Near-Luxury Is a Problem for Cadillac

Automotive Industries, May, 2001 by Maryann Keller

Cadillac no longer defines what "luxury" means--its competitors do.

In the early days of General Motors Corp., Alfred Sloan brought order to the chaos among the rival divisions that made up the company by positioning them within a broad product portfolio. Every consumer could find the type of vehicle they wanted at an appropriate price among brands that appealed to all income and age groups. A consumer could remain within the GM family throughout his entire life, gradually ascending to the premier marque, Cadillac. It was an aspirational brand that communicated wealth, power and sophistication.

It's been many decades since Cadillac was held in such high esteem. Although GM is investing in Cadillac and new models are on the horizon, the marketplace is crowded with competitors that have transformed the luxury car sector, and even the definition of luxury brands. The upward mobility previously supported by the entire GM portfolio is now possible within a luxury brand alone, as they include light trucks and near-luxury cars. Furthermore, several brands have successfully expanded their market presence by selling off-lease certified used cars as entry-level luxury models.

Some observers argue that Cadillac's slide is overstated because so many competitiors' vehicles sell for less than $35,000. Using a price standard to define the bottom end of the luxury segment would boost the ranking of Cadillac relative to BMW and Lexus, among others. However, luxury brands know they have to attract younger customers to ensure future sales growth for their very expensive makes.

Younger buyers are expressing the desire and have the income to afford aspirational brands. Luxury is no longer just stylish, big and comfortable; it offers sophisticated engineering, performance, unique design and value.

Brand loyalty at the high end of the vehicle market is quite strong, and several luxury brands have developed product portfolios that appeal to a wide range of shoppers. Buyers of $35,000 Lexus and BMW models have a strong tendency to return to the same brand when it comes time to replace their car. Even as Lexus adds models at the top end of the range, it continues to add product at the low end. Likewise, BMW Will launch the Mini, which hardly ranks as a luxury vehicle. Nonetheless, the model will introduce new buyers to BMW, and a large number of them will stay with BMW as their incomes and needs expand.

Cadillac's Catera has never fulfilled its objectives of bringing in younger customers to the brand. The Opel Omega, on which Catera is based, never competed effectively against Audi, BMW or Mercedes in its home market, so it's no wonder that the car failed to excite buyers of German brands here. Even if the new Catera is a more competitive product, its competition is broad-based and includes the many variations within the BMW 3-Series, as well as cars made by Acura, Audi, Lexus, Mercedes and others.

BMW and Lexus are also notable for their attention to the "pre-owned" market. By certifying a large number off-lease used cars, these companies are establishing higher trade-in values for their vehicles. If ownership experience is satisfactory, there is a high probability that the pre-owned customer remains loyal to the brand.

Luxury car buyers are acutely aware that the cost of ownership includes the residual value of the vehicle. By establishing credibility for off-lease vehicles, they enhance residual values. This lowers lease payments on new models--an important factor, because upwards of 60 to 70 percent of luxury cars are leased.

Unless Cadillac makes a serious attempt to broaden its customer base with superior, near-luxury models and a well-crafted, pre-owned program, its share of the luxury market will continue to shrink.

Vehicle brands can no longer be defined the way Alfred Sloan did so many years ago. Cadillac no longer defines what "luxury" means; its competitors do.

MARYANN KELLER is a veteran auto industry analyst and author of the books "Rude Awakening: The Rise, Fall And Struggle To Recover At General Motors" and "Collision: GM, Toyota and Volkswagen And The Race To Own The 21st Century".