How to create a luxury nameplate

[bigpoppanils]

Automotive Luxury 101 — How to Create a Luxury Nameplate

By Karl Brauer

Date Posted 07-31-2003 www.edmunds.com

In case you haven't already heard, Chrysler is now a premium luxury car nameplate. And how do I know this? Because Chrysler said so. Well, maybe it didn't publish an official press release stating: "Attention, everyone — the Chrysler brand is now a premium nameplate. Thanks for your time." However, the company has made it clear in recent months that the all-new Pacifica and Crossfire are premium vehicles sold by a premium carmaker and offered up at — you guessed it — a premium price. For instance, the long-term Pacifica we recently purchased had an MSRP of $41,170. Admittedly, our car was loaded with just about every option, including all-wheel drive, a DVD video player and a navigation system; the starting MSRP for a two-wheel-drive Pacifica is almost $10,000 less at $31,230. Be that as it may, the reaction from friends and family when we quote our Pacifica's price is almost universal — they simply can't believe a Chrysler-badged vehicle can cost over $40 grand. "For that price," many of them say, "can't you get a BMW or Mercedes?"

The answer is "Yes…but…." A base 2003 BMW X5 starts at $40,195, but you aren't going to get a third-row seat, DVD player or navigation system for that price. In fact, you don't even get an automatic transmission included, despite spending over 40 large on this particular BMW. Personally, I find the pricing of the Pacifica no more outrageous than the pricing of the X5, but that's just me. Paying over $40 grand for a BMW and not getting body-colored door handles or a standard sunroof seems ridiculous — but that hasn't stopped the X5 from being one of BMW's best-sellers, so what do I know?

Actually, I know that you can get a Lexus, Acura or even a Mercedes SUV for less than $40,000. In fact, for $37,670 you can get an ML350 with more horsepower, more torque, a larger engine and more cargo capacity than the BMW. You also get an automatic transmission and TeleAid satellite communication services (neither comes standard on the X5). The Lexus RX 330 and Acura MDX offer even greater standard feature content and performance for roughly the same amount of money.

Which brings us back to the Pacifica, which starts out at a lower base price than any of these vehicles, but can easily cost as much as the competing Lexus or Acura if a few options are added. And as our long-term Pacifica proves, you can start crowding the Mercedes/BMW pricing realm if you add enough toys. Does this make the Pacifica overpriced? Does it make the Mercedes/BMW vehicles a bargain? Most people would probably say that the German competitors are pricey…but worth it if you demand the "real deal" in terms of a luxury SUV ownership experience. These same people would say the Lexus/Acura models are excellent values that may not carry quite the badge envy of the German SUVs but still offer a first-rate ownership experience — especially in terms of reliability and resale value.

If that's the case, where does this leave the Pacifica? It costs less than any of these other vehicles, but not substantially less. The Chrysler's price advantage for base models ranges from about 15 percent against the lower-priced models (RX 330 and MDX) to about 25 percent against the BMW. Is this enough to send potential X5 buyers running to their nearest Pentastar store? In my opinion, the answer is "No." And if you look at the initial market reaction to the Pacifica, my opinion has some factual support. Sales have not met expectations, and Chrysler started offering incentives on this all-new model less than a month after it went on sale.

Why is Chrysler stumbling on Pacifica sales while Lexus can hardly keep up with RX demand and BMW is cranking out the X5s as fast as it can? Some might point to the Pacifica's less-than-premium engine, which is lacking in both power and refinement. Some might point to the various interior pieces that don't quite live up to the car's "premium" billing. Others may say that buyers simply aren't willing to pay $30,000 for a base Chrysler product when a Lexus or Acura version is available for another $6,000.

While all of the above factors are hurting sales, I think it's that last item that has numerous Pacificas gathering dust in Chrysler showrooms. The fact is that Chrysler (or in this case, Daimler) can make all the noise it wants about the Chrysler badge representing premium status, but the American consumer isn't so easily convinced. It was the same reaction buyers had in 1989 when Toyota announced it was entering the luxury market with a new brand called "Lexus." Many Americans, my father included, responded with, "Yeah, right. A glorified Toyota that competes with Mercedes and BMW? I don't think so."

Fast-forward 14 years and you have Lexus not only competing with Mercedes and BMW, but beating them in total sales, ownership satisfaction and resale value. How did Lexus overcome the "glorified Toyota" stigma? Well, initially, it didn't. Rather than trying to change people's perceptions overnight the company decided to simply produce an exceptional product and offer it at an exceptional price. Stigma or no stigma, when a brand-new V8 luxury sedan called the LS 400 from "Toyota" costs $35,000 and the equivalent Mercedes 420SEL costs $62,500 in 1990 dollars, even the skeptics are going to investigate. Over at the BMW dealership, you had to spend $49,000 to get a six-cylinder 735i, and even the midsize 535i cost $41,500. Lexus essentially forced traditional luxury car buyers to consider its product by pricing it so low.

