Simplification, model II

Peugeot could rev revival by scrapping luxury line

PSA Peugeot could rev its revival by scrapping a fledgling luxury line. Chief Executive Carlos Tavares has turned his make-it-simple strategy into a winning formula at the French carmaker, which cranked out a five per cent operating profit in 2015. But a costly plan to turn the DS range into a standalone premium brand risks spoiling an impressive performance.

Tavares, previously Renault's No 2, streamlined a bloated line-up, focused on profitable markets, improved inventory management and stepped up cost control. Two years ago, Peugeot was on the brink of collapse. Now it is one of the continent's most profitable mass-market carmakers.

Adjusted for restructuring costs, the automotive division's annual profit leaves rivals in the dust. Volkswagen's passenger car brand is earning an operating margin of less than three per cent, and Fiat Chrysler's European operations are a meagre one per cent. Tavares is years ahead of his medium-term targets and still has gas in the tank. In Europe and Asia, Peugeot will launch 16 new models over the next two years, brushing up an already young and attractive fleet.

But a plan to establish DS - initially a premium variant of Citroen - as a standalone luxury brand will tie up billions of euros in investment expenditure and marketing outlays while presenting an uncertain prospect of success. The premium market has long been dominated by Mercedes, BMW and Audi. Other than Toyota's Lexus, there have been no successful newcomers in decades.

And DS performance for now is lacklustre at best. The brand accounted for just 3.4 per cent of the group's overall sales in 2015 and demand fell two years a row. Half of all DS models sold are sub-compact vehicles, which earn lower margins than large sedans and SUVs.

Dropping the DS project could unlock about half a billion euros of additional free cashflow per year, according to Bernstein analysts. That would be 13 per cent more than in 2015. This money would be better used to strengthen core brands Peugeot and Citroen - or to pay dividends to shareholders. It's no time for Tavares to forget his simplification mantra.