'Tier 2' luxury brands struggle to compete with elite Germans, Lexus

Florida auto dealer Bill Wallace routinely stages special promotions at his Cadillac and Lincoln dealerships to lure BMW and Lexus owners in for a test drive -- offers such as a free dinner for two or Starbucks coupons.

"We get the lowest response on those types of promotions of anything we do," he says. "But we continue to bang away at it."

For Wallace and other dealers who sell luxury brands such as Cadillac, Lincoln, Acura and Infiniti, banging away is a fact of life. Try as they might, those second-tier brands, with the exception of surging Audi, have struggled to make inroads against the powerful triumvirate at the top: BMW, Mercedes-Benz and Lexus.

The truth for aspiring brands on the outside looking in is that the rising luxury tide is not lifting all ships equally. Luxury brand sales, up 6.4 percent in 2014, grew faster than the mass market, but the top three brands plus Audi enjoyed the lion's share of the gains.

Combined, BMW, Mercedes-Benz and Lexus accounted for more than half of all U.S. luxury brand sales last year. With luxury sales projected by IHS Automotive to grow from 11.4 percent of the market last year to 12.7 percent in 2016, the stakes for aspiring brands are high.

Though Acura and Infiniti sales grew in 2014, they did not keep pace with the luxury market as a whole, but the two Japanese brands have gotten off to a fast start in 2015. In 2014, Cadillac saw its share drop more than 1 point to 9.1 percent as its sales dropped 6.5 percent.

The big three brands enjoy an enviable combination of advantages -- deep product lineups, global reach, strong residual values and rock-solid brand images -- that aspiring brands cannot match.

Cross-shopping data show that customers of the aspiring brands are more likely to defect to one of the big three or Audi than the other way around.

Not since 1998 has any brand other than BMW, Mercedes and Lexus topped the U.S. luxury market in sales. That year, Lincoln led the field. Before 1998, Cadillac held an unbroken grip on the top spot going back to before 1970.

Since Mercedes grabbed the top prize in 1999, imports have dominated the playing field. Lexus ruled 11 straight years from 2000-10. These days, the top three remain locked in a bitter struggle for the luxury title. BMW has taken the crown three of the last four years but is third so far this year, trailing Mercedes and Lexus.

Ambitious Lexus is breathing down the neck of Mercedes-Benz in a bid to regain the top spot it hasn't held since 2010. Through February, Lexus sales have jumped 26 percent, passing BMW to move into second place behind Mercedes. Like its rivals, Lexus is basing its growth on an aggressive product offensive.

"If I did not want to resecure that luxury leadership position, then my boss probably put the wrong person in this job," Jeff Bracken, Lexus general manager, said at the Detroit auto show. "It's important. No question about it."

Mercedes has been equally bullish. "With SUV sales up 22 percent, we expect our momentum to continue as new or redesigned versions of almost all our light trucks hit the market in the next year," Steve Cannon, CEO of Mercedes-Benz USA, said in a March 3 release.

In 2014, BMW topped the U.S. luxury field with an 18 percent share, followed by Mercedes Benz with 17.5 percent and Lexus with 16.5 percent. From there, it's a substantial drop to Audi at 9.7 percent and Cadillac with 9.1 percent. Together, the top three accounted for 52 percent of the luxury market. No brands come near that kind of dominance in the mass market. The top three mass-market brands -- Ford, Chevrolet and Toyota -- accounted for 43.8 percent of nonluxury sales in 2014.

So dominant are the three top luxury brands, they're almost playing in a different segment, says Tom Libby, analyst for IHS Automotive.

When Lexus introduced its NX compact crossover in 2014, sales of the BMW X3 and Mercedes-Benz GLK declined, while sales of competing vehicles from "striver" brands weren't affected, he says.

"One could conclude there's a lot going back and forth between those brands," says Libby. "When one of those brands brings out a strong entry, it does not affect the strivers. So perhaps it's a separate market."

