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Mercedes axes cheaper models in bid for luxury brand status

Mercedes-Benz will ax three cheaper models and spend the vast majority of its cash on developing top-of-the-range cars in a bid to convince investors that it ranks alongside luxury goods groups such as France’s LVMH.

The focus on more expensive products would help Mercedes achieve profit margins of between 13 and 15 per cent by the middle of the decade, chief executive Ola Källenius said, assuming market conditions were “favorable” at the time.

This would still leave Mercedes far behind LVMH’s 27 per cent operating margin in 2021, and behind the 25 per cent achieved by luxury car leader Ferrari last year, but closer to German rival Porsche.

“If you want to drive your margins upwards, you need to trim the tree at the bottom, and you need to try to expand at the top,” Källenius said ahead of a Mercedes’ event on the French Riviera to showcase new models.

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The group would reduce the number of so-called compact cars it offered from seven to four, he added, and “redefine the entry point of the Mercedes-Benz brand”.

Mercedes’ shares fell 4 per cent to € 62.22 by late afternoon in Frankfurt following the announcement, amid a broader market selloff.

While Källenius refused to name the models that would be phased out, people close to the company have suggested that Mercedes will eventually ax its A and B-class ranges. The cheapest retail versions at € 30,000.

Mercedes will focus instead on the performance-focused AMG brand, the off-road G-Class, and luxury brand Maybach, all of which will offer electric models in the next few years, as well as the electric EQ range and the recently relaunched S -Class saloon.

More than 75 per cent of the group’s investments would be targeted at developing these models, as well as the E and C-Class ranges, Källenius said.

Such a move would mark a reversal for Mercedes, which pioneered the Smart car – one of the smallest vehicles on the market – before separating the brand into a joint venture with China’s Geely in 2019.

It also comes as the car industry continues to post record profits, despite severe supply constraints, with strong consumer demand helping carmakers fetch higher prices for the few models available.

This enabled Mercedes to achieve a 16.4 per cent profit margin on car sales in the first quarter of the year, higher than the 13 to 15 per cent targeted by Källenius for the middle of the decade.

Mercedes-Benz chief executive Ola Källenius
Ola Källenius: ‘Scale still matters’ © Lennart Preiss / Getty Images

But the Mercedes boss said a margin of above 16 per cent was not sustainable because of the “higher variable costs” in the “transformation” to electric. The company said last year it would sell only electric cars by 2030, “where market conditions allow”.

Källenius pledged on Thursday that Mercedes, which doubled its profits in 2021 in comparison with pre-pandemic 2019, despite selling 400,000 fewer cars, would not attempt to sell significantly fewer units overall in the future.

Competitor Volkswagen said last month that it would ax dozens of models by the end of the decade and sell fewer, more profitable cars.

“Scale still matters,” Källenius said of Mercedes, which delivers roughly 2mn cars a year, compared to luxury rival Porsche’s 300,000 and Ferrari’s 11,000.

“We do not want to shrink the company. . . but we want to grow the company in a financially sensible way. ”

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