Mercedes-Benz’s Luxury Pitch Needs Tougher Road Testing
05-21-2022, 08:07 AM
#1
Junior Member
Thread Starter
Mercedes-Benz’s Luxury Pitch Needs Tougher Road Testing
Mercedes-Benz’s Luxury Pitch Needs Tougher Road Testing, from today's Wall Street Journal
Consumers see the German car brand as more luxurious than investors do
Mercedes-Benz Group Chief Executive Ola Källenius puts the problem well: “Even though everybody knows that Mercedes is kind of the elite original luxury brand in the car industry, perhaps the stock hasn’t been viewed in that category,” he told Heard on the Street.
But bridging that perception gap isn’t as easy as it might sound.
At a strategy day near Monaco on Thursday, Mercedes laid out a plan to change the investor mind-set. It committed to selling more top-end vehicles—those that cost upward of 100,000 euros, or $106,000—and fewer, better entry-level ones at higher prices. It also aims to build on the high selling prices it has achieved during the recent period of limited semiconductor supplies and vehicle production.
The payoff, it hopes, will be higher, more resilient profit margins. In benign market conditions, Mercedes expects to earn an operating profit margin of 14% in its flagship car division, which now accounts for the vast bulk of the company. Even in bad conditions it would expect one no lower than 8%.
This is well below the level of the most exclusive publicly traded car maker, Ferrari (25.9% in the first quarter), or car-tech pioneer Tesla (19.2%). It is also below the kind of operating margins made by other upscale manufacturers, such as handbag-to-Champagne giant LVMH—a company Mercedes used to match in market value—or Apple.
Still, if successful, the Mercedes plan would set a new financial benchmark for what the automotive industry usually calls a “premium” brand—one that is classy but widely owned. The company, whose stock currently trades at less than six times forward earnings, might then be rewarded with a higher valuation. Mr. Källenius, unlike his predecessors, is intently focused on questions of market value. As a symbolic gesture of the company’s commitment to stricter capital allocation, he even announced Thursday the sale for charity of a single historic Mercedes from the company’s vast collection for €135 million—making it by far the most expensive car ever sold.
While the strategy makes sense, its success is far from certain. Shifting the model portfolio upmarket seems within Mercedes’s control; retaining the benefits of today’s scarcity-induced pricing less so. The company will be swimming against the tide as industry production normalizes, and it still wants sales to grow by about 5% a year.
A lesson from the likes of LVMH, Apple and now Tesla is that having tight control over the distribution of your products helps generate the pricing discipline, the bond with consumers and the cost efficiencies on which superior margins are built. Mercedes is moving rapidly to a direct-to-consumer sales model in Europe, but laws protecting the independence of dealerships make this difficult to replicate in the U.S.
There is also the question of electric vehicles, which for everyone but Tesla aren’t very profitable. At 16.4%, Mercedes made an even higher operating margin in the first quarter than it now expects in
good times, but just 4% of the cars it sold were fully electric. If this rises fast it will hit the group margin. If it doesn’t, the company might lose customers to Tesla.
Mercedes stock fell 2% Thursday, even as those of its traditional peer BMW remained more or less flat. Investors were likely disappointed by the 14% long-term margin ambition following the blowout first quarter. Watching and waiting for a downturn also seems to be the dominant investor position across the sector, and this wasn’t something Mr. Källenius could hope to address. Only consistent results, particularly through tougher times, will prove that Mercedes is becoming a quality company as well as a quality brand. With recession risks rising, his pitch might be put to the test sooner rather than later.
—Stephen Wilmot
The Mercedes-AMG C 43 4MATIC Sedan.
MERCEDES- BENZ
Consumers see the German car brand as more luxurious than investors do
Mercedes-Benz Group Chief Executive Ola Källenius puts the problem well: “Even though everybody knows that Mercedes is kind of the elite original luxury brand in the car industry, perhaps the stock hasn’t been viewed in that category,” he told Heard on the Street.
But bridging that perception gap isn’t as easy as it might sound.
At a strategy day near Monaco on Thursday, Mercedes laid out a plan to change the investor mind-set. It committed to selling more top-end vehicles—those that cost upward of 100,000 euros, or $106,000—and fewer, better entry-level ones at higher prices. It also aims to build on the high selling prices it has achieved during the recent period of limited semiconductor supplies and vehicle production.
