Consider this: Honda has an excellent, practical, spacious SUV loaded with bells and whistles that chime if you’re about to rear-end a fence, for $38,000.
Your head tells you it’s a smart purchase, but your heart is elsewhere, across the road, looking at Audi’s smallest SUV that starts at $34,000.
For similar money, you can sit behind the wheel of a Mercedes or BMW, too. It won’t have as many bells and whistles – and it will be more cramped – but it will have a prestigious badge on the steering wheel.
Increasingly, our heart rules our head when it comes to new vehicle purchases.
“Small and premium are no longer mutually exclusive in North America,” said Robert Karwel, senior manager at J.D. Power Canada. “While this has been the case in Europe for decades, it’s still relatively recent in North America.”
Evidence of the push down-market is all-around. Porsche launched a new model, the four-cylinder, $52,000 Macan SUV. Jaguar has new entry-level models in the form of the XE sedan ($48,500) and F-Pace SUV ($50,900).
That luxury auto makers are reaching down-market is not “brand” new – the trend has been ongoing for years. What is evolving is their success in attracting more consumers to their products.
Combined Audi, BMW and Mercedes offer 11 models for less than $40,000, including two plug-in hybrids that qualify for a hefty government rebate in Ontario. Including all luxury brands, there are more than 20 models in that $30,000-$40,000 bracket, ranging from coupes to SUVs to hatchbacks and sedans.
“So far this year, sales of these vehicles in the compact luxury segment are up around 10 [per cent] to 13 per cent versus last year,” Karwel said.
That growth is outpacing the automobile market as a whole.
And yet, more luxury vehicles are leaving dealer lots at higher prices – more than $54,000 – while fewer vehicles are selling for less than that, according to data from J.D. Power. So is the compact luxury boom already over, just as it seemingly began?
“It’s complicated,” Karwel said. “It doesn’t mean people are buying fewer compact luxury vehicles, it means they’re moving up to SUVs, or they’re still buying those compact luxury cars but they’re loading them up with more options.”
In other words, once you’ve got a taste of the Good Life, you want more. Luxury car makers know that; the strategy behind the $35,000 model is to lure the consumer into the brand where they’ll remain loyal, in concept.
Timothy Cain, chief analyst at GoodCarBadCar sees luxury SUVs stealing sales away from luxury cars: “Premium brand SUV/crossover volume is up 19 per cent, a massive gain powered largely by the theft of sales from premium brand cars.”
In general, cars are cheaper than their SUV counterparts, which could partially explain the increased spending.
What happened to the practical, frugal Canadian driver?
They’re still here. Canadians don’t buy luxury cars at the same rate as Americans or Europeans.
Wolfgang Hoffmann, the new president of Jaguar Canada, sees that fact as room for growth in the segment. “Roughly 9 [per cent] or 10 per cent of the total market in Canada is premium cars,” he said. “In the U.S., you’re talking about 12 or 13 per cent now. In Germany, 30 per cent are premium cars. So Canada is a little bit behind, but that’s good because for me that’s just potential.”
One of easiest ways for luxury auto makers to close that gap is by offering more affordable models.
“There are many more Canadians who can afford to spend $40,000 on a car versus $60,000,” Karwel said. “The easiest way for a luxury brand to grow is to offer lower-priced models. The reason this is such a powerful force comes down to brand; if you can offer a powerful brand and a lower price, it’s a very appealing combination.”
Another factor, the strain to meet Corporate Average Fuel Economy (CAFE) standards, is pushing all auto makers toward smaller cars because they’re generally lighter and more fuel efficient.
Hoffmann said he expects the XE and F-Pace combined will eventually double Jaguar’s sales in Canada.
If everyone has a luxury car, is it still luxury?
If everyone had a Birkin bag or a Rolex watch, would they still feel special? Would they signify anything at all?
Luxury auto makers play a dangerous game when they increase sales by moving down-market with (relatively) affordable vehicles. It threatens to dilute the brand. And it is the brand, after all, that entices you away from the excellent, practical, spacious SUV and into a smaller, less well-equipped one with a prestigious name.
In the short term, there is little to no damage to the brand, Karwel says. “In the long term, however, there is risk here, as the brand increasingly becomes commoditized.”
In Canada, it’s too early to see what long-term effects the move down-market will have.
“The impact will be felt in the upper echelons of a brand and the pricing power it commands,” Karwel says. “A common definition of ‘luxury’ [i.e., what is a luxury car?] in the auto industry is the ability to command a premium for your brand.”
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