLA, which has been offered in the U.S. since September. Mercedes’s strong start with its lowest-priced vehicle in the U.S. helped the Daimler unit grab the lead in American luxury car deliveries in 2013, beating out BMW and Toyota Motor’s (TM) Lexus for the first time in more than a decade. BMW will add to the lower-priced competition in March when it introduces the $33,025 2-Series coupe.
“Luxury has always been aspirational, and once you’re part of that, you tend to want to maintain that,” says Jeff Schuster, an analyst with LMC Automotive. “There tends to be more loyalty with premium than nonpremium brands. That’s certainly a motivator to expand the lineup.”
The down-market shift replicates the German carmakers’ approach in their home market, where Mercedes, Audi, and BMW are only outsold by Volkswagen’s (VOW:GR) namesake brand. Affordable models such as the Mercedes A-Class hatchback and the Audi A1 subcompact, which aren’t offered in the U.S., broaden the brands’ appeal to less-affluent buyers. Audi’s global sales rose 8.3 percent in 2013 to a record 1.58 million vehicles. In the past four years it has boosted annual sales by more than 600,000. Mercedes also reached an all-time high in global deliveries in 2013.
Upscale brands account for 31 percent of the German car market, vs. 19 percent in the U.S., says consultant IHS Automotive. Backed by expanded lineups, these brands will probably grow 24 percent in the U.S. by 2018, compared with a 6.7 percent gain for the total market.
Getting a share of that growth will be critical as BMW, Mercedes, and Audi contend for the global lead in luxury car sales. BMW currently holds the top ranking, but Mercedes and Audi have vowed to take it by the end of the decade. Audi added the sedan variant to the A3 hatchback for the first time largely to catch up in the U.S. “In Europe, the A3 is massively conquering new customers,” Audi sales chief Luca de Meo says. “This is the mission for the A3 family in the U.S. market as well.”
At the Detroit show, Audi also showed a two-door compact crossover concept vehicle. The two-door model, which will have a sloping, coupe-like roof, represents a potential entry-level sport-utility vehicle for the brand. Mercedes plans to roll out the GLA, its cheapest SUV, in the U.S. later in 2014. BMW already sells the $30,900 X1 crossover in the U.S.; it’s the carmaker’s least expensive model in the American market.
Even if prices are coming down, buying an entry-level German luxury car still requires some sacrifices. The CLA is about 16 inches shorter than the Chrysler 300 and has a trunk 7 liters smaller than that of the Ford Taurus. The less expensive models also have a potential downside for the manufacturers. Offering vehicles far cheaper than cars such as the $92,900 Mercedes S-Class and the $80,200 Audi S7 risks diluting an image based in part on being unattainable for the average Joe. Defending that reputation is critical for high-end German models as the even more elite Maserati and Jaguar marques expand to challenge them.
The cheaper Mercedes, BMW, and Audi models are “bringing the fight down to brands that not that long ago wouldn’t even compare,” like Ford and Chrysler, says Kevin Tynan, an analyst with Bloomberg Industries. “I understand the need for volume, but you’re killing the exclusivity. That just can’t be good.”
Mercedes dismisses concerns that more-affordable cars will hurt its image. So far, 75 percent of CLA buyers are new to the brand, the company says, and the lower prices are drawing people into the showrooms where they notice models like its top-selling C-Class, which starts at $35,800, $5,900 more. Before the rollout, “I might have been worried about CLA cannibalizing C-Class, but quite to the contrary, it fueled C-Class sales,” says Steve Cannon, head of Mercedes-Benz USA. “Just because we’re moving to a new price point doesn’t mean we’re diluting. It just means we’re opening up the brand.”