Why Luxury Sales Could Thrive in 2013


Leather-clad luxury cars may seem the domain of an affluent few. After all, this year's best-selling luxury car through March — the Mercedes-Benz C-Class — ranked 51st among all cars. But the group may be poised for a comeback. Total sales improved 12.3% in the first three months of 2013, outpacing the industry's 6.4% gain. By year's end, one in every 7.5 new cars sold in 2013 could be a luxury model.

That would buck a trend several years in the making. Luxury cars, including Buick, hovered around 13% of the new-car market from 2005 to 2010. In 2011 that share slid to 12.9%, and in 2012 it tumbled to 12.6%.

It seemed counterintuitive, given the wealthy are alive and well.

Consider two households. One is at the 80th percentile of wealth, perhaps a suburban family that's well-off enough to buy a new Ford or Toyota. The other is at the 95th percentile — well-moneyed Americans who might spring for a new Lexus or BMW in their driveway.

Before the recession, from 2001 to 2006, incomes for both groups increased at the same pace — about 16%, according to Census Bureau data. The recession stalled income growth for both households, but the wealthier one fared significantly better. Income grew 6.9% between 2006 and 2011 versus just 4.7% for the less-wealthy household.

Only Wealthier Americans Shopping
The end result? Wealthier car shoppers kept shopping, dragging up the average income of all new-car shoppers. The rest of America, by contrast, tightened its belts. A recent report by the Pew Research Center found the wealthiest 7% of Americans saw their net worth soar 28% in the years since the recession, but the other 93% saw theirs slide 4%.

"Over the course of the recession, it's the middle and lower classes that have been hit the hardest," AutoPacific analyst Ed Kim told us. "They're just trying to pay the bills. And because over the course of the last couple of decades vehicles have gotten so durable and so reliable, [it means] that if you've got a 10-year-old Camry, yeah, you probably want to replace that Camry, but you probably don't have to."

With wealthy Americans making up an increasing portion of all new-car shoppers, the median income of all car shoppers increased. Kim said it stands at $90,000 today versus just $75,000 in 2006.

The affluent are "still, by and large, comparatively well," he said. "They are the ones that are more able to afford a new vehicle. That's what explains the significant rise in the median incomes of new-vehicle owners."

But Fewer Shoppers at the Top
All of this would suggest higher luxury-car sales over the years, but that hasn't panned out. Why not? One possible reason is that despite the rich gaining in wealth, they didn't gain in number. In 2011, the latest year for Census Bureau data, 21% of all U.S. households made $100,000 or more. Adjusted for inflation, that chunk before the recession was 23%. Luxury-car sales followed roughly the same trend:


Will wealthy Americans gain in number? The jury's still out, and a continuing decline may play against luxury-car sales for years to come. But there's another factor at play, and it's changing for the better: products.

The luxury market isn't what it used to be. Former heavyweights like the Cadillac DTS and the Lincoln Town Car, which combined for nearly 100,000 sales in 2006, are gone. So are brands like Hummer and Saab, which combined for nearly 110,000 sales that year. But other models are back on the upswing. From Acura to Mercedes, new compacts are swarming the entry-level side of the market. BMW and Buick have found new niches in the SUV segment. And Cadillac has reinvented itself.

"A lot of the strength of luxury in March [sales] was because of new products that are being compared with nothing a year ago or being compared with something in a launch phase a year ago," Polk analyst Tom Libby said. He pointed toward the new Cadillac ATS and XTS, which should drive "major incremental increases" for GM's luxury brand. So should the ILX for Acura, the JX for Infiniti and the C-Class coupe for Mercedes-Benz.

Still, Libby cautioned that he doesn't see a huge increase in the near term: "If you look at total luxury [sales], it may not be growing as much as one wants to think," he said.

AutoPacific's Kim, by contrast, thinks the factors play out to improve luxury sales over the long haul.

"There [will be] a greater market share for those vehicles because it's people who can afford those vehicles who tend to be into buying new vehicles in general," he said. "The median new-vehicle buyer is a wealthier person than the new-vehicle buyer of five, six years ago."

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Senior Consumer Affairs Editor Kelsey Mays likes quality, reliability, safety and practicality. But he also likes a fair price.  Email Kelsey