Source: Ferrari

We were fortunate to be invited to an important customer event Ferrari held last September at its headquarters in Maranello, Italy, at which the company premiered the first in its new line of limited edition “Icona” cars, the Monza SP1 and SP2. As one would have expected, not only were Ferrari’s marketing chops on full display at the spectacle but the customer enthusiasm was very palpable.

Apple’s customers used to generate headlines for the enthusiasm they showed for new product launches worldwide, regularly camping outside of their stores in order to get the privilege of being the first to hand over their thousand dollars to be the first to get their hands on the new products. Here, some of the world’s wealthiest and most passionate Ferrari aficionados took their very valuable time to fly halfway around the world to participate in one of the most exclusive events anywhere. Ferrari’s best customers were invited to preview the new Monza… presumably to have the early opportunity to sign on the dotted line so they may be among the privileged to hand over $1MM to own one.

 

 

While most special series limited production models that Ferrari makes have been performance-led, the limited run “Icona” line of cars will be design-led cars, incorporating and pushing forward the styling cues from some of Ferrari’s most iconic cars of the past coupled with latest technology performance developed for Ferrari’s higher end sports cars (in the Monza’s case thought to be borrowing the 812 Superfast’s powertrain). As the first in the line, the Monza SP1 and SP2 take their design cues from the classic Monza race cars of the 1950s.

Source: Ensemble Capital Management

The Icona line of limited cars is Ferrari’s new “pillar” that joins its existing product families which also include sports cars, GT cars, special series cars, and its flagship hypercars.

Source: Ferrari

While the exclusive special series cars have traditionally been included among the intermittently released hypercars and special series cars, the Icona models will be released more regularly but each in limited quantities. With the debut of the Monza, Ferrari chose to limit total volume to “less than 500” units, which we found out only a few days later had all been spoken for by clients who had been given the opportunity to attend the premier, probably before having learned of the final pricing on the car a few weeks later. This is very typical of Ferrari’s exclusive model launches, they are typically sold out before the rest of the world learns of their existence. Though we were fortunate to be among those who attended, we did not have the fortune to get our hands on one… (couldn’t resist!).

Despite not coming home with one, I was fortunate enough to get my first Ferrari experience in one of my favorite models, the 458 Italia Spider, for a spin around the hills of Maranello (I had to get suited up first, of course!).

Source: Ensemble Capital Management

While driving a Ferrari is a fantastic visceral experience, talking with customers is even more powerful in understanding the power of the brand and experience in being part of the Ferrari “club”.

I had a chance to speak with some of Ferrari’s customers in attendance. An illustrative conversation with one customer makes clear the value proposition and customer enthusiasm that we believe is typical for Ferrari. He was a gentleman who had flown in that day for the evening event and was likely an executive at a company (didn’t pry too much into his background). I’ve met hundreds if not thousands of executives in the course of my career and they typically are very serious, grounded, busy people who make decisions on a regular basis that impact many, many people whose jobs depend on them with lots of customer, vendor, and investor relationships to manage. That’s a typical high tier Ferrari customer.

Now picture that same guy literally giddy with excitement, waiting in line for a chance to awkwardly contort himself into a Monza SP1 like a kid at Disneyland.

Our passions drive us, and when it comes to Ferrari’s customers, no matter their wealth, status, or age, that passion was on full display and being shared and enjoyed. When I asked him if he was thinking of getting one, he enthusiastically responded, “I’ve already signed up for one!” My guess is that he didn’t even know at that point whether the car was going to cost him $850K or $1.5MM… and it didn’t matter because he’s wealthy enough that the difference didn’t matter too much for the exclusive privilege of owning one but also knowing it will be worth more than whatever he pays the minute he gets delivery of the car because it’s a limited edition Ferrari. A Ferrari is a blend of conspicuous consumption and prudent investment and personal passion.

For many of these customers attending the event, Ferrari had arranged for them an exclusive track event the next day in Barcelona, where they would get to race around the track in their own Ferraris stored in or shipped to Europe and socialize with peers in their echelon of the Ferrari family.