Says Chris Lemley, who owns two Massachusetts Lincoln dealerships: "If you look at sources of sales and defections, those four brands [including Audi] are cannibalizing each other for the most part."

The top three brands enjoy higher loyalty rates than the brands fighting to join the club: 58 percent of Mercedes-Benz owners who went shopping in 2014 stayed loyal to the brand, followed by BMW at 53 percent and Lexus at 52 percent, according to IHS data. Among other brands, only Lincoln hit the 50 percent mark.

Chris Sutton, vice president of auto retail for J.D. Power and Associates, says customers of the top three luxury brands cross shop the other two far more than they do the brands in the second group, with the possible exception of Audi.

"Among customers who bought a BMW in 2014, 21 percent visited an Audi dealer, 20 percent of them visited a Mercedes dealer and 14 percent visited Lexus," Sutton said. "Everything after Lexus is in single digits."

BMW, Mercedes-Benz and Lexus have expanded their model lineups at a rate that rivals, except Audi, have found difficult to keep pace with. The top three have created sub-niches where nobody imagined they existed, particularly in the SUV/crossover segments that are driving much of the growth in luxury. The BMW X4 straddles a line between a coupe and an SUV. Mercedes aims to bring new buyers with the GLA, a compact crossover that might have been called a station wagon in an earlier generation.

Meanwhile, Cadillac doesn't have a compact luxury crossover, while BMW fields the X1, X3 and X4.

Edmunds.com counts 35 models in BMW showrooms for 2015 including variants such as the M performance series. That's up from 27 in 2014. Lexus and Mercedes have 19 models each. Audi, in the midst of a product offensive aimed at joining the top tier, now offers 29.

By contrast, Cadillac has eight offerings, down from 12 last year. Infiniti has nine and Acura five.

Cadillac President Johan de Nysschen has spoken bluntly about the product gap between the top group of brands and those striving to join the club.

"Something has got to be wrong when a brand as iconic as Cadillac, and part of the fabric of American culture, has one crossover and one SUV. The Germans have so many we can't even keep track," he said during a presentation to Wall Street analysts in November.

Indeed, Cadillac has the full-size Escalade and the midsize SRX, while BMW offers five SUV/crossover nameplates, seven when the M performance variants of the X5 and X6 are included.

De Nysschen knows the formidable challenges of challenger luxury brands as well as anyone. He served as global head of Infiniti and president of Audi of America before coming to Cadillac last August. In spite of some vehicles that critics have said are as good as the Germans', Cadillac has continued to tread water.

"Nobody who goes to work at Mercedes-Benz, BMW or Audi works on a part-time basis for those brands," he told Automotive News last year. "They are absolutely, 100 percent immersed in annihilating the opposition. They plan for our demise every working day of their lives."

Without a like mentality, he said, "we cannot combat juggernaut brands like those leading German three, who got there by many, many years of consistent execution."

De Nysschen is frank about the yawning gap between Cadillac and the German stalwart brands, from sales volumes to brand image to the breadth of the vehicle lineup. To close that gap, he's trying to emulate those brands -- not in car design and brand identity, but in mindset. He wants Cadillac to act like it's an exclusive luxury brand, which requires tighter production and firmer pricing to avoid the all-too-frequent Cadillac fire sales that damage its resale values and image.

Howard Drake, chairman of the Cadillac National Dealer Council, told Automotive News that dealers back de Nysschen's efforts to turn Cadillac around.

"It's going to take pricing discipline on our part and not overproducing on their part," Drake said. "He's trying to drive margins up and position us more like a luxury brand.

"Dealers want to believe in Johan. They're rooting for the guy. But guys aren't going to sit there taking double-digit hits every month indefinitely. He's got to continue to evolve that message and reinforce what we're doing this for."

De Nysschen's former employer Audi stands a much better chance of pushing into the top three than Cadillac.

