Strategic Mistakes May Define Mercedes’ New Strategy

Larry LightJune 1, 202232897 min

There is angst in Stuttgart, Germany. The executives at Mercedes believe that Mercedes has lost its luxury caché. Part of this concern has to do with its brand image. And, part of this has to do with its valuation in the eyes of investors and analysts. It seems that Mercedes is troubled that it is valued at a lower multiple than, well, tobacco. Mercedes CEO, Ola Källenius, wants analysts and investors to reconsider how they assess the brand’s PE multiple, especially when compared to Ferrari and Tesla.

At its analyst and investor event in Monaco, Mercedes “pleaded” with investors and analysts “to take another look at Mercedes”. In order to raise its valuation in the eyes of the financial community, Mercedes is rebranding itself to become “the world’s most valuable luxury car brand”.  According to its new brand ambition, Mercedes will focus on luxury in order to woo the financial community. In fact, Financial Times reporting indicates that the new Mercedes strategy is designed to entrance the financial community.

Mr. Källenius is said to be frustrated. He is quoted as saying, “Our (price to earnings) multiple now is kind of stuck with every other incumbent… which we don’t think reflects the true value of this company. I am not dreaming about (a multiple of) 20. We are not crazy, but five or six is not the right number.”

So, now, the brand’s new strategy organizes Mercedes vehicles into three luxury groups: Top-End Luxury, Core Luxury and Entry Luxury. Top-End Luxury will have the lion’s share of resources, including the Maybach brand. Core Luxury will primarily focus on E-Class vehicles while Entry Luxury will have only 4 models. Three entry models are being axed, as there is concern that these less expensive models have tarnished Mercedes luxury perceptions. Mr. Källenius told the business press that luxury has always been at the core of the Mercedes brand. But, now luxury needs to be woven into its strategy.

There are two problems with the new Mercedes reorganization and mission. First, Mercedes is turning itself inside out to become a darling of analysts and investors rather than customers. Second, Mercedes has confused luxury and prestige. This confusion will affect its marketing and communications with its customers.

1. Focusing On Satisfying Analysts Rather Than Customers

In its quest to raise its PE ratio with analysts and investors, Mercedes is admitting that it will do whatever it takes to create an organization and a brand that analysts and investors will love. Being analyst/investor-driven may not be in the best interest of customers or in the best interests of the brand.

Brand-driven, customer-driven growth must be the goal of the brand’s management. This is how the brand’s management links its business performance to brand performance. How you manage your brand is how you manage your business and vice versa. The goal of a brand’s management must be about profitably attracting and retaining customers. This leads to quality revenue growth and enduring profitable growth.

Brands must focus on satisfying customer needs, rather than catering to shareholder interests. Losing customer focus is a certain path to trouble. The future will belong to customer-focused businesses that are best at attracting and retaining customers.

2. Confusing Luxury And Prestige

Unveiling its new strategy in Monaco, Mr. Källenius made it clear that he wanted Mercedes to be rated the same as Tesla and Ferrari. Tesla and Ferrari may not be in Mercedes’ customer-perceived competitive set. Tesla and Ferrari are in Mr. Källenius competitive set.

Tesla and Ferrari are different types of brands than Mercedes. Tesla is not a luxury brand. Neither is Ferrari. Tesla and Ferrari are prestigious brands. These two concepts – prestige and luxury – tend to be used as synonyms. This is a marketing mistake. And, for Mercedes, it is a strategic mistake. Mercedes may have mis-defined its competitive set for the sake of proving itself to investors and analysts.

The misuse and muddling of these two concepts – prestige and luxury – is a problem for luxury brands and for prestigious brands. It is also a problem for brand owners. The two words are different, denoting different brand and cultural experiences.

Prestige and luxury should not be used interchangeably. Prestige is something a person assumes; it is bestowed; it is given; it is leveraged. Prestige is objective. Luxury is a state of being defined by great comfort, extravagance and the absence of vulgarity. Luxury is subjective. A prestigious brand is not necessarily a luxury brand and a luxury brand is not necessarily a prestigious brand.

