Brands Looking to Expand Luxury Crossover Share Dealing With Ruthless Trends

By Michelle Krebs October 26, 2009

Sometime right after the middle of this decade, just about everyone decided luxury crossover 2010 Lexus RX350 - 289.JPGvehicles were going to be the industry's next big profit center.

Sales of traditional body-on-frame SUVs were falling off after a brief but consumer-mindset-shifting run-up of gasoline prices in the summer of 2006. The fuel-price scare came just as the crossover segment was starting to swell, pumping up buyer interest in the newly "invented" alternative to the SUV (and in some cases, pickup trucks).

But better still, Americans still were snapping up luxury items at an unprecedented pace, encouraged by ballooning home prices and easy credit.

Demand for crossovers and demand for luxury led just about every premium-brand automaker to develop - guess what? A luxury crossover. Or a family of them. Practically anybody who talked about it was forecasting hot growth for this new segment.

That was then. A blown-up economy and an all-out recession later, the luxury crossovers are still coming - important launches this year include the restyled, second-generation Cadillac SRX, Audi's Q5 and Acura's ZDX - but the "sell" is going to be anything but the guarantee predicted at the start of the crossover explosion.

"The luxury crossover segment has taken a beating in sales because most of today's consumers are concentrating on value," says Edmunds.com Senior Analyst Jessica Caldwell. "Big profits were anticipated for new models introduced into this segment, and that is just not proving to be the reality for most."

Luxury crossover sales have been dropping since their high-water mark in 2007. The economy tanked in fall 2008 and 2009 has been the Year of the Recession. Many analysts and even automakers themselves are saying consumers may have shifted irrevocably to a luxury-shunning "new sensibility" that has put all luxury makers on notice.

Data generated by Edmunds.com shows the luxury crossover segment has fallen on hard times - particularly those nameplates toward the compact end of the size spectrum.

Suddenly, the future for luxury crossovers doesn't seem so boundless.

Size Matters - And Smaller Still Isn't Better

Practically by definition, the luxury crossover segment is confined to compact and midsize models. There are luxury crossovers that might be classified as "full-size" -- defined particularly by three rows of seating. But volumes are small and as overall size expands, it often eliminates such vehicles from the broad definition of a crossover, a vehicle based on a passenger-car (unibody) structure.

So to assess the prospects for some of this year's new models in the luxury crossover market, data analysts at Edmunds.com stuck with the heart of the segment -- midsize and compact models.

A cross-section of 11 established and newly launched luxury crossovers shows sales sliding precipitously since 2007, when the group accounted for 260,101 sales, led by the segment's established gorilla, the midsize Lexus RX. Through nine months this year, sales for that same group are nearly 26 percent adrift of 2007's pace and tracking for full-year sales of about 192,000 units - a number that includes the volume of two new-in-2009 models.

Premium CUV annual sales - final.gifSource: Edmunds.com

All makes and models have been hit hard. Even sales for the RX are off widely (as might be expected with industry-wide sales running well behind even 2008's truncated pace). But the compacts are enduring a real beating.

Honda Motor Co. Ltd.'s Acura premium division has seen sales of its RDX drop from 23,356 in 2007 to 15,845 a year later and plummet to just 6,975 through September this year.

Or consider BMW's X3. A 31,000 units-plus seller in 2006, sales have dipped to a paltry 5,098 through the first nine months this year.

The story is similar for most compact luxury crossovers. Many observers think the problems these models will have to overcome are manifest.

'Two Markets' But Similar Issues

Ed Peper, general sales manager for Cadillac, agrees the brand certainly could use a strong showing from the 2010 SRX, a drastic evolution from the first-generation model. Initial sales have been strong, which Peper says is encouraging.  

But the SRX's early performance highlights what seems to be evolving problem for many luxury crossovers: they sell briskly to start, then trail off as the "newness" fades. The effect is similar to one that has for years governed the sport-coupe segments: buyers gravitate heavily to the segment's freshest models.

2010 Cadillac SRX studio - 210.JPGPeper isn't worried. The SRX leans to the midsize portion of the segment - a place where sales have been more consistent. And a spot Cadillac sees as wide-open for exploitation as the Lexus RX ages and Acura's typically solid MDX also has lost a step.

