|In this column over the recent past, I have reported on Ferrari’s very strong profit margins, which average about 80,000/car. Ferrari is alone in the automotive world, as it reports adjusted earnings before interest, taxes, depreciation and amortization in the 25% to 30% range. These margins have been achieved by branding Ferrari as a luxury-goods company as opposed to just another car maker. Obligatory options add an average of $70,000 plus to every new Ferrari sold, almost all going to Ferrari’s bottom line. Those options are scaled so they are less for a Portofino than for the Pista.|
Porsche margins run about $20,000 per car while Mercedes and BMW margins run in the $10,000 per car range.
Maserati margins are in the $6,000 range although that will go up thanksto the top-of-the-line Levante SUV.
Bentley has had a bad year because of the developmental costs of launching the 3rd-generation Continental + the substantial long-term cost of EV technology for a 200 mph luxury car with the weight and frontal area of an American pickup truck.
In the US, Ford, GM and Chrysler are cutting passenger car production and closing factories. Conversely, as for the planet’s green-car flagship.
Ferrari’s move from a Supercar builder to a luxury goods company began under Luca di Montezemolo in Y 1998 with the introduction of the Carrozzeria Scaglietti Personalization Program.
The program began modestly by offering “Daytona” seats, modular wheels, fender-mounted Scuderia shields, and colored seat piping.
Then the options list ramped up, with Challenge grilles, carbon fiber interior, engine and intake carbon kits, and so on.
Various other option packages were offered, such as the Fiorano handling package, or the Schumacher option for the 550, or the Sessanta package for the 612.
Ferrari’s latest is the Atelier customization program reserved for the buyers who want to pick out the options for their car at the factory.
The options lists grew ever longer, and with the California introduced to the US market in late Y 2009, Ferrari further mastered the up-sell all in the name of personal exclusivity.
In preparation for Ferrari’s IPO in October 2015, then-CEO Sergio Marchionne needed to extract as much value out of Ferrari’s existing product line as possible, all to help finance Fiat-Chrysler’s plans to compete on the global stage with the Toyotas and Volkswagens of the world.
At numerous press conferences Marchionne declared that “Ferrari is a fully-fledged luxury brand,” and let the world know that he valued Ferrari at up to $12-B putting Ferrari firmly into the Hermès and Louis Vuitton sector that trades at about 20X earnings.
Ferrari priced its IPO at $52/share at the market close on 20 October 2015. The shares jumped 13% when they opened on 21 October 2015, ending the day with Ferrari valued at close to $10-B.
CEO Marchionne’s sales pitch worked wonders and today Ferrari’s sharesnow trade at $102.23 (Friday’s NY close) with a market cap of about $20-B.
Ferrari’ total cash flow was $3.41-B with a net income of $535.4-M in Y 2017.
Life can be good for a Ferrari dealer thanks to a 10% margin on new Ferrari sales and the possibility to get another 5% hold-back. Few get the full 5% because Ferrari deducts 1% from that 5% if that dealer carries other marques and another 1% goes away if the dealer has other marques under the same roof.
And, if your local authorized dealer doesn’t sell an average of $70-K worth of “options” on every new Ferrari it is penalized.
Small dealers might get as few as 25 new cars a year, a mid-size dealer might get 50 new Ferraris a year and the major city dealers can get 100 or more cars a year.
A Ferrari dealer can usually sell every car it gets and more.
In Y 2002 Montezemolo issued a declaration that every dealer should sellused to new Ferraris at a ratio 2-to-1, so a mid-sized dealer getting 50 new cars was expected to sell 100 used, keeping that dealer’s sales and service departments busy while selling more Ferrari factory-supplied parts.
To help get the used cars out the door Ferrari instituted the “certified pre-owned program” in Y 2002. To be “certified” a Ferrari had to have cam belts replaced within 2.5 years or less. There is a service obsession at Ferrari.
Few dealers make the “2 used to 1 new” target.
Some dealers have described Ferrari’s other not-very-negotiable demands. For example all dealers are expected to throw a party for their best clients with a private showing of every example of Ferrari’s latest-greatest models, at a cost of $50-$100-K or more, paid for by the dealer.
A mid-sized dealer selling 50 cars is also expected to hire a General Manager, a General Sales Manager, two dedicated Ferrari salesmen, a used car sales manager and a marketing person, all of which would devour much of the annual profit.
All dealers are expected to make the trip to Maranello 3 to 4X a year, plus do a certain amount of Classiche inspections.
And every dealer is expected to have a spectacular chrome and glass showroom in the right location, with the factory-approved exterior and interior colors, floor tiles in both sales and service, the right lighting and so on,all of which can easily cost as much as $10-M or more all to sell 50 new and in theory, 100 used Ferraris a year or about 4 new Ferraris and 8 used Ferraris a month.
Once the spectacular chrome and glass showroom is built, and the obligatory staff are hired, those costs are more-or-less fixed, so the only way to increase profits is to get the allocation raised.
In a world where Ferrari builds about 9000 cars a year, but allows largerdealers to open a satellite showroom, the battle for allocation can becomepolitical.
For those dealers who have checked all the boxes, are in the right big cities and know how to navigate the political minefield needed to get a 100+ new Ferraris annually, life can be good.
Because, as Ferrari’s new-car price structure clearly defies the normal economic laws of supply and demand. As the price increases, buyer demand also increases.
Have a terrific week.
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Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.