Trends in the premium car market

The so-called “merger made in heaven” of Daimler-Benz and Chrysler ended in divorce. BMW's split from Rover and Land Rover resulted in a platform for the Chinese market and a quandary for Ford. Aston Martin became privately owned once again, old designs have seen a resurgence in Chinese brands, and Toyota has toppled General Motors to take the spot at the top of the motoring world.

All the while, segmentation boundaries have become greyer, more brands are playing in more segments and trying to be more things for the greater motoring public, and, interestingly, more players have felt compelled to participate in the premium end of the market, in the face of global demand for increased affordability.

“The boundaries between the premium and volume segments are beginning to merge,” says Andrew Kirby, senior vice president for sales and marketing at Lexus. “In a space now occupied by more players, the distinction between volume and premium brands is no longer well-defined, complicated by brands moving away from their traditional market positioning into more diverse trading.”

Logical

Kirby points to traditional premium brands now playing in the volume market and vice versa. “Traditional volume brands have never been that successful in the premium market, while premium brands have managed to do well in the volume segments,” he says. “It's a logical rationale for consumers to aspire to premium brands and if those brands address more affordable segments of the market, the consequent take-up is understandable.”

However, Kirby warns of the potential danger of lowering the value of the brand by selling into “cheaper” markets. “While the global product planners and marketing teams of parent companies clearly have an all-encompassing strategy, the effects – especially in a relatively small volume market like South Africa's – are more difficult to manage.” While increasingly, consumers, when viewed from an international aspect, are usually more focused on their immediate surrounds when it comes to brand positioning and perceptions, “so-called premium brands offering affordable, volume products stand the risk of replacing exclusivity and ultimate profitability, with a refocused volume positioning that potentially impacts on the margin and the brand image,” says Kirby.

So what is the traditional definition of a premium brand? “They have traditionally displayed significantly higher quality and price, but the perceptions now hinge more around the brand than the ultimate products,” says Kirby. “It's a historical view that brands will only start to feel the impact of in the future, once the current product perceptions have translated into brand perceptions.”

Significant growth

Practically, the perceptions change according to the individual brand. “For Lexus, the premium feel is in luxury. The smallest engine we have is a 2,5-litre V6, and all our products have an incredibly high feature specification level,” explains Kirby. “Other so-called premium brands play in sales volumes that figure in South Africa's top 10 performers every month but offer four-cylinder engines of capacities as small as 2,0-litres, while others have dropped in quality and rely on their historical brand perceptions to retain a premium feel. Some of those brands even play in the C-segment with 1600cc engines.”

The South African passenger car market has experienced significant growth over the past three years, with a 27,2% increase in 2004, 26,8% in 2005, and 15,3% in 2006, over quite a broad range of segments. “The premium segment has not grown as fast as the rest of the market with its segment share declining from 32% to 27% of the passenger car market during that time,” says Kirby. “We expect that this will continue over the next three years to a level of approximately 25%.”

Premium segment volumes, however, have seen significant growth because of more brands selling into that space. “Our forecast is for that trend to continue, although the growth will be at a lower rate than what has been experienced,” says Kirby.

Drilling down further into the premium segment shows that over half of premium products sold in South Africa are in the volume half of the market. “That would be like 318i sales within the 3-Series market,” explains Kirby – and that is where the boundaries of premium brands and products blur. “Lexus, for example, only plays in the upper end of that market, which is why a sales statistic such as the Lexus IS250 outselling the comparable 325i and C240/C280 is more indicative that outright 3-Series or C-Class volumes if you're talking about premium products.”

Differentiated approach

“Our strategy is not to play in the grey areas occupied by other brands, but only position ourselves higher in the respective segments we compete in, which are truly luxury,” says Kirby of his company's brand and product strategy. “We will never do the same kind of volumes as some of our competitors as a result, but we'd rather maintain a more exclusive feel. It's our differentiated approach to marketing Lexus.”

The results of their efforts can clearly be seen in the significant growth shown by the brand over the last year since re-launching in the South African market. The brand now exceeds its average annual sales volume for the last 11 years every month off the base of an all-new product line-up and new dealership strategy. “The brand has been reinvented around our own premium definition, from our model strategy of luxury offerings only, to the look and feel of our new stand-alone dealerships,” says Kirby. “It's a more traditional take on the premium segment, but one we believe makes the brand inherently more exclusive and truer to what premium should be.”

The premium market will now come under renewed pressure from the introduction of the new National Credit Act (NCA). With increased checks by credit lenders, the amount of credit individuals now qualify for is lower than in the past. “This is likely to drive a trend to buying down into more affordable products or into the pre-owned market,” says Kirby. “But the developing economy is constantly creating business opportunities, which in turn is creating individual wealth, a good sign for the premium market.”