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Mercedes gets small to regain traction

Mercedes, now No. 3 in luxury autos worldwide, is investing $1.9 billion to make five small luxury models in an attempt to regain sales.
Mercedes hopes that the smaller size and price of its B-Class will boost its image and sales.
Mercedes hopes that the smaller size and price of its B-Class will boost its image and sales. Courtesy of Mercedes-Benz
/ Source: Business Week

Daimler Chief Executive Officer Dieter Zetsche had been at the helm of the German luxury automaker less than a year when in 2006 he moved to stanch the eroding position of his flagship Mercedes-Benz unit. The storied brand had fallen behind rival BMW, while Volkswagen’s Audi line was in hot pursuit. Zetsche’s answer to the crisis? Think small. Despite the fact that Mercedes’s reputation was based on the strength of big sedans for the middle-aged affluent, Zetsche figured that a range of upscale small vehicles would raise Daimler’s near-term sales volume and attract a younger generation of buyers to propel the brand for years to come. “We were running the risk that our people assume it’s a law of nature that we grow slower than BMW and Audi,” says Zetsche. “A mindset like that is poison.”

The first fruit of Zetsche’s plan, the diminutive Mercedes B-Class, was unveiled on Sept. 13 at the International Motor Show in Frankfurt. The vehicle is built on a platform Mercedes engineers designed to eventually be shared by five different small models, ranging from a hatchback to a sport-utility vehicle. The new B-Class starts at €26,000 ($35,055), compared with €32,700 ($44,088) for a C-Class sedan and €71,900 ($96,939) for the flagship S-Class. Daimler, which is investing €1.4 billion ($1.9 billion) in two small-car factories, is counting on the new models to help it retake first place in global luxury car sales by 2020. “It’s impossible to tell our customers, employees, and investors that we accept being No. 3,” says Zetsche.

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In 2001, Mercedes was the clear leader, delivering 233,000 more cars than BMW and 390,000 more than Audi. Over the past decade, the two German rivals increased sales five times more than Mercedes, as they moved quickly into growing markets such as compact SUVs and expanded into China and other fast-growing nations. Through the first eight months of 2011, Mercedes’s global sales trail BMW’s by 95,200 and Audi’s by 54,700.

In the U.S., Mercedes buyers are older — 54 years on average vs. 49 for BMW and 48 for Audi, according to researcher Strategic Vision. “The age structure of Mercedes’s customers is challenging, to put it politely,” says Jorgen Meyer, a fund manager with SEB Asset Management. “If Mercedes succeeds in drawing younger customers to the brand, they’d clear their biggest hurdle.”

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Mercedes’s lineup is in the midst of a makeover led by Gorden Wagener, who became the youngest design chief in its 125-year history when he took the job in 2008 at age 39. The former competitive wakeboarder has brought a sportier, bolder styling to the brand. “A youthful appeal is important for the brand’s image and its long-term success,” says Joachim Schmidt, head of sales and marketing at Mercedes. “Once you get these customers and if you convince them with your products and service, it’s very likely [you’ll] have them for life.”

Mercedes is trying unconventional methods to reach a younger, hipper clientele. In July it hosted a three-day party in Berlin dubbed Avant/Garde Diaries in an effort to become cool by association. Designers and artists were invited to talk about what’s cutting edge. On display at the event, quietly bidding for the blessing of the trendsetters, was a concept version of the new A-Class. A similar event is planned for New York.

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Not everyone is convinced. Mercedes is risking its classic position, says Peter Saville, a designer of record covers who contributed to the Berlin event. “Mercedes-Benz doesn’t need to be hip; it belongs to the grownup world,” says Saville, who owns a 1998 SL500. “Their position has been stolen by Audi. Audi is the new Mercedes-Benz. It’s clean. It’s reductive. It’s minimal. It doesn’t try too hard.”

Still, Daimler executives say Mercedes must learn to thrive beyond its franchise, upscale sedans. Says Jürgen Hubbert, the former head of Mercedes: “If we had just listened to the traditionalists, we would just be an E- and S-Class company and probably the 15th brand of another group.”

The bottom line: Mercedes, now No. 3 in luxury autos worldwide, is investing €1.4 billion to make five small luxury models in an attempt to regain share.