Check Your Rear-View Mirrors, Mercedes and BMW
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Volkswagen AG's (NASDAQOTH: VLKAY) Audi AG has accelerated from out of sight into the heart of the rear-view mirrors for the companies atop the luxury car market, and for BMW (NASDAQOTH: BAMXY) and Daimler AG (NASDAQOTH: DDAIF.PK), the objects in their mirrors are definitely closer than they appear.
Okay, I know, enough with the car puns. Still, Audi has crept up on the two leaders of the market, and doesn’t plan to look back. How has it made it here? Let’s look at it by the numbers.
By the numbers
Audi’s winning formula begins in the U.S., where they have nearly doubled their model lineup and shelled out a whopping $206 million in new and sleeker showrooms over the past six years, and Audi Chief Executive Rupert Stadler is the first to admit it. “We have put a lot of work in recent years toward winning over the U.S.,” Stadler noted. He cited plans to introduce new cars to the market, saying that they will serve as “important derivatives which will stimulate additional growth, especially in China and the U.S."
Well, China and the U.S. are good places to start for Audi. In the U.S., Audi sales have jumped 17% so far in 2013, and the share of the luxury-import car market held by Audi has almost doubled, climbing from 5.8%, where it was in 2006, to 10.1%. For them, it is a big first step towards their ultimate goal of increasing annual sales more than 40% to 200,000 vehicles by 2018, something that Audi U.S. Chief Scott Keogh notes is looking more and more possible. It’ll be “sooner rather than later,” he says.
To help accomplish this, Audi will open its first North American plant in Mexico, where it has plans to produce the Q5 SUV in 2016, much of which is destined for the U.S.
What about China?
Audi is the largest luxury-car maker in the ever-growing Chinese market as well. How? In 2001, years before rivals decided to, Audi made the move to China, and hasn’t looked back since. This allowed them to become the Communist Party functionaries’ preferred vehicle.
...And the rest of the world?
Across the world, sales of Audi cars through January and February of 2013 are up nearly 10%, landing them at 221,800 vehicles sold. This figure is just 400 shy of the luxury leader, BMW.
Annually, Audi has great expectations: after passing Mercedes last year in annual sales with 1.46 million in 2012, Audi announced a goal of more than two million cars per year by 2020: a lofty yet reasonable target.
Net profits dropped slightly in 2012, falling 2% to €4.35 billion. However, this can be attributed to investments in new models and the dismal European automobile market. Despite all this, Audi’s 11% operating margin edges out rivals Mercedes and BMW for 2012.
The road ahead
With so many goals for Audi, what are the next steps on the long journey to 2018 and beyond? Mr. Keogh stressed that it is important to maintain Audi’s edge with buyers in their 20’s, 30’s, and 40’s—a group that already makes up just under half (48%) of Audi’s current customer base, as opposed to 46% for BMW, 34% for Mercedes, and 18% for Toyota Motor Corporation’s Lexus brand.
Recall that Lexus once sat atop the market for 11 years, only to be knocked from its perch by Audi (and others) with advertising campaigns like this one:
in which having an Audi was differentiation from “the norm.” Well, if Audi becomes number one luxury car brand in America now…
Other Audi concerns
Luxury-car industry analysts warn that Audi’s conservative nature in some of its recent models, such as the redesigned A3 sedan, feature “minimalist aesthetics” that make it “really hard to recognize on the street as a new car,” according to Christoph Sturmer, and IHS Automotive analyst.
Furthermore, rivals BMW and Mercedes are vying for a younger customer base through lower prices to try to allow these types of consumers to enter the market.
Another concern for Audi, according to Mr. Keogh, is to keep the buyers as they get older. Just 45% of Audi drivers return to buy another the next time, as opposed to higher than 50% loyalty rates for BMW and Mercedes. To do this, they have introduced a more expensive lineup of cars, such as the S8, causing these more expensive cars to account for 33% of total sales, compares to a much smaller 18 % in 2011.
Foolish bottom line
So, with all of this, what matters to you? Well, Hopefully, if you’re looking to buy a luxury car, this helped you out. But that isn’t the main point. With BMW and Mercedes’ market share decreasing as Audi takes more and more, and with lofty yet reasonable sales goals through 2020 for Audi, it looks as though Audi is a safe bet for the next few years. However, don’t bet 100% on the long run—remember that it wasn’t too long ago that Lincoln was on top of the luxury car market. Now look where they are.
So, don’t shy away from adding Audi as a safe bet to your portfolio: odds are it will be helping you diversify. However, I would be careful with its industry rivals—at least for the time being.
Michael Nolan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!
