Slow lane: Mercedes gets lapped in the luxury race

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Once the king of the road in the automotive luxury sector, battered Mercedes-Benz finds itself boxed in on the slow lane.

The latest to overtake the once great Mercedes marque is General Motors' revived Cadillac, which last year leapfrogged the German brand to move into third place in luxury car sales. And although Mercedes-Benz USA reported the best July sales month in its history with 20,791 units sold, it was still stuck behind Lexus, Cadillac, BMW and even American Honda Motor Co.'s Acura.

"Quality issues put a dent in Mercedes," said Jim Sanfilippo, exec VP of consultant AMCI. "Everybody else is getting better faster." As if the quality issues were not enough to damage its image, the Mercedes brand was also tarnished by its decision to introduce of lower-priced models.

Mercedes-Benz Group's profitability has slipped since 2004's second quarter, and the company posted a first-quarter operating loss of about $1 billion.

Its management is unsettled: Not only has CEO Eckhard Cordes tendered his resignation in recent weeks after being passed over for the top job at parent DaimlerChrysler in Germany, the automaker lost U.S. VP-Marketing Michelle Cervantez, who joined Hyundai Motor America.

Last week Mercedes-Benz named Scott Keogh to the new position of general manager-marketing communications from general manager of its Smart USA unit. He will reprt directly to CEO Paul Halata until a new VP-marketing is named.

Mercedes, moreover, hasn't been spending at competitive levels in the U.S. The brand spent only $25 million in the first quarter of the year, according to TNS Media Intelligence, some $10 million below outlays for the same period in 2004. One former insider said the budget is being crimped as part of the company's efficiency effort that resulted in a small operating profit of $15 million in the first quarter. Mercedes declined to comment for this story.

Then there's the question of whether Mercedes will seek a new U.S. agency. Two executives once close to the troubled automaker said Omnicom Group's Merkley & Partners, New York, which got the account in 1999 without a review, is in trouble on the account; one gave 50/50 odds a review would be called. Both laid partial blame on the marketer's revolving door of four marketing VPs since 1999. Merkley CEO Alex Gellert didn't return calls for comment.


The Mercedes-Benz Group "had lots of distractions," like its Smart car and the ultra-luxury Maybach brand launch that diverted resources from the core Mercedes brand, said Iceology consultant Wes Brown. This year's launch of the second-generation M-Class sport utility vehicle he said, "got lost" in sea of SUV ads.

Meanwhile, the brand's loyalty rate slipped from 44.1% during calendar 2004 to 42.7% in the first quarter of this year, according to figures from researcher R.L. Polk & Co. In the same period Lexus, the Toyota Motor Sales USA luxury marque, rose from 44.7% to 46.5%.

The brand, moreover, lost some of its cachet by introducing lower-priced models. Mr. Brown's research with owners of pricier Mercedes' models like the S-Class found they disliked the broadened buyer base with lower-priced models like the entry-level C-Class hatchback. Despite that, most said they would continue to buy the brand.

Now the one-time pinnacle in automotive luxury is trying to get consumers to fall in love with the brand again. Mr. Brown, for one, is confident Mercedes-Benz can restore its luster. What will help, he said, is the new CLS four-door coupe, launched this year, which he called a "smash hit."

Mercedes is fixing its slumping quality of recent years. Despite a setback with its biggest global recall in the spring of more than a million units, (including hundreds of thousands in the U.S.), its initial U.S. vehicle quality during the first 90 days of ownership rose in 2005 to sixth place from tenth in 2004 and fifteenth in 2003, said consultant J.D. Power and Associates based on annual owner surveys.

First aid

The new CLS four-door coupe, say some analysts, should restore some luster to the Mercedes image.

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