Luxury cars are often synonymous with huge, barge-like cars, akin to the Rolls-Royce Phantom or the Bentley Mulsanne. On a more pedestrian level, the Mercedes-Benz (DDAIF.PK) S-Class, BMW (BAMXY.PK) 7-Series, and Audi (VLKAY.PK) A8 sedans are the pinnacle of opulence, performance, and comfort for their respective brands. They also embody the definition of luxury car pricing, with MSRPs that can easily exceed $100,000 after a quick tour through the options menus.
But Mercedes and Audi both — BMW, not so much — are finding out that when it comes to increasing volume, it’s small, entry-level compacts that are doing the trick. Mercedes’ CLA Class, a $29,900 luxury compact sedan, was a godsend for the company that was struggling to remain competitive with its raft of ambitiously priced vehicles. Audi is finding the same with its A3, released earlier this year, which has been proving that the pool of buyers looking to drive a luxury label for less than $40,000 is huge. And it might be the key to continuing their growth trajectories in order to topple BMW’s luxury car empire.
Mercedes once owned the sub-$30,000 market with the CLA, but Audi’s A3 has been quick to make up the disparity as CLA sales have dropped in seven of the past eight months, Bloomberg reports. That’s a stark contrast to last year, when the CLA led Mercedes past BMW to become the U.S. best seller and the most successful new Mercedes model in two decades, according to the news outlet.
Research conducted by Autodata indicates that the A3 outsold the Mercedes CLA almost two to one. “CLA was the only game in town for a while, and now there’s something to compare it to,” said Michelle Krebs, an analyst at AutoTrader.com, in an interview with Bloomberg. “If you read some of the comparison tests, the A3 is coming out on top by a long stretch.”
BMW’s entry-level offering — that is, the company’s most affordable — is the 2-Series, which starts at $32,100, or about $650 less than the most affordable 3-Series. Unlike the A3 or CLA, though, the 2-Series is a coupe. By its nature alone, it’s not exactly a competitor to the CLA or A3; the 3-Series, meanwhile, is better equipped to take on the C-Class and A4.
While both the CLA and the A3 start at below $30,000, it’s highly unlikely — virtually impossible, even — to secure one for that price. After taxes, destination fees, and even an option or two are included, the cars generally go for about $3,000 to $5,000 more. The A3 sold for an average price of about $32,530 in June, Bloomberg said, citing Edmunds, while the CLA went for $38,571, which has declined from its $39,542 average in January.
Despite all the gains, Audi still trails Mercedes, BMW, and Lexus in the North American market. It sold a record 16,867 units in June (its 42nd consecutive sales record), and so far in 2014, sales are up 14 percent over last year. Mercedes has sold 151,624 cars in the same period, though that’s more due to the strong demand for its E- and S-Class sedans. But BMW is still outselling Mercedes by more than 5,000 units.
So far, the compact luxury segment is largely owned by the Germans. The smallest Cadillac , the ATS, was bred to compete with the A4 and C-Class (as well as the 3-Series), as was the Lincoln MKZ. The Lexus IS is in the same class, and none of the three brands offer a small, compact sedan below that level.
The small compacts open the door to a wide range of buyers who wouldn’t otherwise be able to afford a new car from Mercedes et al. Companies like the big German three are straddling a line between low-volume, high-priced vehicles (companies like Ferrari take this to an extreme; Pagani and Koenigsegg even more so), and the consumer-grade, high demand, and high output that the market demands. Their infrastructure is large enough that it can’t be supported by only selling high-end cars. To justify their plants, dealerships, racing programs, and huge research and development facilities, luxury automakers need the high-volume sales that $30,000 compacts provide.
So while conventional companies like Ford, General Motors, and Toyota race to give a more premium feel to their cars — look at the recent trends in pickup trucks — the luxury manufacturers are heading the other direction, racing down to meet the market in that happy medium between $30,000 and $40,000. It’s also a bid to nail a younger demographic — to win business from millennials before they make more money, usually because they are aging. The median age of an Audi buyer is 51, compared with 52 for BMW, 56 for Mercedes, and 62 for Lexus, Bloomberg reports, citing data from Strategic Vision.
The compact trend is slated to continue as Audi plans to release its Q3 compact crossover, which is already available in other markets, to go head-to-head with the Mercedes GLA. There’s no indication that BMW will be hopping onboard the super-small bandwagon with a small SUV of its own (smaller than the X1) or a small 4-door sedan; Lexus is prepping for the release of the NX, though that’s expected to rival the GLK, Q5, and X1.