Luxurious Small Cars Are -- Finally! -- Driving Big Profits for Automakers

Why didn't Detroit think of this 30 years ago? The secret to making profits from small cars is not to view the vehicles as joyless, stripped-down Ralph Nader-mobiles, but to position them as scaled-down luxury vehicles, loaded with creature comforts that make the difference between black and red ink.

Profits without incentives
Using that formula, carmakers across the board are finally making money on compacts and subcompacts. The Big Three are joining the party, and without using the traditional Detroit crutch of incentives. The average transaction price for compacts in June was $20,491. That was up $1,332 for compacts in the same month a year earlier, Edmunds.com reported, and it added:

Buyers seem to be accepting that the feature content, electronic technology and improved fuel economy they seek comes at a price -- and seem less concerned that the package is small.

Part of the sales resistance to small cars was that people saw them as tiny prison cells on wheels. Now that they're a bigger part of the market, buyers have discovered a less-expensive route to the kind of cosseted, well-appointed ride that once would have required $40,000 or more.

It's worth pointing out that the small car market is now strong enough to push a sharp increase in the trade-in values for fuel-efficient 2006-2009 compacts, which according to the National Automobile Dealers Association are expected to be up 10 to 30 percent in August over what they were at the beginning of the year.

Just check the boxes
But it's the new cars that are really tricked out. We're talking about Chevrolet Cruzes with fancy upgraded stereos, and tiny Ford Fiestas with keyless entry, premium paint and, why not, heated seats. Ford CEO Alan Mulally told analysts exultantly, "One of the most popular features on the Fiesta is heated leather seats." Larding on the extras pushed the average Fiesta transaction price to second place in the segment, just below the Honda Fit. Three quarters of Fiestas sold have luxury-like packages, and more than half are the upmarket hatchback version.

The revelation that people will pay for extras in small and even ultra-small cars led carmakers to get creative with the options list. Want rain-activated wipers in a Hyundai Elantra? No problem. Rear camera? Just check the box. A built-in iPod dock for the Honda Civic? Yours for the asking.

The Mazda3 is no luxury car, but you can turn it into one. The average transaction price for the Mazda3 hit $19,642 in May, and it was because of choices like the Grand Touring model, which for $7,100 adds an automatic transmission, Bose audio, heated leather seats, xenon headlights and a ton of other bells and whistles. But this is a $25,785 Mazda3.

A base Toyota Prius is $22,800, but add on the Advanced Technology package (adaptive cruise control, pre-collision warning, self-parking) and other features and the bottom line can be $36,000. Go for the Premium trim level in the Subaru Impreza, and your $17,500 car becomes $23,190.

This new high-end version of lower-end cars is likely to become a permanent part of the automotive landscape. Automakers have discovered a new route to bigger profits, so expect the option lists to grow. You say you want a Mini Cooper with 10-speaker Harmon Kardon surround sound and a dual-pane sunroof? As long as the average Mini is selling for $5,800 above the base MSRP you'll be able to get it.

Here's a video look at some of the high-end small cars from the Wall Street Journal:
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