My short essay on Ferrari pricing - please comment!

Alright, I'll be the first to bite. Not knowing how old you are or what grade level this is for I'll leave out grammatical and spelling issues as there weren't very many. Overall you did a thorough job of thinking through the whole situation and have described it quite accurately. That being said, Ferrari has already figured out ways around at least two of the issues you raise.

1) Dealers are not restricted to selling new cars for sticker price any more.
2) Some dealers are requiring a contract with "first right of refusal" within a specified time period should the new owner decide to sell.

Also, if demand continues to increase look for production to do the same. With a new production line starting up within two years the capacity will likely be there should Ferrari want to pursue it.

Lastly, the whole scheme of "requiring" people to become better customers by buying used cars is, in my opinion, a brilliant way to increase revenue for a dealer who has limited profit potential on new car sales.

By the way, welcome to F-chat and if you fill out your profile a little more, we would know more about you.

John

 

Interesting read! One minor correction -- Silicon Valley is in Northern California, not SoCal.

 

Not only that, but you never right "Socal" in an essay.

 

well i know i'm just being ****** here you said never right don't you mean never WRITE?

 

You make a number of good points in your essay. There are a couple of more things you may want to weave into your essay to further explain why Ferrari doesn't just dramatically increase their MSRP prices for new cars.

A critical success factor for Ferrari is maintaining or increasing the value of its brand. Licensing the Ferrari brand name to non-automotive products has been an additional source of revenue for Ferrari without increasing car production. Therefore, finessing their customer relationships, while maintaining a very high level of car marketplace demand, is a key aspect of this brand value management strategy.

Another key for their brand management strategy is the general public's perception of the typical Ferrari owner. It would be detrimental to their brand if the sports car enthusiast portion of that population were replaced by only the super-rich people of the world. For example, this is the difference between the current Ferrari brand and that of Rolls-Royce or Maybach. It is easy for the general population to be critical of the super-rich's behavior and the appearance of them being nothing but self-absorbed people, especially the "nouveau riche". This form of perceived elitism is a hazard for the brand's value, which is why Ferrari puts energy into sustaining and cultivating the image of the sports car hobbyist/enthusiast. Examples of this are the factory-sponsored driving schools, dealer-organized track days, the Challenge race series for customers, the FXX program where customers participate in the R&D process of gathering data for the next supercar design, etc.

As far as your essay writing style, you might want to use fewer parentheses. This will help the essay flow better and be a less distracting writing style. I'd suggest eliminating about half of your parenthetical clauses in your current text. For example, instead of "Since the moral hazard (flipping the car) happens after ..." you could write it as "Since the moral hazard of flipping the car for a higher price happens after ...".

Also, it is a good idea to footnote any abbreviations you use. For example, you might want to add a footnote for "BRIC" explaining that it stands for "Brazil, Russia, India and China" and that the term comes from Jim O'Neill, a global economist at Goldman Sachs, whose thesis argues that the economic potential of those four fast growing countries is such that they may become the four most dominant economies by the year 2050.

Good luck on your essay. I hope we collectively get an "A".

 

As an essay that you are doing for school, I suggest using references. Call Ferrari Silicon Valley and ask them a few questions. You reference "new money" ask them about their demographics (age, gender, etc). You also talk about the different markets in California and New York, I would also then talk with a dealership in New York, such as Ferrari of Long Island.

As them their opinions on the points you bring up in your paper.

If you call Silicon Valley, ask for Parris. He's a great guy, who is honest and won't give you a bunch of bull.

Good luck on your paper!

 

______________

Thank you for this post - I would like to reply on the above points:

a) - this replie is based purely on my opinion. I assume that any spelling errors are the fault of the internet.

b) - ass-ymetric? as opposed to what - these cars are probably cheaper in the US than anywhere else on earth.

c) - adverse selection == Lamborghini. moral hazard == the Cops, the Pope, and Al Gore.

d) - Ferrari (both NA and Italy) wants only to extract as much money as possible from its customer base. They do not care if you drive it or do not. They do not care if the last Enzo gets crashed in Malibu. Paris Hilton would probably be more acceptable as an applicant than Phil Hill these days.

e) - Neither the buyers nor the sellers are trustworthy, and neither of them give a flying fart.

f) - They (the old V12 ones) do not actually appreciate. They actually depreciate at alarming rates, considering the maintenance and auction fees, and their genuine owners lie about this to their wives and girlfriends. They tell the truth only to the IRS and the CPA (if even to them under oath).

g) - I can only suggest that you bring your 355 in with 3 miles over warranty and 3 days past time for valve guides. This and a little talk with my ex-wife's attorney should set you straight on long-term trust in a relationship.

h) - Dont count your money when it's sittin on the table. Time enough for countin, when the deal is done. See points e) and f).

i) - Indeed. It is the stuff of which dreams are made. (and usually by which they are broken)

I hope you are able to have a fine example of this red misery sooner rather than later!

James

 

PJ86,

FYI, the only reason I brought up the writing style issue of using too many parenthetical clauses, is that I suffer from the same style. I got butchered for it on several classroom assignment papers when I was going to school for my undergraduate degree (back when dinosaurs roamed the Earth). I actually like that style, but most professors don't. It takes one, to know one.

Toggie

 

Gimme a break it was late!

 

Interesting read. My comments:

1) Be very, very careful about identifying Ferrari customers as "new money". New money usually refers to people who have jumped classes within their own career. I would suggest that many of Ferrari's customers, in NA or internationally, actually do not in any way qualify as new money. For instance, while Bill Gates has made billions in his lifetime, he really cannot be considered new money, because his grandfather was filthy rich by contemporary standards, as was his father.

