Will Audi’s New A3 and Mercedes’ CLA Dilute the Luxury Brands?

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Audi is planning to shake up the entry-level luxury sedan market in the United States with the new A3 sedan it is launching this spring as a direct competitor to Mercedes-Benz’s popular CLA-Class that it introduced last fall. And Audi’s strategy could prove challenging, in different ways, for each German rival.

The premium brand owned by Volkswagen Group has been signaling the importance of the coming A3 for a while and plans to make it the centerpiece of the Audi ad during the Super Bowl on February 2. Mercedes, of course, introduced the CLA with a memorable Super Bowl ad last year and then managed to build anticipation for the new car so that it raced off to sales success when it actually hit the US market in September. Strong CLA sales, in fact, helped Mercedes-Benz grab the US premium-segment sales crown for all of 2013 from BMW.

“We’re seeing buyers we’ve never seen before in our stores,” Steve Cannon, CEO of Mercedes-Benz USA, told CNBC.com about the impact of CLA. Which, of course, was exactly the point of the brand’s best-ever entry-level sedan.[more]

Then Audi locked in the direct challenge to CLA last week by announcing pricing of the A3 beginning at $29,900—exactly CLA’s beginning price point. With a big focus on connectivity as the first car available in the US market with 4G LTE, the new car is a “compact sedan designed for American tastes from the start,” said Scott Keogh, Audi of America’s president.

And for Mercedes, the challenge posed by the new A3 may be steeper than is apparent by their matching initial price points. That’s because even entry-level premium sedans typically aren’t sold at their entry-level price points. And when Motor Trend put together what it called “comparably equipped” A3 and CLA models that would include, more typically for those nameplates, upgrades such as heated seats and bigger engines, its A3 price came out to $36,545 compared with $39,325 for the CLA. That’s a fairly large gap.

Yet for Audi, there also lurks a stiff caution in its launch of the A3. And ironically, the more successful the car is in the US market, where it will take over from the hatchback-style A3, the more difficult this challenge becomes for Audi. The brand has deliberately upped the portion of its sales from higher-priced, loaded “premium” models such as the A7 and A8 sedans and Q7 SUV over the last couple of years, boosting profitability for the company and its US dealers. A hot A3 could erode that advantage.

Most analysts have high expectations for A3. Not only is the vehicle sound, but Audi already has an edge in sales and perceptions over Mercedes, and, for that matter, BMW among the Millennial demographic that is the target for both A3 and CLA.

What Audi’s Super Bowl ad for A3 kicks off will be one interesting contest.

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