Q&A: Audi's Success Transcends Numbers

Audi-AAudi of America is going strong. In April, the automaker posted its 16th consecutive month of record sales, marking the fourth-best month ever in the U.S. for the brand. Sales were up 15% to 11,521 vehicles sold. The company reports that 82% of its April sales gains were in the premium end of its product spectrum. Scott Keogh, VP of marketing at the Herndon, Va.-based U.S. division of the company, says all the stars are aligned: Audi is benefiting from a resurgent luxury market, tight supply, and hot products. In the first segment of this two-part interview, Keogh talks to Marketing Daily about how forthcoming products align with long-term strategy, and how the brand is benefiting from the current market. 

Q: Audi’s sales numbers are very strong, but so are a lot of companies' numbers. How much of this is a recovering auto market?

A: It’s not just sales increases, but health of the business. We have raised our transaction prices by nearly $5,000 over the last two years. Our incentives are basically the lowest in the industry. What that means is we have a much healthier business now. The trick in this world is not just to sell more cars, but to sell more cars and do it profitably. Last year, dealers got 3.5 returns on sales, which is one of the better ones in the industry. The reason that happens is simply marketing and hot products: we have more people who desire our cars than we have physical cars, and when have that you can turn your cars extremely fast, so dealers don’t have these cars in inventory. When you have five people for only two cars, you can hold pricing -- and that’s the exact situation we have now, which is one we want to keep. 

Q: But is that because, to some extent, you are production constrained?

A: I think it’s a combination. We would like to get more cars; we do think we are missing some opportunities. But the other truth is that the brand has never been stronger -- consideration has never been stronger. Another dynamic is that when the market was extremely weak in 2008 and 2009, the financial companies were putting very conservative residual values on those cars. Now consumers are coming back in a market that is very tight because there are not that many cars coming off lease because the market had collapsed. So we have people with a lot of positive equity in their cars -- $5, $6, $7 thousand -- when you have that, dealer calls you says, ‘hey, you have$7, $8 thousand, why don’t you trade in that car, push the $7 thousand into a brand new vehicle, we can hold the same exact payment you used to have and you get a stunning new car. 

Q: Are you leasing more?

A: I’d say for us, leasing is at its lowest level from what it’s been for a number of reasons. And there are a couple of reasons for that. The leasing business tends to move when it’s heavily incentivized, but we just aren’t putting leasing incentives out. I think the reason you have to be cautious is because if you incentivize leasing, these cars come off lease three years later -- lower than the value they were set at, and then you start to get these big multipliers. 

Q: There wasn’t a lot of leasing in 2008 and 2009, obviously. That should start affecting the market ...

A: Right now. Very tight supply is what led to this positive equity in cars, and you are right -- there are lots of dealers looking for cars, and it leads to a healthy business. 

Q: What about this year for Audi products?

A: In terms of product marketing, this is going to be a very aggressive product year for us right off the bat, we have new product in our core model lines. We have product improvement to the A4, A5, and Q5; all get new front ends, upgraded interiors; they get Audi Connect, which is the WiFi Google system we have in the A8, but which will now be in those three vehicles as well. The other big news is we are launching all the S (high-performance) models -– the S6, S7, and S8. We have a new V8 we are launching in all of those cars; it’s a twin turbo engine with cylinder-on-demand. So you get 4-cylinder mode when you’re cruising. The other product news will be the A8: we are going to have 6-cylinder engine for model year 2013, and a TDI (diesel) engine. 

Q: Are you going to do a marketing campaign for the S cars?

A: We are going to do a big campaign in September, so we are working on the final details of that. 

Q: Audi’s three-row SUV is the Q7. What’s the opportunity for that area, since there are a lot of competitive vehicles offering that feature?

A: In the three-row segment we think there’s a lot of opportunity. For the most part, within the segments we compete in, we tend to get 12%, 13%, 14% share. When you get to large SUV -- the three-row Q7 -- we tend to be around 3% to 4% share. For one thing the segment is very large and robust, The struggle we have is being able to get enough Q7s. We’d like to get more if it and when we do we think we can sell more. Three rows is a must-have. And when if you look at that vehicle, it’s still doing extremely well. Right now we have an eight- to ten-day supply. 

Q: So you have this supply issue holding back potentially larger share?

A: We have never brought more cars to the market than we are now. We brought 1.3 million cars to market globally [last year], and we are the second-largest luxury car brand in the world, and passed Mercedes-Benz for the first time. Yes, supply is tight -- but the other side is we have never sent more cars to dealers in America or around the world. Truth be told, demand is stronger than factories can meet, but it is far, far better to be a car short. These are good problems to have, and we are very confident we will make the investments and do what’s needed. This year alone we have grown 18% and there’s still more demand than that. It’s an issue but a good one. 

Q: The other area is are so-called “gateway” vehicle: entry-level luxury cars. Mercedes-Benz will have the A Class, and BMW already has the 1-series. What about you?

A: We have the Audi A3 sportback in the market now, and will be bringing something called the A3 sedan, too, which goes into production late next year. We definitely think there’s lots of opportunity in that segment. The A4 has gotten larger, so there’s room for a car that is a little smaller and gets back to the roots a little bit. We think a sedan is the way to go. There’s a good business case for that car in and of itself but also a great way to pivot people into the world of Audi. Strategically we think it fits in our sweet spot. In coming years, Gen X and Gen Y will purchase 80% of luxury cars. Right now they are 50% of Audi sales, which is higher than our competitors. So think we have a leveragable advantage for that segment. Gen Y came of age as Audi came of age. Now they are entering the luxury market. Our competitors are not naive’ you can see that they are positioning themselves theoretically younger and theoretically hipper, but I don’t think we have to “theoretically” do anything at Audi. We don’t have to be the old guy at the club trying to buy people drinks.

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