In North America, the once popular luxury car market is losing popularity as sales pick up in Asia, the Middle East and Russia.
Ferrari dealership is nothing like a Ford dealership, when you drive near one you don’t see many unsold vehicles parked in the parking lot, where billboards advertise great discounts and bonuses. But what they have in common is the fact that their cars are selling less and less these days.
THE Sales of luxury car brands, which until recently had outpaced the rest of the US market, began to plummet. Many people had thought that Italian sports and high-end cars would remain as invulnerable after economic decline as Hampton real estate and Louis Vuitton bags, but the trend is starting to change.
To some extent, the higher up the luxury range you aim, the stronger the market remains, but even ultra-luxury brands (such as Bentley, whose sales have fallen 27.9% this year) are proving vulnerable. And brands that are part of ‘mass luxury’, such as Mercedes-Benz (DAI), Porsche (PSHG) and the Lexius branch of Toyota (TM), have seen some of the biggest declines in sales, particularly those of their most expensive models. This is because last year’s sales in North America were artificially inflated by the housing boom and easy access to credit. As more Americans fooled themselves into thinking they were richer than they actually were, luxury car designers increased their production capacity and targeted sales and enjoyed years of prosperity. Customers who have never been able to afford cars as luxurious as the Mercedes-Benz S-Class, the Porsche 911, or even the Lexius LS have found car manufacturers, banks and dealers very happy to launch the their car keys. Now, for those who took out loans to resist the ever-increasing value of their homes or who considered spending their opulent Wall Street bonuses, driving is over.
There are people who have money, and they go in and buy these premium, brand-name cars, said Roger Penske, president of Bloomfield Hills-based Penske Automotive Group (PAG). Michigan, one of the nation’s largest automotive dealership groups. Penske’s remarks came during a July 30 conference call. ‘But with the financial market where some brands are down, this trend is slowly dying out, and that’s to be expected.’ In particular, Penske mentioned a few Porsches, expensive BMWs and Mercedes.
This trend will not recover, according to David Paterson, the Governor of the State of New York. He recently announced that a 20% drop is expected this year in certain Wall Street bonuses. New York State Comptroller Thomas DiNapoli estimated, earlier in the year, the fees paid by the securities industry at $33.2 billion, an average of $180,420 per beneficiary.
Luxury car dealers await these bonuses with almost as much anticipation as the stockbrokers who receive them. But with the financial industry in decline and stock markets and real estate values falling, no one is immune.
DECLINE AT BENTLEY
‘It’s fair to say that some parts of the market are immune to economic declines in that same market, as far as we’re concerned,’ says Geoff Dowding, chief operating officer and corporate vice president of Bentley Motor located in Crewe, England.
In the United States, sales of Bentley cars fell 27.9% during the month of July compared to those dating from a year earlier, according to AutoData, a company based in Woodcliff Lake, New Jersey. For the whole of 2007, Bentley sold 3,990 cars in the USA, thus multiplying by almost 10 times its sales of 2003, when its parent company Volkswagen (VOWG) took over and relaunched the brand.
A downturn was inevitable, since those big gains were brought in by designing all-new models, and for now, Bentley’s staff is at full strength. The economic climate is a factor, however, Dowding finds. He suggests that even those customers who can afford a Bentley car might refrain from buying one for fear of appearing to brag about it at an inopportune time.
‘We hear people are starting to pay attention,” says Dowding. ‘Real estate values, the size and increase of financial portfolios: all of this has made people cautious. The repeat buyer of the same model might think, ‘Maybe I’ll wait. In some cases, you can feel that people are afraid of making a bad impression in terms of extravagance, and so on’.
RESUMPTION OF SALES AT ROLLS
This does not seem to deter customers from buying Rolls-Royces. In the United States, the increase in the sale of the latter is estimated at 48.8%, according to the company AutoData. However, just as Bentley has done in recent years, Rolls-Royce is adding a series of all-new models to its range of cars.