Cadillac sees the luxury crossover segment as "two distinctly different markets," Peper told AutoObserver. Like the difference between midsize cars and compacts, "there's a definite difference and feel."

Sales of midsize luxury crossovers, Peper asserted, are less volatile than the compacts, which he agreed do seem to be more fashion-statement-driven purchases.

Midsize luxury crossovers, meanwhile, "are like 26 percent of the luxury market," Peper said. "That's no fad to me. This one's not going away."

Sam Chung, senior manager - model line marketing for Nissan Motor Co. Ltd.'s Infiniti premium division, said the compact luxury crossover subclass "has catered to a more discretionary buyer," but the economy likely has been the biggest factor for the chaotic sales performance of compact premium crossovers. As the entry point to these upscale brands, their buyers are widely considered to have their purchase choices most affected by economic conditions.

And Chung agrees that the sales of compact premium crossovers "act like coupes" because "buyers tend to be individuals (rather than those with one or more children). The vehicle in essence becomes kind of a personal expression."

2009 Audi Q5  -225.JPGThe newest compacts the segment - Audi's Q5 and Mercedes-Benz's GLK - have performed well to start, but have not been on sale long enough to discern whether they will follow the trend of the X3 or the RDX. 

Ivan Drury, Edmunds.com's supervisor - pricing and industry analysis, said the comparatively meager utility and performance of luxury compact crossovers may be limiting their appeal more than planners and analysts may have believed.

"The near-$45,000 mark for any compact vehicle - other than sports cars - really has people thinking about size," Drury said. "Compact crossovers are low on practicality, obtain mediocre gas mileage and have a high price point. The only sales pitch is the brand's prestige appeal - which most (buyers) tend to equate to bigger vehicles.

"These automakers entered a new segment," Drury added, "but the number of prospective buyers might be smaller than they had originally thought."
                                                
Visuals Are Vital, Though

Don't take crossovers as "fashion statement" too literally, however. The term usually relates to vehicles the latest flashy styling that appeal to fickle buyers - and Cadillac's Peper thinks that's not the case for midsize luxury crossovers, which offer more utility and can be more versatile for buyers with families. It's just that fresh looks are important, too.

"I think in this class, to have a good-looking vehicle - inside and out - is important," Peper said, adding it's worth noting that sales of midsize luxury crossovers are down less than the overall market so far this year.

Peper said that while it may yet remain to be seen whether compacts can generate reasonable sales volumes, he has no such qualms about midsize luxury crossovers, a portion of the segment he sees as being dominated by one player: the Lexus RX.

"Lexus really has been out there running away with it," Peper said, adding that with the new SRX that looks a lot more like the "traditional" vision of a crossover but with some of the brand's signature avante garde styling flair, Cadillac sees the potential to go after some of the RX's outsized share. He said a visually striking vehicle should be a strong performer regardless of the difficulties of the segment.

Indicating Cadillac's faith in the appeal of the new SRX, Peper said the new SRX "could be as much as 30 percent of our retail business."

That would be a huge leap for Cadillac - and a performance that also swims against the tide in the segment.

Edmunds.com data show that as a percent of the make's total sales, luxury crossovers also have been declining. In some cases, drastically. 2010 BMW X3 - 225.JPG

BMW's X3, for example, has plunged from accounting for as much as 12.1 percent of BMW sales to just 3.5 percent so far this year. Volvo's XC90 has dropped from a high of 29.7 percent of Volvo sales to 15.5 percent so far this year.

Most midsize luxury crossovers have tended to account for a consistent portion of the brand's sales, but for the SRX, comprising Peper's possible 30 percent of Cadillac's sales would be a major leap from its high of 11.3 percent so far this year, according to Edmunds.com data.

"We're where the customer is and where the volume is (with the '10 SRX)," Peper said.

 Premium CUV as percent of sales - FINAL.gifSource: Edmunds.com

Recovering Economy, New Configurations May Improve The Outlook

Infiniti's Chung said one problem with luxury crossovers has been optimistic mixes of high-content vehicles. It has been an Achilles' heel for more than one model in the segment, and Chung said Infiniti's compact EX35 was a victim.

