How low can they go? Entry-level luxury cars heat up
A new wave of luxury cars is coming to a car lot near you.
Audi will introduce its completely redesigned 2015 A3 sedan at a starting price of $29,900—about $4,000 lower than the brand's current base model, the A4. The lower price will match that of the new Mercedes-Benz CLA, currently one of the hottest products on the U.S. market.
Both offerings are part of a group of new entry-level luxury vehicles—a list that also includes automakers Lincoln, Cadillac and Lexus—meant to attract buyers who might traditionally opt for mainstream brands, but would like a vehicle with a more upscale cachet.
"We're seeing buyers we've never seen before in our stores," said Steve Cannon, CEO of Mercedes-Benz USA, about the impact of the new CLA coupe-like sedan. The model is perhaps the German automaker's biggest success story in the U.S., with an estimated 80 percent of its buyers coming from outside the Mercedes brand.
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Audi certainly hopes to emulate that success, which could be critical to the smaller luxury brand's ambitious expectations. The automaker still lags behind the market's "big three" luxury leaders, Mercedes, BMW and Lexus but scored a 13.5 percent jump in sales last year, selling a record 158,061 vehicles. It is aiming to sell more than 200,000 vehicles during the second half of the decade, and the A3 is expected to play a critical role in reaching that goal.
The launch of the A3 makes the whole landscape a lot more competitive in the entry-level luxury market, one of the fastest-growing segments in the U.S. and much of the world. The market will grow even larger in the near future, with the upcoming launch of the redesigned BMW 1 Series.
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In some ways, these new models actually fill a gap that the manufacturers have themselves created, said AutoPacific analyst Dave Sullivan. "They've elevated the prices and grown the size" of many older models that once served as entries into their brands, like the older Mercedes C-Class and Audi A4. Cadillac launched an all-new version of its CTS for 2014 to give more breathing room to the smaller, lower-priced ATS it introduced in 2013.
Nonetheless, Sullivan said, it's a little odd and unexpected to see the Germans get so competitive in this crowded market. In some ways they're reversing roles with the Japanese, whose luxury brands originally debuted in the 1980s as bargain alternatives. The lowest-priced Lexus, the IS250, now goes for $35,950.
Only Honda's entry-level Acura ILX, at a suggested retail price of $26,900, comes in at a lower price than the new German offerings, but it boasts far fewer features. What's more, the brand doesn't carry nearly the cachet of its German rivals, analysts stress.
Starting prices often meaningless
The reality, however, is that these entry prices are largely meaningless, cautioned Stephanie Brinley, a veteran analyst with IHS Automotive.
"You'll have a hard time finding a car at that price," she said.
While models like the Mercedes CLA and Audi A3 are reasonably equipped to start with—the A3 includes leather seats, a retractable touch screen, 4G connectivity, a sunroof, xenon headlights and a Bang & Olufsen audio system as standard gear—most customers are loading up with options. Audi will offer a more compelling engine package, allowing buyers to upgrade from a modest 1.8-liter inline-four engine to a 2.0-liter turbo-four option for an extra $3,000.
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Mercedes, meanwhile, has a high-performance alternative, the CLA45 AMG, which starts at $47,450.
Even if a buyer were to want a stripped-down version, good luck finding it, analysts warned. With less than a 10-day supply in showrooms—compared to an industry norm closer to 60 days—Mercedes has little incentive to build many of those base models, and few dealers are ordering them.
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According to data collected by Kelley Blue Book, the average transaction price for a new Mercedes CLA is coming in closer to $36,000.
But that's not unique to luxury automakers. Even a Ford Focus can push into the $30,000 range when loaded up with options. And for many buyers, it's worth the extra money to trade in Ford's blue oval badge for the likes of Mercedes' tristar or Audi's rings.
—By CNBC Contributor Paul A. Eisenstein. Follow him on Twitter @DetroitBureau or at thedetroitbureau.com.