“We can’t talk about a real comparison in this case, because we are adding models right now,” says Paul Ferraiolo, president of Rolls-Royce Motor Cars North America. Nord), a division of parent company BMW based in Woodcliff Lake, New Jersey. ‘It is undeniable that we have seen some customers suffer from this economy. I will never venture to express myself in a general way to announce that our clients are sheltered from what is happening, nor insensitive to the distress of other people. Our sales are increasing significantly because people are very keen on owning their own car, and our buy-back rate is very high.
Even when the economy is vulnerable, exclusivity is an important part of the appeal of premium brands, says Marti Eulberg president and CEO of Maserati North America based in Englewood Cliffs, New Jersey. She adds that Maserati car showrooms are less crowded at 56 of the brand’s US dealerships, but its sales are increasing, and there is a waiting list for new models to be acquired. ‘I wouldn’t venture to say that we are seeing record numbers of people (entering our home), but what is happening is customers are coming in because we have the exclusivity. We’re providing them with something they can’t get from the ‘mass luxury’ automakers, if you don’t want to call them anything else’.
The Lamborghini and Ferrari brands are also showing waiting lists at their US dealerships, although AutoData figures indicate their US sales are down slightly. The turnovers of these exotic brands are so low that a mere shipment of cars from one month to the next can make a huge percentage difference in their sales. Sales of Lamborghinis and Ferraris are increasing worldwide. Spokespersons for both companies say they each expect to end 2008 with sales at least equal to 2007.
Sales vary so much from one region to another in the American market that it becomes difficult to generalize, relates the CEO of Lamborghini, Stephan Winkelmann. ‘Let’s say that the United States is a huge country, so in different markets there are also different realities throughout the territory. States like Texas are very powerful and don’t seem to have any problems. Others are more affected by the real estate crisis, such as California. Overall, this hasn’t bothered us so far, because the level (of our sales) is good and decent.’
Mitch Katz, CEO of Premier Financial Services base in Woodbury, Conn, says its revenue is growing. The company rents out new and used exotic cars, including some vintage cars for collectors. ‘Our turnover is slightly up on last year, which we find surprising in this market.’
BETTING ON THE ATTRACTIVENESS OF VINTAGE CARS
A couple of wealthy entrepreneurs, William McMichael and Ari Straus, bet a large sum, convinced that there will be considerable demand for very high-end cars. With their associates, they recently founded the Monticello Motor Club, now located on the old municipal airport in Monticello, New York, about two hours north of Manhattan, with a launch pad for helicopter and a long track of approximately 6.5 kilometers, intended for the members of the club who race with their exotic and vintage cars.
If all steps in this resolution go as planned, including the construction of the condominiums on the sides of the runway, the total cost of the The project could cost $50 million, according to McMichael. Initially, the group had set the subscription fee at $100,000 for 500 member and collected so much interest that they almost immediately increased it to $125,000. ‘It is undeniable that there cannot be 500 people who have the means nor the desire, admits Strauss. Despite what auto companies are saying, there are at least a few people who don’t seem to be in short-term economic decline, says Katz of Premier Financial Services. ‘There are those who are simply not concerned, he continues. They have enjoyed a good financial situation for several years, and they are able to continue to buy. Others become very cautious.’
The strong demand in Asia, and more particularly in China, lessens the pressure exerted in the United States by the drop in sales of ultra-luxury brand cars. This finding helps Bentley and other car manufacturers and dealerships to implement a so-called ‘customer pull’ system, in which there are always few products supplied, as opposed to the so-called ‘push-off’ system, in which too many cars seek to sell to too few buyers.
‘It wasn’t that long ago that sales of our cars in the United States were 60% of our sales worldwide,” says Dowding of Bentley. Now these sales are around 40% of total sales. It is clear that the world market is balancing slightly.’
Henry is a journalist who covers the automotive industry and automotive market trends in New York.