Redefining Luxury

By RON STODGHILL II/DETROIT

For all their image as the caviar of automobile brands, Mercedes-Benz and Jaguar spent much of the past decade longing for a little meat-and-potatoes appeal. Slumping sales in the U.S. had execs worried, as did the rising popularity of Japanese newcomer Lexus. The haughty Germans and the aristocratic Brits realized that the wealthier baby-boomer set--now in a buying frenzy--was turned off by the companies' stuffy image and limited product line. "Our cars were admired but were perceived as an unattainable icon," concedes Joe Eberhardt, vice president of marketing for Mercedes-Benz North America. "Our problem was, we weren't considered a fun car."

These days, though, both Mercedes and Jaguar have loosened up their styles (although not their steering)--and are ready to take on American carmakers, who have been more intent on defining luxury in terms of bigger, badder sport-utility vehicles. Mercedes' designers and engineers, once stubborn purveyors of Teutonic practicality, are rolling out the kind of spiffy variety--from elegant sedans to sport utes--to bring it into touch with today's big-spending yet more finicky car buyer. Meanwhile, Jaguar, for the first time in more than a decade, has expanded into a new market segment with its S-Class and plans to introduce a small "Baby Jag" next year.

Vehicle vogue seems to have taken a decidedly luxurious turn, if this week's annual North American International Auto Show in Detroit is any indicator. Nearly a dozen automakers are unveiling new models or concept cars aimed at affluent buyers--the goal being to win a place on the open, prosperous highway of the American luxury-car market. Says Michael Dale, president of Jaguar North America: "The economy is wonderful, Wall Street is doing great, and people want to buy a car that feels like more than just transportation. Frankly, you're just not going to get that in a Firebird." John Smith, general manager of GM's Cadillac division, puts it another way: "Baby boomers have always been a relatively self-indulgent generation. Now that they're becoming empty nesters, the luxury segment is benefiting."

If the U.S. auto industry had a good though uneven year in 1998, then many foreign brands had a great one. U.S. manufacturers continue to benefit from the popularity of light trucks and SUVs, sales of which grew 8.2% last year. But in a market in which sales of traditional sedans are stalled, car buyers have lately been going for upscale vehicles at unprecedented levels. In 1998 Mercedes' sales rose 39.2%, Jaguar's increased 15.4%, Lexus' jumped 60.2% (partly due to the addition of the RX300 to its lineup), while Audi's and Porsche's rose 39% and 33%, respectively. Overall sales of luxury cars, roughly defined as anything selling for more than $30,000, accounted for 15.1% of the passenger cars sold in the U.S. during the first quarter, up from 9% just five years ago.

Indeed, the luxury movement represents the industry's first significant market shift since the introduction of the minivan and the Jeep Grand Cherokee in the mid-1980s. And it suggests that the old model developed by General Motors' Alfred P. Sloan in the early 1920s, which sliced the industry into carefully graded segments and moved consumers up as their income rose, may be headed for extinction. Instead, as automakers lavish more and more attention on a narrower, wealthier band of consumer, the U.S. is moving to a more European marketing model built around sales of luxury cars to the affluent and small, inexpensive shoeboxes on wheels for everyone else.

The rub for American carmakers is that they will not necessarily be the beneficiaries as the number of wealthy boomers expands over the next decade. Experts predict that the gradual drift away from American-made luxury cars toward such European models as Mercedes and BMW will only accelerate. According to Ward's AutoInfoBank, European brands account for more than a third of U.S. luxury-car sales, and Mercedes and BMW are leading with about 10% apiece.

For the home teams, the boom in top-of-the-line sport-utility vehicles has helped expand the market for luxury in new directions and fatten the profits of General Motors, Ford and Chrysler as Motown-made Navigators, Expeditions and Grand Cherokees have amassed the lion's share of the SUV segment. Last year SUVs accounted for 17.7% of overall Big Three sales, up from 12.7% five years ago. But even that segment is under pressure. In Detroit this week BMW is unveiling its X5, a so-called sport-activity vehicle that combines the company's vaunted performance with a light truck's capability. Mercedes' American-made M-Class SUV is already a hit.

Much of the Big Three's luxury lag has to do with changing consumer tastes. The high-end market has detoured dramatically from the posh, living-room-on-wheels tradition of Cadillacs and Lincolns that once defined upper-middle-class status. Today's luxury buyers, guided by the Information Age, are less extravagant, more practical and technologically sharper. "The status symbol used to be 'I've got money,'" says Jim Press, general manager of Toyota Motor Sales USA. "But here in the late 1990s, it's 'I've got good taste.' The days of conspicuous consumption are gone."

In many cases, American automakers are left with the tough work of revamping their luxury cars to appeal to young buyers, while maintaining their hold on older ones who never took to European brands the way their children have. Ford recently unveiled its all-new LS8, a rear-wheel-drive, technologically loaded sedan tweaked and tuned by Jaguar. Chrysler, which has scored a connection to boomers with its Jeep Grand Cherokee, last year launched the 300M, a sleek, import-fighting luxury sedan that competes against such other luxury sedans as the BMW 3 Series and Audi A4. "Our cars became boring, and we lost some ground," says John Sloan, director of DaimlerChrysler's large-car operations in Auburn Hills, Mich. "But our 300M makes you fantasize about driving Route 1 in California."

GM, which pioneered the luxury segment in the U.S., is aggressively pushing to preserve its eroding lead. Last year the company rolled out the Cadillac Seville STS, which blends the raw power and agility reserved for its Chevrolet Corvette with a cabin as quiet as the best European and Japanese sedans. And in Detroit this week executives are introducing what they trumpet as "the future of Cadillac" in a concept car called Evoq, a two-seat roadster with a supercharged V-8 engine, boasting such features as a voice-activated navigation system and e-mail that flashes everything from news bulletins to stock quotes.

Smart gadgetry for safety and entertainment represents the new lap of luxury. The BMW 740i, for example, can be equipped with a navigation and traction control system that acclimates from driving on normal pavement to moving through a winter storm with the touch of a switch. Road-weary travelers might prefer GM's sophisticated stability system, which uses two-directional sensors attached to the car's suspension, steering column and brakes to keep the car on its intended course. Mercedes last year began offering near obstacle detection, which uses radar to alert drivers to objects close by.

American execs, known for overindulging in the hottest trend of the day, insist they'll tread lightly on the techie gizmos for now. Real luxury should simplify a driver's life, not complicate it, they say. "Some of these kinds of items come in handy," says DaimlerChrysler's Sloan. "But we have to be careful about creating too much driver distraction." Maybe so. For now, though, the biggest distractions seem to be parked in rival dealers' lots.

--With reporting by Joseph R. Szczesny/Detroit

With reporting by Joseph R. Szczesny/Detroit