The second crucial element in Lexus' original marketing plan was equally obvious: Build a superior product. That original LS 400 included one of the most refined drivetrains ever offered in a production car. It was a four-cam V8 that fully competed with the Mercedes V8 in terms of power and poise. The Lexus interior also offered plush leather, a long list of standard luxury features and lower maintenance and service costs. Sure, the car had no heritage compared to the German competition, but plenty of buyers were willing to ignore that minor deficiency in the face of such overwhelming value.

Of course, Lexus isn't the only successful luxury brand to enter the American market in the last 15 years. Honda has Acura and Nissan has Infiniti (Mazda wanted to have Amati, but it didn't have the resources to pull it off so the company just built the Millenia sedan instead). Honda and Nissan used essentially the same tactic of offering superior value at a lower price to launch their luxury divisions, though neither has proven quite as successful at it as Lexus, which is currently the number-one selling luxury brand in America.

But, back to Chrysler and its Pacifica (and Crossfire, since that's the other model that represents the "new" Chrysler brand). When you think about it, Toyota was actually in a better position in 1989 than Chrysler is today. In 1989, the name Lexus had no heritage, but it also had no baggage. People had never seen a Lexus "K-Car" or Lexus "Le Baron." Don't get me wrong, both the K-Car and Le Baron served Chrysler well in terms of making a profit when that was exactly what Chrysler needed. But neither conjures images of a "premium" brand. (And yes, I know the Le Baron was once an upscale trim in the Imperial line — but I'm probably one of less than 100 Americans under the age of 45 who even knows what an Imperial is, let alone the role the Le Baron played in that model line.)

So Chrysler doesn't get to start with a clean sheet. It has to overcome the association many Americans have with the brand's not-so-distant past. And even its present product lineup has nagging signs of "non-premium-ness." The Chrysler Voyager minivan is a leftover nameplate from the days of Plymouth, a brand that's about as anti-premium as it gets.

How does Chrysler overcome these obstacles? Is it possible that 10 years from now Chrysler could be the number-one selling luxury brand in America? Maybe, but the company's got to make a few changes.

First, Chrysler has to ditch models like the Voyager, which do nothing to convince buyers that a Pacifica is a viable alternative to an ML350. Second, the company needs to price its vehicles in a manner that makes it impossible to ignore Chrysler as a worthy choice in a given segment. This means the Pacifica should start at $28,000 and not go above $35,000 no matter how many options are added. And finally, the product has to be at least as good as the current offerings from established luxury brands. We all know that DCX will eventually drop-kick that 3.5-liter V6 and stick in a proper V8 that offers adequate power and refinement, but the company should have done this from the start.

Both the pricing and the engine issues show a lack of foresight on Chrysler's part. The company wanted to maximize profits by using the cheaper V6 and pricing the car closer to its rivals. Those decisions will cost the company and further delay any successful bid to appear as a full-fledged premium player. Does anyone think Toyota was making a huge profit on $35,000 LS 400s in 1990? Of course not, but two years later, after establishing the brand and the product, the LS 400 cost $47,000 and Lexus couldn't keep up with demand. If Chrysler had offered a V6 Pacifica for $28,000 and a V8 version for $33,000, the same thing would have happened. The car would have sold faster than the company could produce it, and a few years later the price could have been increased without substantially affecting sales because of the car's established presence in the marketplace. This strategy requires a company to forego short-term profits in order to build long-term brand loyalty — something many automakers can't fathom.

If you question my thinking, you might want to look at what happened with the PT Cruiser. The car came in as an amazing value. Even buyers who weren't fans of the styling couldn't deny the level of utility offered in the $17,000 base package (with "loaded" versions going for a mere $21,000). The car sold faster than Chrysler could produce it, and it continues to be one of the brand's best-selling vehicles despite price increases every year. You know someone at Chrysler was probably taken to task for "pricing the PT too low" once the company saw how hot the car was. Indeed, there was a "price adjustment" for the PT within weeks of it going on sale, but thankfully it was only a $500 increase that had no real effect on total sales. And the long-term effects of such a successful vehicle launch far outweigh the short-term gains in pricing a hot, new model too high and then having demand crumble once the "first-on-the-blockers" (who will pay almost anything) are all satisfied (did I just hear someone out there say "Thunderbird"?).

I'm not suggesting that creating a successful luxury brand is easy. In a world of rising costs and increased competition (not to mention labor unions and pension funds if you're a domestic player), it's not always possible to create a superior product that can be sold for a lower price. But anyone watching the car industry for the last 15 years knows that's exactly what allowed Lexus to leapfrog BMW and Mercedes in terms of sales and owner satisfaction.

The path to a successful luxury nameplate is obvious…if not easily accessible.