Although not mutually exclusive, prestige and luxury deliver different functional, emotional and social benefits. And, the values of the target customer may be profoundly different. For example, a power seeker will want to associate with goods and services that bestow an image of control over and a sense of elevation relative to others. This does not mean that this power seeker will refuse to buy luxury items. What it does mean is that the power seeker uses the luxury items not for the experience but for stature and reputation.

Bernard Dubois of the HEC School of Management, a French grande écoles, wrote a journal article in 2002 on this subject of prestige and luxury. He reported, “… prestige is based on unique human accomplishment” while luxury refers to the “benefits of refinement, aesthetics and sumptuous lifestyle.” His research demonstrated that prestige and luxury have different consumer perceptions that if ignored have “substantial consequences” for a brand.

Prestige was associated with admiration for a person or for an object while luxury reflected perceptions of comfort and beauty.

The late Professeure Elyette Roux taught at the University Paul Cézanne in the IAE Business School, in Aix-en-Provence. Professeure Roux was considered to be France’s most reputed (luxury) brand researcher.

In 1999, Professeure Roux wrote a “white paper” on understanding luxury, describing the difference between prestige and luxury. She wrote, “Prestige is the act of striking the imagination, demanding respect and admiration. Prestige implies that one is looking for power over others, impose power over others.” Luxury is not about seeking power over others. “Luxury is more a way of being, a way of living. Luxury refers to pleasure, refinement, and perfection as well as to rarity, and the costly appreciation of that which is not a necessity.”

According to the French, and they should know, luxury is “a way of living represented by great spending to show elegance and refinement… it is a way of being rather than a way of appearing.” Professeure Roux regretted that the concept of luxury had come to be associated with ostentation, which is all about “showing”. In her opinion, luxury is this paradox of total rejection of everything economical and the aesthetics of sensory consistency.

Coco Chanel was quite clear when she said, ‘Luxury must be comfortable, otherwise it is not luxury.”

The American sociologist, and author of The Power Elite, C. Wright Mills, wrote, “Prestige is the shadow of money and power.” Synonyms for prestige are status, standing, stature, reputation, repute, regard, fame, note, renown, honor, esteem, celebrity, importance, prominence, influence, eminence, and more. These are not synonyms for luxury.

Ferrari is a racing vehicle. And, it is a prestigious brand. Ferrari’s website says so.

“The Prancing Horse symbolises exclusivity, performance and quality all over the world.

Our prestige is built upon decades of sporting success and the inimitable style of our cars, which are unique in their innovation, technology and driving pleasure.

We craft exclusive, authentic and memorable experiences for our clients in everything we do.”

Tesla is a prestigious brand. And, it is a brand that is not afraid of offering less expensive, entry level models. The brand is prestigious because of its credibility and innovation in sustainability and environmental impact. Being associated with Tesla says a great deal about a person’s ecological commitment, whether warranted or not.

Choose Your Competitors Wisely

For Mercedes, using Tesla and Ferrari as its competitors, from a marketing standpoint is a mistake. There is no indication in the new strategy that actual customers see Tesla and Ferrari as brands among which to choose.

Mercedes is correct in wanting to emphasize its luxury pedigree. Perhaps, over time, its luxury perceptions have diminished. Certainly, some investors and analysts think so. In fact, one automotive analyst at the Monaco event told Financial Times that although its Maybach brand is luxury, the Mercedes brand is “everyday” as in common.

Mercedes should clarify whether its reorganization and new strategy are designed to create customer love and loyalty. If it has made changes just to satisfy shareholders, then this is a terrible mistake.

Additionally, brands must identify whether they wish to deliver a promised experience of prestige or a promised experience of luxury. And, then, uphold whichever is chosen. Prestige is about the power of respect, status, and reputation. Luxury is “a world of creations that make life more beautiful.” Brands and their owners must understand and never confuse or misuse these differences.

Contributed to Branding Strategy Insider by: Larry Light, CEO of Arcature

At The Blake Project we are helping clients from around the world, in all stages of development, redefine and articulate what makes them competitive at critical moments of change through our in-person or online strategy workshops and engagements. Please email us for more.

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