Product quality and service problems have dented the reputation of one long-standing member of the premium car club, Mercedes-Benz. But it's not the only manufacturer to come under pressure as other club contenders - notably Lexus - aspire to meet growing consumer demand for posh cars, reports Richard Feast.

People in this country bought more new cars in the opening years of this century than in any similar previous period. Three successive record years were followed by a marginal decline last year, but the overall level was still one third higher than a decade earlier.

The reasons are easy to find. Today's cars are better equipped, more affordable and of higher quality than in the past. Combine those factors with greater consumer confidence, high employment and attractive interest rates, and the good times look set to continue. Garel Rhys, professor of motor industry economics at Cardiff Business School and one of the shrewdest observers of the sector, believes 3m sales a year (in the UK market) are sustainable in the future.

But the scenario has made consumers unbelievably picky. Competition between marques has divided the cake into more equal slices. The market share difference between the leading car marque last year and the one in 10th position was under 11 per cent; a decade ago the difference was over 18 per cent. The top three brands in the mid-1990s - Ford, Vauxhall and Rover - forfeited a combined market share of 18 per cent over the same period.

Good products are no longer enough because everyone has them. Ford, Vauxhall and Rover lost ground not so much because of poor products - though some may have been - but because they were dull and ubiquitous.

Today, companies need aspirational models with inspirational pricing to attract buyers. More than anything, though, their commercial success revolves around consumer perceptions of brands.

What car buyers clearly like more than anything are brands that carry cachet. They want something special in order to send the message to their friends and neighbours how discerning and wealthy they are. It is the same in everything from bottled water to bathroom taps.

Consumers are prepared to pay more for certain labels because they consider the products to be superior - irrespective of whether they are or not. Parents who complain that their children insist on clothes with the right logos should remember what's in the garage. To many grown-ups today, a Ford is what a Tesco trainer is to a teenager.

But which car marques qualify as premium? According to JATO Dynamics, which tracks vehicle sales across Europe, the main premium car producers are - in alphabetical order - Alfa Romeo, Audi, BMW, Jaguar, Lancia, Lexus, Porsche, Maserati, Mercedes-Benz, Saab and Volvo. Certain models from MG Rover, Mini, Nissan, Toyota and Volkswagen appear in specific JATO market segments, but the organisation categorises Aston Martins, Bentleys, Ferraris, Lamborghinis, Maybachs and Rolls-Royces as "exotic".

Premium brands enjoy charmed existences in the UK, and in most other parts of the world. They managed to lift their collective market share here from under 10 per cent to around 15 per cent over the past decade. As they did so during a period of rising overall demand, they enjoyed huge jumps in unit sales compared with most volume carmakers.

While this performance was impressive, and prospects for most premium brands look sound, the big changes have now occurred. The gains reflected the launch of much broader model ranges by the premium producers. A decade ago, for example, there was no Porsche Boxster, Jaguar X-type or Mercedes A-class and so on. Carmakers will continue to plug small gaps in the market, but the gaping holes have been filled in.

In addition, Jaguar's ambitious product strategy mis-read the market and the company is painfully retrenching. In spite of 18 years of General Motors' control, the product line-up at loss-making Saab remains uncompetitive and narrow. Alfa Romeo's models are widely admired for their style and performance, but they have failed to gain real consumer credibility on account of indifferent quality, poor resale values and an inadequate dealer network.

The arrogance at many Mercedes dealerships led the import company to take direct responsibility for sales in its key regions. More recently, dealer staff have been given special customer training - which will probably be required because of the poor quality of products turned out by the company recently. In March, Mercedes recalled nearly a third of the 4m cars it made over the past four years. When Mercedes sales in the UK uncharacteristically fell last year, the company attributed the change to the run-out of the old A-class and other models. But the quality issue clearly put a dent in the firm's previously case-hardened credibility.

Mercedes' performance over the coming years will therefore be closely monitored by rivals, and nowhere more so than at BMW where a sales increase of 86 per cent since the mid-1990s has turned the group into a significant presence here. If Mini is included, more people now buy BMW group products than they do cars sold by its former subsidiary, MG Rover, and by so-called volume car makers such as Citroen, Fiat, Honda, Mazda, Nissan and Toyota.

The really clever part is that BMW manages to out-sell these mass producers, yet retains its envied exclusive image. Even so, Jim O'Donnell, managing director of BMW (GB), decided in March to warn dealers that 30 per cent of them are not pulling their weight. The prospect of BMW dealers alienating potential buyers has considerable appeal at firms like Audi, Lexus and Volvo.

Certainly sales of other premium marques have done proportionately better than BMW. Mercedes leapt by 150 per cent and Alfa Romeo by 180 per cent over the past decade. Audi's numbers doubled over the same period, and in the opening quarter of this year it even moved ahead of BMW. UK registrations by Jaguar last year were around 275 per cent higher than in 1995. None of them, though, could match Porsche's performance. Its sales presence here was transformed with a stonking seven-fold jump over the decade.

By comparison, Sweden's two premium brands seem laggards.

Saab's growth was 76 per cent, which meant it missed the longest and strongest increase in demand for premium category cars this country has experienced. It may be too late for the firm to regain its credibility now that the decision has been made to turn what was once an integrated car maker with its own engineering, manufacturing and marketing into another GM brand.

Even as Saab's integrity is being eroded, Cadillac is being promoted as GM's alternative to BMW and Mercedes. That includes this country, where Pendragon will shortly start selling the cars that were once described as 'the standard of the world'. Part of GM's bizarre strategy will see some future Saabs being made at an Opel factory in Germany and a new, smaller Cadillac being made at Saab's Swedish factory.

On the face of it, Volvo was a flop over the past decade because its sales in the UK today are roughly the same as they were a decade ago. The difference, though, is that the firm ditched the cheap small cars that once formed the bulk of its business. In the place of those unlovely 300 and 400-series models, Volvo's emphasis is now on high-margin models like V70s and XC90s.

Lexus, Toyota's up-market brand, is the sleeper of the premium segment. It failed to repeat its astonishing US success after being launched in Europe, where the brand remains largely unknown. UK buyers quite like them, but the most they bought in one year was just over 11,000 in 2001. That's a 10th of the number of BMW, which Lexus comfortably outsells in the US.

However, no one in the business under-estimates mighty Toyota. It is demonstrating fresh resolve this year with Lexus, with new versions of the GS and IS, modern diesel engines to power them, and a hybrid RX. The fresh design language of the new cars seems destined to prove more appealing to buyers.

And with Lexus consistently at the top of surveys about car quality (J.D. Power and Associates) and dealer satisfaction (Retail Motor Industry Federation), sharp-looking new products from the world's most prosperous car maker can only be bad news for the old-established members of the premium car club.

N.B. Market figures relate to UK market unless otherwise stated.

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