IHS Global Insight Perspective | |
Significance | Volkswagen (VW) appears to be taking steps to more clearly define the positioning of its brands in an attempt to try and limit sales cannibalisation between its separate units. |
Implications | One of the strategies appears to be to take equipment that was previously standard on the company's Skoda models and put it on the options list. There appears to be some anxiety within the wider VW Group that Skoda is competing too closely with the VW brand model in key markets, with Skoda having the advantage of significantly lower price points for equivalent models. |
Outlook | With the addition of Porsche next year the Group will number ten brands and the task of managing the brand and model strategy will become even more difficult. It appears that there is too much complexity in VW Group's volume brand structure at the very least—especially if the company is serious about its ambitions to acquire the Alfa Romeo brand—with SEAT being the obvious casualty. |
There are signs that the senior management of the Volkswagen (VW) Group is becoming increasingly focused on preventing sales cannibalisation between its brands. It appears that there is a move within the organisation to more clearly define the positioning of the various volume brands within the group, with special emphasis being placed on the relationship between the VW brand itself and Skoda. As the "mother brand" and by far the largest volume brand with in the overall group VW will always take precedence, both in terms of debuting new technology and in terms of positioning and marketing over the other volume brands within the group. When Skoda was acquired in 1991 it was always seen as the clear entry-level brand within the group. However, the leaps in quality and design that Skoda has made under VW's ownership, with the brand basing models on VW's platform and powertrain technology, means that in terms of its product offering Skoda has transformed itself over the past two decades. As a result the company now offers VW brand technology and build quality at a significantly lower price point than the VW brand in European markets.
However, according to an Automobilwoche report VW is now de-contenting certain items of equipment from the Skoda range, and making previously standard items optional extras. This would appear to be an initiative to principally boost margins, although it has the useful side-effect to the VW brand of reducing Skoda's value proposition in relation to VW brand products. For example, Skoda's Climatic semi-automatic climate control system with a cooled glove box has been cut. This extra feature was a particularly popular selling point in dealerships. On the company's Superb model, which has taken a massive amount of plaudits in the media and has beaten other VW Group products, including the Audi A6, in group tests Skoda has already removed the umbrella integrated in the rear door—another highly regarded feature. This is now only available as an optional extra. And on the new sporty Fabia RS, xenon lighting can no longer be ordered at extra charge, while it was standard on its predecessor. However, this move is proving extremely unpopular with Skoda's dealers, with the chairman of the Skoda's dealer association Thomas Peckruhn claiming that the move is hurting customer satisfaction. He does not believe that Skoda is taking significant sales from the VW brand. Peckruhn said, "We conquer customers from French brands such as Peugeot and Renault, including Dacia."
At the recent Paris Motor Show, Martin Winterkorn indicated that senior VW management believes that Skoda has already strayed too far into traditional VW territory in terms of design and quality, saying that, "We cannot have a Fabia with a higher value instrument panel then the Polo." It is thought in some circles that the recent replacement of Reinhard Jung with the former head of VW China Winfried Vahland was partly motivated by the increasingly unwanted crossover between the Skoda and the VW brands.
Outlook and Implications
Managing the overall group's model and brand structure, which is based on a successful platform-sharing strategy, is something that VW Group has managed very successfully over the past decade. Building models in the same segments on the same platform has been key to the VW Group's overall business strategy. For example the current VW Golf, Skoda Octavia, SEAT Leon and Audi A3 are all built off the same VW Group PQ35 platform, while powertrains are also shared across the ranges, albeit often with different features and power outputs. However, VW is now concerned that Skoda in particular is taking sales from higher margin models further up the brand spectrum. Purely from a business point it makes little sense for Skoda to take sales from higher-margin VW and Audi models. For example in Germany the entry-level Superb Estate sells for 2,500 euro less than the equivalent VW Passat, while the B-segment Fabia is 1,695 euro less than its sister model, the VW Polo. The Fabia was one of the biggest winners from the German scrappage scheme last year, with the model selling over 100,000 units in that market alone in 2009 (see World: 17 August 2010: Skoda Sales Rise 11.5% Y/Y in August), showing that some German consumers are less concerned about the badge on the car than they are about the value proposition on offer. There have already been some efforts to stem Skoda's creep into the territory of other VW Group products. For example it is noticeable that there is no six-cylinder diesel option in the Superb sedan and estate ranges. It was thought that senior Audi and VW marketing and engineering staff were vehemently opposed to such a model being offered. Hardly surprising when a V-6 diesel Superb would be a credible rival to equivalent Audi A6 version, which has a price point around 20% higher than the Superb. Bloomberg has reported data from the Center for Automotive Research at the University of Duisburg-Essen that VW is losing 500 million euro a year as a result of sales cannibalisation from VW to the cheaper Skoda and SEAT brands.
While the expanding portfolio has been key to the VW Group's expansion, to the point where it is looking to topple Toyota as the world's biggest volume carmaker by 2018, the task of managing these multiple brands and an ever expanding model range, which now numbers nearly 200 separate models, is unlikely to become any easier. This is especially the case with the integration of the Porsche brand as the Group's tenth brand in 2011. If VW is serious about its reported interest in the Alfa Romeo brand (see France: 1 October 2010: Paris Motor Show 2010: Fiat CEO Says Alfa Romeo Not for Sale), it also begs the question of how another volume brand, albeit one which has been criminally underexploited in recent years, will fit into the VW Group's structure. The obvious casualty to make way for Alfa Romeo would be SEAT as it would be difficult to see how the two brands could co-exist together in the same group. SEAT is basically in the last-chance saloon. The brand has been the only consistently loss-making unit in the VW Group in recent years and the Spanish manufacturer is being allowed a five-year plan to turn around its fortunes under the new management of James Muir. If this fails and the group does eventually acquire Alfa from FIAT it would make sense to position Skoda as the Group's single defined entry-level brand, and it already appears as if the ground is being prepared for this strategy.