Profit Margins

For most car companies profit margins are tight and made up for in the volume of sales. For luxury car companies the opposite is true. Mercedes, Audi, and BMW all survive by selling cars that have high profit margins in low volume. What this means is that it wants to make as high a profit margin as possible without forsaking quality at the expense of market share.  In the first quarter of this year Mercedes had an operating profit margin of 3.3%, 7.8% lower than Audi and 6.6% less than BMW. To alter this Mercedes is focusing on its new s class sedan not only in terms of the car itself but in strategy of the sales.

Poor management lead to Mercedes having separate sale management in China so Mercedes dealerships were competing with each other and led to reductions in price. To correct this Mercedes has streamlined management by merging the separate sales organizations. 2013 should be a much stronger year for Mercedes profit margins once the China sales organizations are no longer competing.

Source: Automotive News

3 comments to Profit Margins

  • M-B also moved downmarket, selling smaller cars in Germany (and at the extreme partnering and now owning Smart cars). So their strategic issues go beyond selling their top models.

    Note that in the US Toyota has 3 separate distributorships, dating back to when it never thought it would sell many cars here. Southeast Toyota is the importer for Florida and the Carolinas (and Georgia and ?). Another handles Texas. Both are owned by American entrepreneurs. Toyota owns the distributorship for the rest of the US. So it’s not just M-B that has made such miscalculations.

  • gradyb13

    I am very surprised to hear that Mercedes’ profit margins are so much smaller than BMW and Audi’s. From the outside it appears that the three companies are pretty similar, which after reading this is obviously not the case. What I am curious about is how they differ.
    Professor you mention Smart with Mercedes and downmarket cars, but BMW has MINI (which I assume sell better than Smart vehicles do) and also the 1 series, so I still don’t see how the companies are different enough to account for the profit margin differences.

  • tyler

    Mercedes is “downmarket” in a lot of the rest of the world, while not necessarily in the US. Although the Mercedes we know is leather clad and high priced, Mercedes sells many many utilitarian vehicles in the rest of the world. For example the “G Wagon” which costs well over 100 thousand dollars in the US and is loaded with every luxery feature imaginable was originally a spartan military vehicle similar to the Jeep Wrangler. Even in the US however Mercedes is taking a shot at the “lower end.” Mercedes new CLA will debut with a price under $30,000. That is a great point about the 1 series however, Audi’s A3 being another example of “premium” makers moving downmarket. I am curious to see if any of the three makers will break into the sub $30,000 market effectively.

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