► Mercedes changes tact
► Volume and growth will be key
► So it’s time for mainstream premium
Back in 2022 Mercedes-Benz boss Ola Källenius emphatically declared that the increasingly crowded pool that the car industry calls ‘mainstream premium’ was no place for his company to wallow in. No: Mercedes, he insisted, is a luxury company.
‘I say it here officially: the entrance point into the Mercedes-Benz brand in the future will be a different one than it is today,’ Källenius told a crowd of analysts at an exclusive venue high above Monaco.
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These were the new ‘economics of desire’. In a slide show littered with images of diamonds, Källenius’s chief financial officer pointed to a chart that drew a stark comparison between a decrease in the volume of sales and an increase in the average selling price. More was less. Value was more important than volume. Sell fewer cars, but make more profit on each sale.
‘We’re not going to go in and compete with volume makers. We’re a modern luxury company,’ Källenius said. More top-end sales and fewer entry models, including axing the VW Golf-size A-Class, would bring predicted profit margins of 14 per cent by 2025.
Mercedes assured them it wasn’t, highlighting the fact that 30 per cent of upcoming launches such as the new S-Class and GLE SUV were in its top-end segments that account for 15 per cent of sales.
But it’s clear that, going forward, squeezing the rich is a smaller part of the equation. That much-vaunted average selling price, up to €71,500 in the second quarter of 2022, slipped to €52,765 last year amid a torrent of headwinds, led by a US tariff bill of around €1bn and rampant competition in China that slashed sales by 19 per cent last year to 551,932.
That hurt profits to the point that margins weren’t at the 14 per cent mark predicted in 2022 but instead slumped to 2.6 per cent in the fourth quarter. Mercedes predicts margins of three to five per cent this year for its car division, with a medium-term aim of eight to 10 per cent.
These are tough figures to reach given the return to lower-margin compact segments, but Mercedes pointed to the 400,000-car annual capacity it now has in its Kecskemét plant in Hungary. Here, production is around 70 per cent less expensive than in Germany, ensuring that the new A-Class built there might have a competitive margin. A round of job cuts started in 2025 and continuing in 2026 and 2027 will also control costs.
It’s hard to blame Mercedes for the cloudiness of its crystal ball. Anyone back then who dared to predict today’s reality would have been met with many a raised eyebrow. At that time, Mercedes was ‘all in on BEV, all out of ICE’ as an electric future beckoned.
A-Class sales have jumped 20 per cent in the first two months of this year across Europe, suggesting Mercedes has taken the brakes off discounts in its somewhat inflexible direct sales system in key markets including the UK.
However, China is on the decline for all Western premium brands and already the company is refusing to play the brutal discount game with its new electric CLA, resulting in sluggish sales for what should have been a key model. ‘We did not participate in those measures,’ China head Oliver Thöne said, a trifle sniffily, at the investor event. ‘We believe that the substance of the product will require a certain amount of time to be fully understood and fully appreciated.’ The new electric GLC should be a better fit, if Mercedes can price it right.
Being fully appreciated was never a Mercedes weakness, and for one brief period it thought it could leverage that appreciation to elevate itself onto a higher level. But now the diamonds are becoming harder to mine, it recognises it’s time to get back into its civvies and muck in with ‘mainstream premium’ again.
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Mercedes abandoned its luxury-only strategy and will return to mainstream premium cars by 2028.
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This shift shows how quickly automaker strategies must adapt to market realities and competitive pressures.
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Mercedes' profit margins fell from a targeted 14% to just 2.6% in Q4, forcing the strategic pivot.