Can Mercedes’ star shine brightly again?

Mercedes-Benz has suffered a massive drop in profits as ageing models and reliability worries hit sales. New management and a range revamp could be the key to recovery. By Robert Lester

Mercedes-Benz used to be synonymous with reliability, and you would rarely see taxi drivers in Germany at the wheel of any other make. But that is changing.

Sales of the marque have plummeted over the past 12 months, partly because of quality problems. The dip comes at a difficult time for parent company DaimlerChrysler, which has been rocked by a sales scandal that has led to several employees being investigated for alleged breaches of fiduciary duty.

In a shake-up at Mercedes, group marketing chief Joachim Schmidt has been replaced by Klaus Maier, head of DaimlerChrysler’s European commercial vehicle division (MW last week). The restructure is unconnected to the sales scandal at the holding company, and Schmidt is expected to be given a new role.

Mercedes’ fourth-quarter operating profits for last year fell by 97 per cent, to just ââ¬20m (£14m). This was in part due to the struggling Smart division and the weak German economy.

Figures from the Society of Motor Manufacturers and Traders show that Mercedes’ UK sales for 2004 were down more than 12 per cent on 2003, to 81,963. By contrast, BMW’s sales jumped almost nine per cent to 102,200. Audi sold 77,039 cars in 2004, an increase of just under nine per cent. Mercedes’ sales for January and February were down 26 per cent year on year.

Mercedes blames the fall in sales in the UK on the fact that the current M-Class off-roader and S-Class luxury saloon are coming to the end of their lifespans and new versions are being launched later this year.

Mercedes is also being hit by the issue of reliability. It is a factor that is reportedly affecting the brand choices of taxi drivers in Germany, where the German Taxi and Hire Car Association (BZP) says Mercedes’ proportion of new taxi sales has fallen from 70 per cent to 50 per cent since the turn of the century.

This isn’t just a problem for Mercedes: the German car industry as a whole, once renowned for its high quality, has seen its reputation dented of late.

Recent studies by Which? have shown that German premium brands are falling behind their Japanese rivals when it comes to reliability. In its latest study, BMW and Audi along with Volkswagen were rated as “poor”, while Mercedes only ranked as “average”. Honda, Hyundai, Lexus, Mazda, Suzuki and Toyota were all in the top “excellent” category.

Professor Garel Rhys, director of the Institute of Automotive Industry Research, says: “If you’re a quality car manufacturer you shouldn’t be having more faults than other companies that would not necessarily be considered quality manufacturers. Your image will eventually be damaged if your vehicles are not as reliable as cars coming from supposedly lesser rivals.”

But Rhys thinks the Mercedes brand is strong enough to survive the criticism, providing the company can show it is addressing the problem.

DaimlerChrysler has drafted in Eckhard Cordes, a former head of the European commercial vehicle division, as Mercedes chief executive with the task of doing just that.

A spokesman says the company has been working hard to make sure it is building cars to a higher standard than ever before. “The cars that are coming out now are the best cars we have ever built,” he adds. “A good company is one that wakes up to its problems and fixes them and Eckhard Cordes is doing that.”

One thorn in Cordes’s side is the Smart marque. Despite an increase in sales, Smart has suffered heavy losses and Cordes has admitted that it is a “disaster”.

A BMW source says: “Smart is one of Mercedes’ funkier products, but it’s costing too much money and it might have to be axed.”

But Cordes has ruled out closing Smart for the time being. Next month, he is expected to present a turnaround plan for the marque.

Mercedes’ UK advertising account has been held by Campbell Doyle Dye since 2001. But former Toyota marketer Mike Moran, now a managing partner of the Orchard Consultancy, does not think the agency or Mercedes’ UK division is to blame for the slide in sales.

He says: “Dermot Kelly [managing director of Mercedes Car Group UK] has done a terrific job and can’t be held responsible for what’s going on. The problems are coming from Germany.”

In the UK, Mercedes has taken steps to overhaul its dealership operations by reducing the number of operators to 35 retail groups in an effort to improve customer service. It has also set up its own division – DaimlerChrysler Retail – which owns all the sites in London, Birmingham and Manchester.

Mercedes also plans to open a £100m “brand experience” centre next summer, which will be used to give existing and prospective customers test drives.

Although steps are being taken to turn Mercedes around, and a boost is expected later this year with the arrival of new models, Cordes and Maier will still have their work cut out if they are to persuade German taxi drivers to return to the marque.v

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