Israel's luxury car segment, worth $250-350 million a year, has always been highly competitive, and in the past few weeks it has become a real battleground. Salespeople have been applying steady personal pressure on every potential customer of theirs and their competitors, advertising budgets have soared to new heights, "special" sales days are being held almost monthly, and new premium models land here daily.
All this turmoil is shoved into a narrow marketing space with a glass ceiling of less than 10,000 sales a year, including personal import vehicles, representing 4-6% of the car market as a whole. Although the entire market grew last year, the luxury segment is still small in comparison with its relative size in developed Western countries.
Now, however, the glass ceiling is about to be smashed, with the potential of expanding sales in the prestige segment to 10% of the market and even more. The expansion of the prestige brands in Israel will not happen upwards, among the few very wealthy customers, but rather downwards.
This week, for example, Mercedes importer Colmobil is due to announce the planting of the prestige German brand's first flag in price territory that, according to estimates, will be around NIS 170,000-180,000, with its new A-Class series. It will thereby double the number of its models in the "accessible" price bracket, which it recently entered with the larger B-Class, also priced below NIS 190,000.
This new policy will set Mercedes against competing prestige brands already in the NIS 120,000-180,000 price bracket, such as Delek Motors, with the Mini brand and the BMW 1 Series, Lexus, with the hybrid CT200, Audi, with the A3 and A1, and soon Cadillac as well.
The manufacturers stir the pot
The current competitive heat in this segment has three causes: pressure to raise profitability, which is much higher in the luxury segment than in the popular cars segments; a battle over prestige born of old, sometimes highly emotional, rivalry between the importers competing in this segment; and pressure from the car manufacturers themselves, which are setting aggressive sales targets for their Israeli agencies.
The manufacturers have played a key role in the entry of the importers into the new price arena. The German car manufacturers have always kept their importers in Israel on a tight rein, closely monitoring their sales, their competitive positioning, and their profits. Colmobil's ability to sell a new Mercedes for NIS 170,000 undoubtedly stems from a decision by Mercedes in Germany not leave the field vacant for BMW, which recently cut prices for its Israeli importer and allowed it to stake a claim in new, virgin territory.
One may certainly assume that a substantial factor in the manufacturers' decision to lower prices is the heavy pressure from personal imports of prestige vehicles, especially the possibility of importing personally (and soon even "personally commercially") luxury German cars from the US. As far as the manufacturers are concerned, this is a nightmare scenario, which undermines the geographical price discrimination policy that allows them to make much higher profits on cars sold in Europe. One can therefore say, with a degree of irony, that personal imports have been one of the biggest gifts that the official importers of the luxury brands to Israel could have received.
Next target: the leasing market
With all due respect to the manufacturers and importers, the most significant fissure in the glass ceiling over luxury car marketing will occur if the leasing companies in Israel decide to push the new base models of the luxury brands into the middle manager layer of company car fleets.
This is a layer of tens of thousands of customers entitled to upgraded vehicles from their employers, or whom their employers allow to upgrade from a family car to something grander at their own expense. In the past, this group was known as "personal use value group 4" (for tax purposes), and was almost entirely made up of large family sedans (such as the Mazda 6 or Ford Mondeo) with an upper price threshold of around NIS 150,000.
In recent years, however, two important structural changes have taken place in this segment. The first is the abolition of the personal use value groups, and their replacement with a use value based on the actual price of the vehicle, which has made the price threshold of this segment much more flexible, sometimes exceeding NIS 170,000.
The second change is the greater openness that employers are now showing in relation to employees' choice of vehicle. So, for example, SUVs with "presence" have lately become one of the standard types of vehicle in car fleets and have even become an option at fairly conservative companies and organizations whose public image is important to them. A prominent example is the latest leasing tender for members of Knesset, which enables them to choose a fashionable all-terrain vehicle like the Mazda CX-5 as their official car.
The last psychological barrier
Theoretically, it is but a short step from choosing a fashionable SUV costing NIS 170,000 as a company car to choosing a prestige brand vehicle. Moreover, the basic models of the prestige brands have something to offer the car fleets from an economic point of view: most of the new generation vehicles are equipped with high technology that makes them exceedingly frugal in fuel consumption.
The new Mercedes A-Class has average fuel consumption of 18.5 kilometers per liter; the BMW 116 does 17.9; while the Lexus CT200 hybrid boasts official average fuel consumption of 24.4 kilometers per liter. Cadillac's future player, the ATS, also offers a basic model with modest fuel consumption.
These are operating figures that are much lower than those of many traditional sedans in this segment, and certainly than those of most SUVs. But despite the economic logic, and despite the fact that many of those entitled to company cars would be happy to park a prestige brand car in their reserved spot, the brands still have to overcome a high image hurdle, which these importers, the leasing companies, and also the fleets, hesitate to jump.
The importers are still in a dilemma over whether it is possible to stretch the image of a prestige brand to a mass "sticker car" in car fleets without impairing its value. As far as the leasing companies are concerned, buying premium vehicles is almost unknown territory, associated in the past with rapid depreciation in the used market. They will probably agree to broad entry into this segment only if the importers give them a safety net of trade-in and repurchasing. It is worth mentioning though that the close relationship between Delek Motors and the leasing companies enables Delek to push BMWs into the car fleets, should it decide to do so, while Colmobil controls boutique leasing company Debis, which specializes, overseas, in financing and leasing of Mercedes vehicles.
Some company managers may not be convinced that cars with high visibility badges and a wealthy image in their fleets are the right thing for the company and its senior employees, especially in a period of belt tightening.
Nevertheless, it is highly likely that, as internal competition in the prestige segment grows, we will see greater and greater penetration of these brands into car fleets, particularly of privately-owned enterprises that do not have to account to the public. When that happens, the prestige segment could even double within quite a short time.
Published by Globes [online], Israel business news - www.globes-online.com - on August 27, 2012
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