"Audi is closest to being able to transition from second tier to first tier. The rest really have to struggle," says Karl Brauer, analyst for Kelley Blue Book.

Audi's sales jumped 15 percent in 2014 as the brand passed Cadillac and Acura to move into fourth place. Its U.S. sales lag behind its global success -- it led global luxury sales for the first two months of the year -- but an aggressive product offensive could change that. Audi's global reach is paying off, with a broad product lineup -- 29 vehicles for 2015 up from 25 in 2014 -- that makes it a match for its German rivals.

Acura, Infiniti and Lincoln face bigger uphill climbs. But leaders of those brands seem to understand they won't make up the ground overnight.

Acura finished sixth in the U.S. behind Cadillac in 2014 but has jumped past Audi and Cadillac into fourth place for the first two months of 2015, demonstrating just how hot the competition is among the aspiring brands.

Mike Accavitti, general manager of Honda's Acura division, says Acura is comfortable with its portfolio of five vehicles.

Though Acura has just two SUVs -- the RDX and MDX -- they're major players in two of the hottest segments: compact and midsize crossovers.

Accavitti says Acura always has been a "challenger brand" and is comfortable with that status: "We zigged while competition was zagging. We established ourselves quickly as an alternative to conventional luxury brands. Throughout our history, we have continued to offer that type of brand proposition."

He pointed out that the delayed arrival of the TLX last year slowed Acura sales, which have regained momentum now that the pipeline is full.

John Connelly, chairman of the Acura National Dealer Advisory Board and president of Acura Columbus in Dublin, Ohio, said: "Acura should stay with what it's good at, and it's good at making reliable luxury cars that will hold their value, cars that do very well in the certified pre-owned market. Honda is not a company that looks to grow by leaps and bounds."

Volvo, the Swedish luxury brand struggling to regain its footing after a product drought, also realizes it can't match the German luxury giants.

"They are in a rat race. We are not going to follow them," Volvo r&d boss Peter Mertens told reporters at the Geneva auto show earlier this month.

Lincoln, a brand on a rebuilding mission after decades languishing in the luxury hinterlands, has shown one possible avenue to gaining ground: Wage an opportunistic campaign by strategically entering one promising segment at a time. Lincoln sales jumped 16 percent in 2014 almost entirely based on its new luxury compact crossover the MKC, a new nameplate in a segment where Lincoln previously didn't compete.

But Lincoln's gain came on a low base, rising from 81,694 U.S. sales in 2013 to 94,474 vehicles in 2014, less than a third of what the luxury leaders sold.

"We have to realize we're not the biggest luxury brand," Ford Motor Co. CEO Mark Fields told reporters at the Detroit auto show, "and we need to use that to our advantage -- the personalized service that we and our dealers are delivering to our customers."

Infiniti, which is up 14 percent so far this year -- better than Acura, Cadillac and Audi -- is going through another leadership change. De Nysschen left for Cadillac last summer after just two years.

And there was more churn in February as Nissan CEO Carlos Ghosn named Randy Parker to replace Michael Bartsch as vice president of Infiniti Americas. In announcing the change, Ghosn said: "Infiniti has a long history of overpromising and underdelivering."

Larry Dominique, executive vice president for data solutions at TrueCar and a former product planning chief at Nissan, says the job of overtaking the major luxury brands will require patience: "If you look at this industry over 30 to 40 years, no brand has gained transaction prices and volume fast. It takes multiple generations of product, consistency, brand management and patience. It's tough to have the patience."

Wallace, the Florida Cadillac and Lincoln dealer, says challenger brands such as Cadillac and Lincoln have to get everything right.

"It's still not as cool to drive a Cadillac as it is to drive a BMW. They've got to work harder to cut through," Wallace said. "It's got to be a cool car with great marketing, great styling and a great lease offer.

"I feel if we had more people cross shopping, we have a nice story to tell, if you could get enough people into the showrooms. But it's a big leap getting them in."

Mike Colias contributed to this report.