Mercedes-Benz faces steep road to reach ‘luxury’ status

The hundred-or-so investors and analysts corralled into a hotel on the French Riviera for the relaunch of Mercedes-Benz as a luxury brand on Thursday were first confronted not with a new sports car, but with an image of a 6,000-year-old jade axe.

The artefact from the British Museum, displayed on a screen behind chief executive Ola Källenius, told a story that humans had always yearned for “something special”, he said, and would therefore inevitably want to buy Mercedes’ new line-up of upmarket vehicles.

The presentation, which also offered glimpses of future Mercedes products including “digital NFT crypto art” and limited edition “haute voiture” collectors’ cars, was part of the 120-year-old German brand’s ongoing attempt to convince the market that it does not deserve to be valued at a lower multiple than tobacco companies — roughly five times earnings — but rather as the world’s largest and most valuable luxury car brand.

Rival carmakers have watched with envy as first Ferrari, then Tesla soared in value, while the rest of the sector languishes with the lowest price-to-earnings multiples of any major industry, despite recording bumper profits.

Thus Källenius pleaded with investors on Thursday “to take another look” at Mercedes, which last year doubled its pre-pandemic earnings to €14bn and has cut fixed costs by roughly €2bn since 2019.

Chief financial officer Harald Wilhelm told attendees on Thursday that Mercedes could post consistent profit margins of approximately 14 per cent by the middle of the decade if the economy remained “sunny”, bringing it closer to Porsche’s recent average of 15 per cent, but far off Ferrari’s 20 plus per cent.

Yet even as attendees test drove new performance cars — which they were told were designed to stand out in a “sea of sameness” — and mixed with Mercedes F1 drivers Lewis Hamilton and George Russell, investors shrugged. Amid a broad market sell-off, shares — already down more than 10 per cent over the past six months — fell by almost 3.5 per cent while Källenius and his board were on stage on Thursday. although they recovered some of these losses on Friday. 

Before the event had started, Källenius had warned against reading too much into the initial market reaction. Mercedes’ strategy update, he said, was not like “handing over a paper to the teacher and hoping we will get a gold star”, but part of a long-term change in strategy.

However, the muted market response underlined the lengths to which traditional auto companies must go to generate enthusiasm, while new entrants such as Tesla — referred to only as the “main American competitor” at the Mercedes event — are able to move their share prices skyward with grand promises and social media posts.

Källenius, a softly-spoken Swede, betrayed some frustration with this situation. “Our [price to earnings] multiple now is kind of stuck with every other incumbent . . . which we don’t think reflects the true value of this company,” he said before the event.

“I am not dreaming about [a multiple of] 20,” he said. “We are not crazy, but five or six is not the right number.”

Philippe Houchois, an auto analyst at Jefferies, said Mercedes faced a “dilemma” in trying to convince investors of its luxury pedigree. “There’s nothing you can do to snap your fingers and get the valuation up,” he said.

By axing three cheaper models and renaming compact models as “entry luxury” in order “to sex it up a bit”, as Källenius said, Mercedes hopes to cast off the cars, and the perceptions, that are holding it back.

But Houchois warned that a rebranding would have little impact unless it leads to a significant rise in entry-level prices, currently around €30,000, while the cheapest Ferrari costs a six-figure sum.

“The word luxury has become overused,” he said. “A [Mercedes brand] Maybach is a luxury product but a Mercedes is not a luxury product, it’s an everyday product, it’s a leather couch instead of a cloth one.”

For his part, Källenius was keen to emphasise that the group’s century of experience making premium products would also make a difference in the electric era. Mercedes has launched several electric vehicles since pledging last summer to be ready to go fully electric by 2030.

“If you drive some of those new entrant products, and I have driven all of them . . . you find out that some of them are technically very interesting, but they are not luxury,” he said.

Mercedes’ combustion engine models, which still account for more than 95 per cent of sales, Källenius insisted, were an asset and not a burden, and would “continue to produce positive cash flows for many years to come”.

This reliable business “tends to be forgotten”, he said, but “is like the venture capital, the seed money for all the other technology stuff”.

Mercedes’ combustion engine “baggage”, he said, “is a baggage full of cash”.