Mercedes-Benz’s Luxury Pitch Needs Tougher Road Testing

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Group CEO Ola Källenius puts the matter very clearly: “Although everyone knows that Mercedes is the kind of elite original luxury brand in the car industry, perhaps the stock has not been viewed. in that category,” he told Heard on the Street.

But closing that perception gap isn’t as easy as you might think.

At a strategic day near Monaco Thursday, Mercedes launched a plan to change investors’ minds. It pledges to sell more premium cars — those priced at 100,000 euros or $106,000 or more — and fewer, better entry-level ones at higher prices. It also aims to build on the high selling prices they have achieved in recent times in terms of semiconductor supplies and unlimited vehicle production.

Hopefully the reward will be higher, more flexible margins. Under stable market conditions, Mercedes is expected to generate a 14% operating profit margin in its flagship car division, which now makes up the majority of the company. Even in bad condition, it will not be lower than 8%.

This is much lower than that of the most exclusive carmaker listed, Ferrari (25.9% in the first quarter), or car technology pioneer Tesla (19.2%). It is also lower than the operating profit margin of other high-end manufacturers, such as handbags to champagne giant LVMH — a company Mercedes uses to match market values ​​— or Apple.

However, if successful, Mercedes’ plan would set a new financial benchmark for what the auto industry often calls the “premium” brand – a luxury brand that is widely owned. The company whose stock is currently trading with forward earnings of less than six times can then be rewarded with a higher valuation.

Mr. Källenius, unlike his predecessors, has always focused on questions of market value. As a symbolic gesture of the company’s commitment to tighter capital allocation, on Thursday he even announced the sale to charity of a single historic Mercedes in his vast collection. company for 135 million euros – by far the most expensive car ever sold.

While the strategy makes sense, its success remains uncertain. Changing the luxury model portfolio seems to be within Mercedes’ control; retains less of the benefits of scarcity-induced pricing today. The company will swim upstream when manufacturing activity in the industry normalizes and still wants to increase revenue by about 5% a year.

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One lesson from LVMH, Apple, and now Tesla is that having tight control over the distribution of your products helps to create price discipline, consumer relationships, and cost-effectiveness that profit margins. superiority is built. Mercedes is rapidly transitioning to a direct-to-consumer model in Europe, but laws protecting the independence of dealers make this difficult to replicate in the US.

There’s also the question of electric cars, which are open to everyone but Tesla isn’t very profitable. At 16.4%, Mercedes produced an even higher first-quarter operating profit margin than currently expected in good times, but only 4% of the cars it sells are running. completely electric. If this increases rapidly, it will reach the group boundary. Otherwise, the company could lose customers to Tesla.

Shares of Mercedes fell 2% on Thursday, even as shares of traditional rival BMW remained more or less flat. Investors will likely be disappointed by their 14 percent long-term margin ambitions after the end of the first quarter. Watching and waiting for a downturn also seems to be the dominant investor position across the industry, and this is not something Mr. Källenius can hope to address.

Only consistent results, especially through tougher times, will prove that Mercedes is becoming a quality company as well as a quality brand. With the risk of a recession growing, his pitching could soon be put to the test.

Write letter for Stephen Wilmot at stephen.wilmot@wsj.com

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Edmund DeMarche

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