If you follow the luxury segment of the automobile business in the US, then you know that the best and most powerful brands are those considered to be “Tier 1.” They represent the largest volume brands in the segment, have the most loyal customers, command the highest margins, have the highest resale values, are the best defined, are the most prestigious and the most desirable.
Every Tier 2 brand aspires to be in Tier 1. Audi set the target years ago to become a Tier 1 brand and some would say that it has achieved that goal. More recently Cadillac has made no bones about the fact that it wants to be a Tier 1 brand and has set it sights on BMW. Infiniti is striving to make it into Tier 1 and Jaguar would like to return. The fact remains that only Mercedes-Benz, BMW and Lexus have achieved the volume, credibility and prestige to be true Tier 1, everyone else is Tier 2:
That said, I think the goal of becoming a Tier 1 brand may be a fool’s errand in today’s luxury segment. It made sense almost 20 years ago when Audi set that as the target but does it really make sense today?
Tier 1 is full of accepted conventions that must be present in order for the brand to be truly Tier 1. For example, in the Tier 1 world, all dealerships must be exclusive and should be Taj Mahals built to reflect the prestige and loftiness of the brand they represent. In these Taj Mahal dealerships, customers must be served lattes, have a customer experience befitting their level of success and certainly not have that experience sullied by the presence of mass market product or customers. In Tier 1, as defined today, manufacturers must offer three sizes of sedans, at least two cross-overs, a sports car as well as a tuner division that churns out high performance model variants. In traditional Tier 1, it is essential to have a D-segment (think MB S-Class, BMW 7-Series, Audi A8) sedan that represents the brand’s ultimate execution of a luxury vehicle. It’s pretty rarified air up in Tier 1, but if you can get there, profits and volumes are huge.
Here’s the rub, the whole Tier 1 paradigm has been built around the baby boomer generation and I can’t help but wonder if the conventional thinking about Tier 1 runs the risk of taking a manufacturer down a path that will be less relevant in the future. There’s a new generation of luxury car buyers coming into the market that are forming their own opinions about what “luxury” means, what connotes prestige and what brands they will value.
What’s interesting about the new generation (call them Millennials if you like, they’re the children of the boomers) is that their view of luxury is being shaped by experience that has included the Great Recession and its re-jiggering of peoples’ sensibilities, high unemployment particularly for their age group, the broken promise that they will do at least as well as their parents not to mention technologies that are changing the way they communicate, collaborate, research and ultimately act as consumers.
All luxury brands recognize that their future depends on younger upcoming luxury car buyers, but the goal of Tier 1 and its conventions risk throwing them off track. This new generation of luxury car buyers may not need a Taj Mahal dealership or even a latte. They’ll need a product and experience that fits their sensibilities, not their parents’.
I think the future of luxury rests with the next generation and if I were introducing a new luxury entrant or re-building a luxury brand I would focus all of my energy on understanding how Millenials will define luxury and what I need to do to satisfy their requirements.
The luxury segment is going to go through a transformation and becoming a “Tier 1” brand with all its trappings represents “old luxury.” The long-term winners will figure out how to become the new generation’s luxury brand without losing their existing customer base. Fortunately, boomers are consumed with the need to be perceived as youthful and forward looking, so chances are if their kids think something is cool, they will too.