The payoff, it hopes, will be higher, more resilient profit margins. In benign market conditions, Mercedes expects to earn an operating profit margin of 14% in its flagship car division, which now accounts for the vast bulk of the company. Even in bad conditions it would expect one no lower than 8%.
This is well below the level of the most exclusive publicly traded car maker, Ferrari (25.9% in the first quarter), or car-tech pioneer Tesla (19.2%). It is also below the kind of operating margins made by other upscale manufacturers, such as handbag-to-Champagne giant LVMH—a company Mercedes used to match in market value—or Apple.
Still, if successful, the Mercedes plan would set a new financial benchmark for what the automotive industry usually calls a “premium” brand—one that is classy but widely owned. The company, whose stock currently trades at less than six times forward earnings, might then be rewarded with a higher valuation. Mr. Källenius, unlike his predecessors, is intently focused on questions of market value. As a symbolic gesture of the company’s commitment to stricter capital allocation, he even announced Thursday the sale for charity of a single historic Mercedes from the company’s vast collection for €135 million—making it by far the most expensive car ever sold.
While the strategy makes sense, its success is far from certain. Shifting the model portfolio upmarket seems within Mercedes’s control; retaining the benefits of today’s scarcity-induced pricing less so. The company will be swimming against the tide as industry production normalizes, and it still wants sales to grow by about 5% a year.
A lesson from the likes of LVMH, Apple and now Tesla is that having tight control over the distribution of your products helps generate the pricing discipline, the bond with consumers and the cost efficiencies on which superior margins are built. Mercedes is moving rapidly to a direct-to-consumer sales model in Europe, but laws protecting the independence of dealerships make this difficult to replicate in the U.S.
There is also the question of electric vehicles, which for everyone but Tesla aren’t very profitable. At 16.4%, Mercedes made an even higher operating margin in the first quarter than it now expects in
good times, but just 4% of the cars it sold were fully electric. If this rises fast it will hit the group margin. If it doesn’t, the company might lose customers to Tesla.
Mercedes stock fell 2% Thursday, even as those of its traditional peer BMW remained more or less flat. Investors were likely disappointed by the 14% long-term margin ambition following the blowout first quarter. Watching and waiting for a downturn also seems to be the dominant investor position across the sector, and this wasn’t something Mr. Källenius could hope to address. Only consistent results, particularly through tougher times, will prove that Mercedes is becoming a quality company as well as a quality brand. With recession risks rising, his pitch might be put to the test sooner rather than later.
—Stephen Wilmot
The Mercedes-AMG C 43 4MATIC Sedan.
MERCEDES- BENZ
Last edited by drose224; 05-21-2022 at 08:09 AM. Reason: source of artivle
05-23-2022, 05:55 PM
#2
Senior Member
Ha ha, the company has already lost many customers in the US to Tesla. I know many people that moved out of higher optioned E Class and S class to Tesla. Sure they apologize for the build quality but most of the guys I know that did this were not really "car guys" and were more interested in the features vs. fit and finish and build quality. As a first time MB owner (2016 S-Class bought in 2019) I wasn't as familiar with the lower end of the model spectrum, I have had C E and several of the entry level SUV's as loaners over the last few years. I don't think the lower models are anything very speciaal while my S-Class is sometihng very very special. Merecedes is going in the right direction with EQS models, they are building them directly to fight against Tesla's large displays and toys, yet they have lost every review to Tesla and Rivan.
I think that is probably the best strategy for the company, and then have trickle down to lower models, at least for the US. In Europe they are a full line company and probably need to be
I think that is probably the best strategy for the company, and then have trickle down to lower models, at least for the US. In Europe they are a full line company and probably need to be
05-23-2022, 08:48 PM
#4
Junior Member
Haha...iow the next decade your cars will only get worse but expensiver. Like in the last 30 years. Back then MB had the chance to move the benchmark to a higher level but on every aspect the opposite of what you're talking about occured. And now that almost every manufacturer reached the equel qua experience its time to lift the identity. Sure. Succes, you've got a tough job ahead. Didnt read sustainable anywhere though, thats a plus.
