21st century style: 'Less is more' auto

Functionality, character part of new wave; brands like Audi push fun factor

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In the pre-launch phase of the Audi A3 on U.S. shores, even Audi executives in Ingolstadt, Germany-known for their "Never follow" thinking-were a tad nervous. Brand mavericks were getting their way.

Could the race-inspired sporty compact A3 convince Americans with a "more is better," SUV-loving mind-set about one critical element? That is: Small, when loaded with snazzy features, space and fuel-efficient engine power, is actually more.

The answer seems to be yes, and that's reassuring for carmakers trying to market smaller luxurious cars that are more profitable than econoboxes. Audi backed the A3 with $15.7 million in ad spending last year, according to TNS Media Intelligence, and the award-winning vehicle quickly sold 5,389 units in its first seven months; for 2006 it's tracking above last year's pace with March sales of 2,347.

Audi of America sees the A3 as signaling a new direction for the luxury unit of Volkswagen AG. It's a direction that forces societal issues: Cars vs. trucks? Will U.S. consumers opt to trade more for less?

"This car is about creating a new class of compact luxury in the U.S.," says Stephen Berkov, marketing director at Audi of America. "It's about what's next, more than what's new."

As gas prices soar, global and natural forces threaten, and domestic giants stumble, it's a climate where old values and habits collide with new realities and needs. Americans are re-evaluating how much is too much in every aspect of their lives. For that part of their lives that consists of transportation, the question is whether a shift to small, albeit pricey, cars is really going on and whether these vehicles are the wave of the future.

"The time has come where our [Audi] values and personality are more relevant than ever before in the marketplace," Mr. Berkov says. "We're the right brand at the right time with the right product."

Overall, 2005 was one of Audi of America's best years ever, with sales up 6.6% to 83,066 vehicles in an otherwise dismal marketplace. For first-quarter 2006, sales are up 6.2%.

All eyes are suddenly on this pricier part of the compact market in which Audi, Mini and even Volvo compete, though the exact boundaries of what J.D. Power & Associates calls the "compact-premium" segment vary according to industry analysts. Prices range from $14,000-$27,000, which encompasses the A3 at the high end and Honda Civic, Nissan Sentra and Saturn Ioon at the low end.

Is such a shift to small, but expensive, cars really under way?

"It could be the wave of the future. It depends on the way manufacturers are executing the vehicles," says Dan Gorrell, partner-automotive at research consultancy Strategic Vision.

Mr. Gorrell says three things are necessary to succeed in the U.S. small-luxury segment: The car must have functionality, though not of a big sport-utility vehicle; it must have character, or fulfill the brand promise; and if attached to a luxury brand, it must look premium, act premium and be fun. "Pulling all these off is a challenge," he says.

Marketers like Audi and BMW's Mini USA are doing it right at the near-luxury end, Mr. Gorrell says. The Audi A3 2.0 T FSI, for example, is armed with 200-horsepower, ample cargo space and a $26,220 retail price, making it attractive to entry luxury buyers. With all that power, estimated fuel efficiency is 24/30 mpg.

The premium compacts are "a huge part of [carmakers'] financial pictures," says Tom Libby, senior director-industry analysis, Power Information Network. "They need them to be successful."


Among consumers, roller-coaster gas prices, approaching $3 a gallon recently, will trigger sales for these cars if two conditions are met, says Mr. Libby: "Pump prices must rise to at least $4 and stay there for a year." Otherwise, buyers tend to trade within segments, minivan to SUV, or midsize to midsize, he notes.

John Mendel, senior VP at American Honda Motor Co., doesn't think spiking gas prices are greatly affecting the entry luxury market.

"If you look at those shopping luxury, they're looking at the whole package," he told Advertising Age at an Automotive Press Association meeting in March. People "in love emotionally with the style of the car" can better rationalize their decisions to buy, he adds.

Marketers say premium compact brands, like their econobox cousins, are being aimed at younger demographics, the ones who can afford a $25,000 Mini. Reaching the well-heeled is always a challenge, and these young consumers especially demand a new marketing game. Think Internet, hometown and college campus events, musical forays in new directions.

Audi caters to "sophisticated individualists for whom push marketing is very ineffective, so they communicate with rather than market to them," Mr. Berkov says. "We create an environment and communicate with people with whom we want to have a relationship ... in a charming way."

To get the A3 before desired 25-to-34-year-old targets, Audi and its agency, McKinney, Durham, N.C., partnered with the American Film Institute for a competition called "Step Ahead With Audi A3: Personal Journeys." Before that, Audi orchestrated a major spoof and viral campaign called "The Art of the Heist" to attract Internet audiences.

"You have to reach in lots of different places, but the message has to be consistent," says David Berne, director-strategic planning for Honda-Acura agency RPA, Santa Monica, Calif. "Younger buyers want it all."
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