Mercedes-Benz chose the location of the event to match the message that CEO Ola Källenius has to announce: The Côte d’Azur, meeting place for the rich and beautiful in Europe and home of many international millionaires. There, on the roads between posh places like Nice, Cannes and Monaco, the Mercedes star has of course always adorned a lot of expensive cars. In the future it should be emblazoned on even more – and on even more expensive ones.
The company has undergone a fundamental change since Källenius rose to the top of the former Daimler Group exactly three years ago. The truck division was spun off as an independent company, the notoriously loss-making small car division Smart was transferred to a joint venture with the Chinese Geely Group and the company was renamed Mercedes-Benz.
Last but not least, the new, old name is symbolic of Källenius’ major strategic goal: the car company based in Stuttgart should once again become a luxury manufacturer. Less mass, more class, that’s how the line can be summed up quite trivially. Källenius announced that the share of the “Top End” segment in total sales should grow by 60 percent by 2026. This means that in four years about every fifth Mercedes-Benz will be a Maybach, an S-Class, an AMG or a G-Class model.
And it means a cut at the bottom end of the product range. The smaller A and B class cars offered today will disappear. Instead of the current seven vehicles, from the small, compact A-Class to the GLB SUV, there will only be four cars in the “entry-level segment” in the future. Källenius left open whether they will still bear the names A and B class. “We will redefine the entry-level segment,” he said in an interview with journalists.
In doing so, he says goodbye to the old strategy of Daimler boss Jürgen Schrempp, who wanted to forge a global corporation in the style of Volkswagen out of the Stuttgart luxury car manufacturer. Under Schrempp, the A-Class was introduced, and the acquisition of Chrysler was intended to propel the company into new market segments. As is well known, this project failed miserably.
Now Mercedes is concentrating again on its old core market, which has grown enormously in the meantime. In addition to the millionaires on the Côte d’Azur or in California, there is now a steadily growing group of rich Chinese. They have become the Group’s most important target group.
So important that Mercedes now builds models that are only sold in China. Källenius tried to put the growing dependence on China into perspective. But he admitted: “In the next ten years, the largest amount of growth will come from China.”
Despite the luxury course, they do not want to say goodbye to growth at Mercedes. After the end of the semiconductor crisis, probably from 2023, you will have a normal market again, said Källenius. “Of course we then have opportunities for growth.” But the profits should grow with it. “However, we will continue to maintain the discipline of placing margins above volume,” said Chief Financial Officer Harald Wilhelm. “Even if others do it differently after the crisis.”
This can be understood as an allusion to BMW. The Munich competitor does not participate in the concentration on luxury, which was already clearly shown in the results of the past year. BMW continues to focus on a wide range of products, from the 1 Series to the 7 Series and the huge iX in the core brand. In addition, there are both Mini and Rolls-Royce to buy from the BMW group.
As a result, BMW’s sales volume increased significantly in the past year. And although the Bavarians sold more cars than Mercedes, they made less profit. A comparison by the management consultants from EY shows: BMW achieved 13.4 billion euros in profit before taxes with 2.5 million vehicles sold. Mercedes-Benz, on the other hand, earned 16 billion euros – with only 2.3 million cars sold. This trend continued in the first quarter of 2022.
Now the profit targets of the new Mercedes strategy are clearly higher than those of BMW. Under optimal conditions, a margin of 14 percent is aimed for in the future, and in crises the return should not fall below 8 percent. This is roughly in line with analysts’ expectations. Even before the event, they were delighted with Källenius’ strategy of making more money with fewer cars.
Daniel Röska, from investment bank Bernstein, estimates that the average price for a Mercedes could rise from around 70,000 euros last year to 85,000 euros in 2025. He is cautious about 2022, he writes in an analysis, but sees significant profit increases after that due to the strategy. One of the reasons for this is the reduced costs. The number of employees fell from 165,300 to 160,700 last year. BMW, on the other hand, hired additional staff.
The new strategy also affects retail. Independent dealers who would haggle over prices with their customers have almost no place in the luxury course. At least in Europe, Mercedes wants to handle more than 80 percent of its sales directly with customers by 2025. This not only saves costs in sales, but above all gives the company the opportunity to monitor and control prices and offers themselves.
Direct sales is one of the strengths of the competitor Tesla, which, however, only plays in the Mercedes categories with its S and X models. Tesla currently only sells these cars in very small numbers because the company is concentrating on becoming a mass manufacturer with the Tesla Model 3 and Model Y.
Mercedes-Benz, on the other hand, is building up in the super-luxury class. For example, with S-Class special editions that come onto the market in limited editions. You create collector’s items with it, said Källenius: “Everyone knows haute couture, we call it haute voiture.” Currently on offer are 150 Maybach S-Classes from the Limited Edition by Virgil Abloh. The deceased star designer had designed the car together with Mercedes.
Beyond these extremes, Mercedes-Benz no longer wants to offer millions of equipment combinations in the future, as Bentley does, for example. Instead, customers should only be able to choose between equipment packages. The manufacturer argues that this simplifies online configuration and leads to higher and faster availability of the wagons. And used car prices would rise as a result.
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