America’s SUV thirst hits luxury brands with hidden hangover

America’s SUV thirst hits luxury brands with hidden hangover
Cars like the Mercedes S-Class are high on supply and low on demand.

Luxury carmakers benefiting from red-hot demand for lucrative SUVs are dealing with a behind-the-scenes headache because of just how swiftly demand has shifted away from their sedans.

The glut of vehicles being returned after their leases expire disproportionately affects premium lines like Daimler AG’s Mercedes-Benz, BMW AG, Toyota Motor Corp.’s Lexus and Volkswagen AG’s Audi, because they rely more on leasing than mainstream brands. Sales for luxury manufacturers’ car models have dropped dramatically the past few years, leaving them in a bind with both too much supply and falling demand.

“It’s not necessarily the overwhelming amount of vehicles, it’s the mix of those flood of vehicles,” said Scott Keogh, president of Audi of America. “You’re throwing all these cars into the marketplace a couple years after it has evaporated and jumped into SUVs.”

Luxury automakers reported fresh figures this week showing just how pronounced the preference for sport utility vehicles has become. Demand surged last month for models like the Audi Q5, Mercedes GLE and Lexus GX, and slumped for sedans, including the Mercedes S-Class, Audi A4 and Lexus GS.

Mercedes extended its sales lead for the year, with the German brand’s total deliveries rising 1 percent, excluding van models or Smart small cars. With a 9.6 percent sales gain in October, Audi continued to narrow its gap with Lexus, which reported a 7.7 percent drop. BMW – which delayed reporting sales 24 hours following an IT issue – saw October deliveries fall 3.4 percent.

The surplus of luxury coupes and sedans being returned after leases poses obvious challenges to the used-car market. Significantly more passenger cars were leased a few years ago than there’s appetite for now: SUVs have surged to 56 percent of luxury sales this year through September, compared with 42 percent three years ago, according to car-shopping website Edmunds.

Costlier leasing

Until demand for car models stabilizes, the vehicles returning to the pre-owned market are going to be out of step with what consumers want. And if supply and demand remain out of whack, it’ll depress prices of coupes and sedans and have an impact on the new-car market. When vehicles aren’t retaining value well, it makes leasing more costly, pricing consumers out of the market or forcing manufacturers to offer richer incentives.

Thanks to the hot-selling Q5 and Q7, Audi’s average incentive spending per SUV has barely budged this year, at $1,994 through October, the lowest among the four top-selling luxury brands, according to Autodata Corp. But discounts on Audi car models have risen by about $391 per vehicle to $4,796.

Mercedes is spending $6,755 on incentives per car sold through the first 10 months of the year, up about $242, while Lexus is up $266 to $5,426. Only BMW has reduced spending on passenger-car discounts, dropping its promotions by about $1,533 to $5,747 per vehicle through October, data released Thursday show.

(Contact the reporter on this story: Gabrielle Coppola)

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