Audi Races for Luxury Crown

Published in WSJ on Mar 12, 2013.

BERLIN—For decades, Audi AG NSU.XE +1.63% has played the poor cousin to Germany's luxury-auto kingpins.

Now the car maker owned by Volkswagen AG VOW3.XE -1.72% is doing what was unthinkable several years ago: It's running neck-and-neck with BMW AGBMW.XE -0.77% for the crown of the world's top-selling luxury-auto maker, thanks in no small part to surging U.S. sales.

 

Reuters

A worker takes a steering wheel of a new Audi A3 at the production line of the German car manufacturer's plant in the Bavarian city of Ingolstadt.

On Tuesday, Audi forecast increased sales world-wide this year—after outpacing Daimler AG's DAI.XE -0.45%Mercedes-Benz with 1.46 million cars sold globally last year—and said it remained on track to reach its target of more than two million in annual car sales by 2020. Though its 2012 net profit slipped 2% to €4.35 billion ($5.68 billion) due to new model investments and Europe's dismal auto market, its 11% operating margin bested both BMW and Mercedes's recent profitability.

Six years ago, Audi trailed both of its German rivals in sales and cachet, and nowhere more so than in the U.S. Since then, it has nearly doubled its U.S. model lineup and prodded its American dealers to invest some $206 million in sleek and airy new showrooms over the past three years. Along the way, it has crafted an image as the upstart alternative to its more blue-blooded premium rivals, tapping into a luxury ethos that's favored the high, yet minimalist, design typical of Audis. "We have put a lot of work in recent years toward winning over the U.S.," said Audi Chief Executive Rupert Stadler.

The strategy appears to be working. World-wide, Audi's sales through the first two months of 2013 are up nearly 10% to 221,800 cars—400 short of BMW-brand car sales. Some of Audi's biggest growth is coming from the U.S., where sales have climbed 17% so far this year and its share of the luxury-import car market has nearly doubled to 10.1% from 5.8% in 2006.

The Bavaria-based car maker's U.S. sales are still roughly half those of its German rivals. But Audi is within reach of a critical goal—boosting its annual U.S. sales by more than 40% to 200,000 cars by 2018, a target the company's U.S. chief, Scott Keogh, argues it is likely to reach "sooner rather than later." A few years ago, "when Audi announced its 2018 numbers, I rolled my eyes," said Mike Sullivan, an Audi dealer in Torrance, Calif., who as the owner of 10 other dealerships had heard lofty sales goals from car makers before.

Last year, though, Mr. Sullivan spent nearly $24 million to construct a massive glass-walled, 17-car showroom—the largest Audi dealership in the U.S. His old Audi showroom, built less than a decade ago and now housing Mr. Sullivan's Subaru franchise, no longer fits "anywhere near where [Audi] was going."

Elsewhere in the world, Audi is much more established. It is the biggest luxury-car maker in fast-growing China, thanks to its move to produce cars there in 2001, years before its rivals. Its first-mover status, though, has allowed it to become Communist Party functionaries' ride of choice. In Europe, it also has become the top-selling luxury brand.

Audi's growth is key to its parent Volkswagen's own ambitions to become the world's largest car maker by 2018. It's also arguably Volkswagen's key profit driver, contributing nearly half of its €11.5 billion in operating profit last year. The benefits are mutual: a big reason's for Audi's high profitability is its ability to share technology and platforms with the bigger Volkswagen group, whose brands range from Porsche to Bentley to Skoda.

To reach its U.S. sales goal, Audi is breaking ground this year on its first North American plant in Mexico, where it will begin producing its popular Q5 sport-utility vehicle in 2016, much of it for the U.S. market.

Just as critical, Mr. Keogh says, will be maintaining Audi's edge with luxury-car buyers in their 20s, 30s and early- to mid-40s—whose numbers rival the size of the baby-boom generation. That cohort already makes up nearly 48% of Audi's U.S. customer base, compared with 45.8% for BMW, 34% for Mercedes and 18% for Toyota MotorCorp.'s 7203.TO -1.01% Lexus luxury brand, according to research firm Strategic Vision.

These buyers' aesthetic preferences are shaped as much by Apple iPhones as high-performance cars, and many of them have been drawn to the understated lines of Audi's design and details such as the cars' high-tech multimedia systems.

Like Ed Wirtz, a 46-year-old Los Angeles-area insurance and investment adviser, many customers have flocked to Audi's "new luxury" image. A longtime BMW loyalist, Mr. Wirtz instead bought an Audi S8 high-performance sedan a couple of weeks ago, drawn to its sporty look and feel despite its large size.

Though still a BMW fan, "it just seems like it's been around so much longer; it's starting to feel the same," he said. Audis, on the other hand, "now look faster, sleeker," he added. "It looks like they're going after a younger market, a younger executive."

Audi's U.S. gambit isn't without risks. U.S. luxury buyers have proved to have fickle tastes before: Witness the fall of the Lexus, which was the top-selling luxury car in the U.S. for 11 years before 2011, when product shortages and a loss of prestige from concerns about sudden acceleration knocked it from its perch.

Industry analysts warn Audi's minimalist aesthetic has risked being too conservative in some of its recent models. Its redesigned Audi A3 compact sedan, for instance, which arrives on U.S. shores later this year "is really hard to recognize on the street as a new car," said Christoph Stürmer, an analyst at IHS Automotive. In late 2011, it appointed a new design chief, Audi and Alfa Romeo veteran Wolfgang Egger, who has pledged to bring more differentiation to Audi's various model lines.

Both Mercedes and BMW are also aggressively trying to court younger buyers with new, lower-priced models aimed at lowering the barrier to entry for their brands in the U.S. Mercedes, whose average customer in the U.S. is 52, four years older than the average Audi driver, is making an especially concerted effort with a compact sports sedan that it will launch later this year at just below $30,000.

Audi's challenge, Mr. Keogh says, also will be to keep its buyers as they get older.

Only 45% of Audi drivers today buy another the next time, compared with loyalty rates of more than 50% among BMW and Mercedes customers.

Audi is trying to keep customers as they upgrade to new cars by expanding its higher-end lineup in recent years, such as the new S8 sedan, which starts at $110,000. Audi's larger, more expensive sedans now account for one-third of its total sales, compared with 18% just two years ago.

Mr. Keogh, though, said Audi has lost a few customers simply as a result of its growing pains. When the brand wasn't as much in demand, "our prices used to be lower," he said. Now that the brand is hot, and Audi has reined in its spending on discounts, the average Audi purchase price is $6,000 higher than in 2010. "It could be some of those earlier buyers weren't true Audi drivers," he said.