The death of the middle market could trigger a premium re-birth

The inescapable conclusion is that the retail world is only working at the extremes: discount and premium. Which is much like the European auto industry.

The big difference is that the discount end of the car industry doesn’t want to be discounted. According to one auto analyst, as much as two thirds of the cars sold in Europe are sold at loss.

That might sound pretty extreme, but the economics of selling mass-market cars in Europe is vicious. First off, wage costs in Western Europe (Germany, France and Italy particularly) can as much as 20 percent higher than in Poland, for example. Factory utilization in Europe is also underpar in many countries, further increasing costs.

Of course, material costs for building a car are not so different whether it’s, say, a VW Golf or a Renault Megane. But the killer is the final transaction price.15 years ago the then-boss of Renault told me that VW could command 1500 Euros more for a Golf than he could for an equivalent Megane.

If you do the figures, it’s pretty astonishing. Over 400,000 units per year, VW pockets 600m Euros more than Renault. Over four years, that’s 2.4bn in extra revenue.

I don’t want to pick on Renault. The same problems of discount pricing have plagued Ford of Europe, General Motor’s European arm and Peugeot-Citroen.

All suffered significant losses in recent years. Like in UK retail, being caught between true discount brands and premium badges is a pit of unprofitability that is very hard to climb out of.

Sure, the mass-makers have pushed extra hard with ever better cars, ever better engines, interiors and equipment levels. Yet driving up those transaction prices is proving very difficult indeed.

Today, some mass-makers have embarked on a new path to profits. Citroen wants to spin the DS sub-brand off as a premium offering and Ford wants to see the Vignale sub-brand encourage buyers to spend money on a super-high specification.

These are highly admirable moves, but they remain either a long-shot or a long-term project. However, I heard an amazing rumour the other day that one Asian mass-maker has an even more audacious plan.

This brand, so the story goes, has decided that it could end up mired in the automotive mass-market.

It came to the obvious conclusion that it needs to command higher prices, but that it could never shift perceptions of its now well-established badge. It also concluded it needed another brand. But rather than invent one, the company is said to poised to buy an established premium name, which it will re-launch and ‘nurture’.

I have no idea which auto brand – dead or alive – is in the sights of this (wealthy) carmaker. It certainly has the engineering firepower, but massaging a marque back to life is hard to very manage, as BMW found out with Rover and Ford with Jaguar.

Still, it’s worth a try. A couple of thousand extra on the transaction price and a few hundred thousand sales and you’re suddenly making real money.