And this is what it really means to be part of the Ferrari club. The customers invited to this Ferrari premier are among the global elite. Not only do they get a chance to buy exclusive Ferraris that appreciate in value over time (i.e. an investment as any coveted work of art would be, only this one is also mechanical and can be enjoyed through a physical experience), but they get the opportunity to attend several events every year with others in their peer group that share their passion in Ferrari and auto racing. It’s a sort of global level country club or aristocratic club that only Ferrari can cultivate with its rich history, its culture, and exclusive clientele. And this social networking function is just as important a benefit as the exclusivity and value of the cars Ferrari sells to its customers.

Source: CSFB 2018 Global Wealth Report

Based on its production of 9,000 cars in 2018 and statistics from CSFB’s Global Wealth indicating that there are 5MM individuals with net worth of $5MM or more, Ferrari’s current annual production penetration is only 0.2% and only 0.5% among those worth $10MM or more. It’s very likely that the collectors at its highest customer tier are worth $100MM or more, with annual exclusive vehicle sales of 500-1000 units representing 1-2% penetration among them. Which is probably why whether a Monza was priced at $1MM or $2MM was not of great concern when the offer to sign a purchase order was presented to them. On the other hand, not being invited to the next exclusive event or opportunity to purchase the next rare model from Ferrari could be a more costly missed opportunity, both socially and financially. Because of its exclusivity and limited run model selling strategy, having the means to own a Ferrari is not a sufficient condition for owning one. Ferrari has the luxury of picking customers for its exclusive models and “rewarding” them for their loyalty.

Source: Greenwood Investors

Considering that Ferrari maintains a 12-18 month wait list for production and delivery for most of its cars, combined with the social characteristics of the access it provides to its curated events, it’s not surprising that most customers would be loath to cancel their orders unless they were forced to… with others nipping at their heels waiting to take their place. As result, Ferrari sales tend to be fairly well insulated against recessionary impacts and its profit margins highly predictable.

Source: Morningstar

Source: Morningstar

Source: Morningstar

And as would be expected given the characteristics of the brand, its undersupply relative to demand, and the emotional content of luxury goods, Ferrari has historically displayed good pricing power dynamics.

Source: Morningstar

In fact, one could posit that Ferrari has been conservative in exercising its pricing power since the wealth of its targeted base of customer has grown 50% faster than the 4% price increases it has enjoyed. Having said that, the recently appointed CEO Louis Camilleri was very upfront about Ferrari’s 5 year plan at its Capital Markets Day to maintain its exclusivity by exercising its pricing power as Ferrari migrates its future models towards hybrid powertrains, which are targeted to drive EBITDA margins higher over time as outlined in Ferrari’s plan. And as a Veblen good, this is value enhancing for customers and the company.

Source: Ferrari

In tying all of this together — our visit to Ferrari’s Icona/Monza premier event, speaking with its elite tier of customers, understanding at a deeper level the power of the brand both as a purveyor of racing, technological, and artistic passion as well as a curator of a global aristocratic club, and the financial metrics that attracted us to the company in first place, we find the mosaic of a winning formula culled from the entirety of our experience that can be represented by what we learned from attending the Monza premier event.

Everybody wins with Ferrari — the customers wins because they get to be part of a curated club of their global peers and get access to exclusive cars that they get to enjoy and that generally appreciate from the moment they take delivery; Ferrari wins because it benefits from a stable foundation of client demand for its products who highly value being part of the exclusive club and pay for the privilege through their patronage of its products (~2/3 of cars are sold to repeat buyers); and shareholders win because the brand and exclusivity Ferrari has built over its history allows it to command admirable profit margins (we estimate 60%+ incremental gross margins) that generate enviable returns on tangible invested capital (nearly 100% long term by our estimate). The combination of  the strong moat built around its globally recognized brand, the product experience and value created for the customers, and a management team focused on protecting and enhancing its value, we think it makes for an incredible business.

 

As of the date of the post, clients invested in Ensemble Capital Management’s core equity strategy own shares of Ferrari (RACE). This company represent only a percentage of the full strategy. As a result of client-specific circumstances, individual clients may hold positions that are not part of Ensemble Capital’s core equity strategy. Ensemble is a fully discretionary advisor and may exit a portfolio position at any time without notice, in its own discretion.

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