Mercedes-Benz DMLRY -1.31%
Group Chief Executive Ola Källenius articulates the issue well: “While everyone knows that Mercedes is sort of an elite original luxury brand in the car industry, the stock may not have been looked at in that category,” he told Heard on the Street.
But bridging that perception gap is not as easy as it may sound.
On a strategy day near Monaco Thursday, Mercedes presented a plan to change investor mindsets. It promised to sell more top-of-the-line vehicles — costing more than $100,000, or $106,000 — and fewer, better entry-level models at higher prices. It also wants to build on the high selling prices it has achieved during the recent period of limited semiconductor inventories and auto production.
It hopes the result will be higher, more resilient profit margins. In favorable market conditions, Mercedes expects to achieve an operating profit margin of 14% in its flagship car division, which now accounts for the bulk of the company. Even in bad conditions one would expect no less than 8%.
This is well below the level of the most exclusive publicly traded car manufacturer, Ferrari (25.9% in the first quarter) or car tech pioneer Tesla (19.2%). It’s also lower than the kind of operating margins made by other luxury manufacturers, such as handbag-to-champagne giant LVMH — a company that rivaled Mercedes in market value — or Apple.†
But if successful, the Mercedes plan would set a new financial benchmark for what the auto industry usually calls a “premium” brand – one that’s stylish but widely owned. The company, whose shares are currently trading at less than six times future earnings, could then be rewarded with a higher valuation.
Unlike his predecessors, Mr. Källenius is emphatically focused on questions about market value. As a symbol of the company’s commitment to tighter capital allocation, he even announced on Thursday the charity sale of a single historic Mercedes from the company’s vast collection for €135 million, making it by far the most expensive car ever. sold.
While the strategy makes sense, its success is far from certain. Shifting the model portfolio seems to be within Mercedes’ power; less retain the benefits of current scarcity-driven pricing. The company will swim against the tide as manufacturing normalizes in the industry, and it still aims to grow sales at about 5% per year.
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A lesson learned from companies like LVMH, Apple and now Tesla is that tight control over the distribution of your products helps generate pricing discipline, the connection with consumers and the cost savings on which superior margins are built. Mercedes is moving quickly to a direct-to-consumer sales model in Europe, but laws protecting dealer independence make it difficult to replicate in the US
There’s also the issue of electric vehicles, which aren’t very profitable for anyone but Tesla. At 16.4%, Mercedes made an even higher operating margin in the first quarter than it now expects in good times, but only 4% of cars sold were fully electric. If this rises quickly, it will hit the group margin. If not, the company may lose customers to Tesla.
Shares of Mercedes fell 2% on Thursday, even while those of its traditional colleague BMW remained more or less flat. Investors were likely disappointed with the long-term margin ambition of 14% after the first-quarter blowout. Watching and waiting for a downturn also seems to be the dominant position of investors in the sector, and this was not something Mr Källenius hoped to address.
Only consistent results, especially in difficult times, will prove that Mercedes is becoming both a quality company and a quality brand. With recession risks mounting, his pitch may be tested sooner rather than later.
write to Stephen Wilmot at stephen.wilmot@wsj.com
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