2009 Infiniti EX35 - 225.JPGThe EX35 and Acura's RDX could be the poster children for the indifferent performance of compact luxury crossovers. The EX35 sold 12,873 units in 2008, its first full year on the market, and sales this year have struggled to just 5,316 through September - less than 600 per month.

Chung said the EX35 was hurt by a the fact Infiniti had scheduled an industry-typical rich mix of initial vehicles, but "the economy fell out in the first part of the launch." And he said many makers have had to take second and third looks at the mix for both midsize and compact crossovers in response to market conditions.

"We're very comfortable with the volume (of EX35) we're selling now," Chung said.

But price points seemingly have become an issue, particularly for the slow-selling compacts: Acura added a front-wheel-drive RDX model for '10 to knock down the starting price to $35,520. Infiniti's base EX35 has cloth trim.

"When the economy fell out, everybody had to adjust," said Chung. "It magnified any type of mix issues."

One answer to reviving segment sales may be in the configuration of crossovers themselves.

The definition seems to be still evolving - or the target is ever-moving. One point: many (but not all - witness the SRX) are continuing on a development path that has them looking more like cars and less like SUVs. The move might enable lower price points.  2010 Acura ZDX - 225.JPG  

Acura's new ZDX is clearly on the "car" side of the continuum. Toyota's mainstream Venza blurs the line, as does BMW's new 5-Series GT, a hatchback variant of the 5-Series sedan that also has a raised ride height, but whose profile is in no way as SUV-ish as an SRX or Lexus RX.

Will the segment recover to its former volumes? Nobody can be sure, of course.

Cadillac's Peper sees encouraging signals from the market about the new SRX, but remains guarded.

Initial consideration for the SRX "has jumped off the charts," Peper said. Of early SRX retail sales, he said, "I'm very pleased," but cautiously added, "I'm not overly exuberant."

Infiniti's Chung also is taking a wait-and-see attitude. "I think there will always be place for luxury goods," he said.

But "We have to be vigilant" about the segment's downward trends. "We're not going to dismiss it." -- Bill Visnic, Senior Contributing Editor

Photos by Manufacturers

1 - Even the luxury-crossover segment's established gorilla, the Lexus RX, has suffered a sales drop this year. (Photo by Lexus)

2 - Cadillac is encouraged by strong initial interest in the 2010 SRX. (Photo by Cadillac)

3 - The Audi Q5 had a strong start. (Photo by Audi)

4 - The BMW X3 had paltry sales this year. (Photo by BMW)

5 - Sales of the Infiniti EX35 are running half what they were in its launch year. (Photo by Infiniti)

5 - The upcoming Acura ZDX leans toward car more than SUV. (Photo by Acura)

 

 

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fulcrumb says: 11:08 AM, 10.26.09

By comparing the Infinity EX35 AWD vs Nissan Rogue SL AWD on http://www.edmunds.com/ ,the base EX35 is $12,070 more than the Rogue. While the EX35 comes standard with a 3.5l V6 which is unavailable in the Rogue, it's still a hefty bump for essentially a rebadged Rogue. My perception is that there isn't enough value to warrant such a premium. I find this true across most models, not just Nissan. Ford Edge-vs-Lincoln MKS; $8,500 more to get a heated outside passenger mirror?
For the Luxury brands, maybe the way to go is to offer truly limited special editions of their mainstream small crossovers.
Once, during a platform's life cycle, put out a unique body configuration in a small batch, 7500-10,000 units tops. Bump it 10hp or, these days, 2-4 mpg over the mainstream model, and give it exclusive skin and options that aren't available in any other model until the limited run has been built, and price it accordingly.
The Chrysler Pacifica was derived from the minivan platform. It might have made it as an exclusive limited production premium car at $45-50,000 with this market approach.

grover10 says: 3:38 PM, 10.29.09

"it's still a hefty bump for essentially a rebadged Rogue." maybe so if that were true, except that the EX35 is essentially a tall, short wheel based G35 wagon, not a rebadged Rogue. The closest and only Nissan equivalent is the Z, also an FM platform car. You probably think the FX is a rebadged Murano...

MLB6 says: 5:21 PM, 10.29.09

My 2007 X3 looks lovely, in a perfect package. But, why the X3 fared the worst? Google "BMW X3 Transmission Problems" and there's your answer. Ultimate in customer service? Google "BMW customer service" and that's the record.

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