Mercedes-Benz’s Luxury Pitch Needs Tougher Road Testing

At a method day close to Monaco Thursday, Mercedes laid out a plan to alter the investor mind-set. It dedicated to promoting extra top-end autos—those who value upward of 100,000 euros, or $106,000—and fewer, higher entry-level ones at greater costs. It additionally goals to construct on the excessive promoting costs it has achieved throughout the current interval oflimited semiconductor supplies and automobile manufacturing.

The payoff, it hopes, will likely be greater, extra resilient profit margins. In benign market circumstances, Mercedes expects to make an working revenue margin of 14% in its flagship automotive division, which now accounts for the huge bulk of the corporate. Even in unhealthy circumstances it could anticipate one no decrease than 8%.

This is effectively under the extent of probably the most unique listed automotive maker, Ferrari (25.9% within the first quarter), or car-tech pioneer

Tesla

(19.2%). It can be under the type of working margins made by different upscale producers, equivalent to handbag-to-champagne big

LVMH

—an organization Mercedes used to match in market worth—or

Apple.

Still, if profitable, the Mercedes plan would set a brand new monetary benchmark for what the automotive business normally calls a “premium” model—one that’s elegant however extensively owned. The firm, whose inventory at present trades on below six instances ahead earnings, would possibly then be rewarded with the next valuation.

Mr. Källenius, in contrast to his predecessors, is intently centered on questions of market worth. As a symbolic gesture of the corporate’s dedication to stricter capital allocation, he even introduced Thursday the sale for charity of a single historic Mercedes from the corporate’s huge assortment for €135 million—making it by far the costliest automotive ever bought.

While the technique is smart, its success is way from sure. Shifting the mannequin portfolio upmarket appears inside Mercedes’ management; retaining the advantages of at the moment’s scarcity-induced pricing much less so. The firm will likely be swimming towards the tide as business manufacturing normalizes, and it nonetheless desires to develop gross sales by about 5% a 12 months.

A lesson from the likes of LVMH, Apple and now Tesla is that having tight management over the distribution of your merchandise helps generate the pricing self-discipline, the bond with customers and the fee efficiencies on which superior margins are constructed. Mercedes is transferring quickly to a direct-to-consumer gross sales mannequin in Europe, however legal guidelines defending the independence of dealerships make this tough to copy within the U.S.

There can be the question of electric vehicles, which for everybody however Tesla aren’t very worthwhile. At 16.4%, Mercedes made a good greater working margin within the first quarter than it now expects in good instances, however simply 4% of the vehicles it bought have been absolutely electrical. If this rises quick it is going to hit the group margin. If it doesn’t, the corporate would possibly lose clients to Tesla.

Mercedes inventory fell 2% Thursday, at the same time as these of its conventional peer

BMW

remained roughly flat. Investors have been probably disenchanted by the 14% long-term margin ambition following the blowout first quarter. Watching and ready for a downturn additionally appears to be the dominant investor place throughout the sector, and this wasn’t one thing Mr. Källenius might hope to handle.

Only constant outcomes, notably via more durable instances, will show that Mercedes is changing into a top quality firm in addition to a top quality model. With recession dangers rising, his pitch may be put to the take a look at sooner quite than later.

Write to Stephen Wilmot at stephen.wilmot@wsj.com