I'm not so certain a global economy has so much to do with it, either. Many European, Asian, Arabian Ferrari owners are simply utilizing the interest on inhereted funds to buy their F-cars. In the United States, the Internet Economy has created more wealth than the "global economy" -- and the basis of this wealth is not international sales, but rather the value of the stock relative to option strike price.

2) Ferrari always has and always will sell to anyone they can. My father walked off the London street in the 1950s and was offered the opportunity to buy a brand new Ferrari at a dealership. He was in his 20s at the time. If you have the money, and they have the car, that's all it takes.

3) Many dealerships have provided their clients the ability to essentially "trade" for a new Ferrari every year or two. With a minimal payment, one can trade their 612 for a 599, for instance. These customers are often the first to be in line for a 550 Barchetta or Enzo. The thought, though, is that when the next one comes out, the customer pays a little cash out of pocket to get the next one, the dealer gets the old car back and can still sell it for more than original MSRP.

New Ferraris, just like vintage ones, are not all about value as a function of just supply. As for new cars, the company produces as many as it believes it can sell through its limited distribution network. Keep in mind that until 328 production began in 1985, the Ferrari factory was very antiquated. Now the company is much more high-tech, which translates to efficiency and the ability to produce more cars.

When the cars hit the market, given the limited supply, high demand, as well as the demographics and psychographics of the consumer base, the value is considered higher than MSRP. This may or may not affect ultimate collector value. 308 and 328s soared to over $100K as slightly used after Enzo Ferrari died, but are down in the sub-$50K range now.

Most cars depreciate over a 20 year cycle, where they tend to sit for another five years. After which, a slow appreciation can happen. At 30 years, if the car is going to take off, it will. Some cars break this curve, such as the Buick GNX. Some Ferraris simply don't appreciate ahead of the market -- and these are usually the four-seaters.


And by the way -- my personal feeling that one should never start an article or essay with "the purpose of this is...". Make a statement and then support it.

 

James, I believe you have established a new term, in owning a Ferrari!

"I hope you are able to have a fine example of this red misery sooner rather than later!"

James

"Red Misery," gives a definative meaning to the experience, in those two words! BRAVO!!!

Ciao...Paulo

 

Very interesting work, it is a pity that I saw it only now. I think that nowadays many manufacturers of sports cars, not only Ferrari, the main problem is the economy of motors. It is extremely unfortunate that the world feels about pollution of the environment but makes decisions regarding the benefits for making money. I wrote a work about this and knowing it, and I would like to wish the manufacturers patience and understand that no matter how stupid the world is, the truth remains with those who still give the feeling of a holiday behind the wheel. And this can only be provided by the right sports car like the Ferrari F40 that is trying to kill you on the track.

 

I really enjoyed this! Make sure you have an editor do some grammar/spelling checks. I generally agree with your thesis, however, the model does backfire for Ferrari during extended down markets. We're emerging from a 10-year bull run so it is not easy to see in this current environment.

Keep up the great work and thanks for sharing!

 

His write up was in 2007 - during a down market. In between is the transition from 5,000 to 11,000 units and the elimination on the dependency of the US market.

Since his post, in absolute terms the US is really a negative growth market for Ferrari and the sales practices utilized by Ferrari in EU and the US are vastly different. In a prolonged down market shareholder focus should be on Ferrari's performance and sales practices in it's growth markets the EU, Japan and to a lesser extent China.

In terms of the US, Ferrari customers in general are less sensitive to economic conditions as they in general are significantly older than their competitors (ex: Rolls Royce customers are on average are 15+ years younger than Ferrari customers in the US - same for McLaren and Lamborghini). While Ferrari needs a sharp change in demographics in the US , its demographics are actually a benefit in a down market.

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Stupid me, I didn't realize this was from 15 years ago.
***
That said, in an extended downturn, your thesis would yield continued growth.

Can you explain 67-69, 74-75, 82-83, 92-93, 02-03, 09-10?

 

Looking at absolute production numbers in a cyclical business that operates internationally and requires 3-4 year lead times to introduce new products means little without context.

Even in robust economic periods all mature automotive manufacturers numbers fluctuate based on product lifecycle, product mix, roll outs of new safety or emission requirements etc.

That doesn't even consider geopolitical (distributor conflicts) and environmental (factory fires, supplier labor or material, transportation) issues etc. Covid is a great example, so are oil embargoes, wars etc. Heck there isn't even a industry standard on how to account for the Taycan's now at the bottom of the ocean. In 3 years you will see some will eliminate them from production numbers and others won't.

Yes, economic downturns have an impact but just looking at production numbers in a vacuum is a disservice to how complex and cyclical this industry is - even in the best of times. Simply graph Model S & Model X sells in great economic times....off the cliff with zero correlation to the economy.

So your question - can you explain is a bit silly. My guess is if you run a "stale bread calculation" most of your down turns don't correlate strongly
to economic factors.

I'll stick with my thesis that having an older demographic in is usually a plus in an economic downturn. Maybe we should conduct a poll in the coming downturn? My bet is that the majority that cancel their new Ferrari order are under 60 years old.

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1967-1970 (4 years)
1973-1977 (5 years)
1993-1996 (4 years)

As much as your exegesis is commendable in the effort, your point is not convincing.

I mean, say you're right, great for (NYSE:RACE) me - so I'm not even biased.

I would love to think the House of Enzo is immune from macro-economic issues as beauty products.

 

My exegesis had nothing to do with convincing you or anyone else that Ferrari and its stock are as immune to macro-economic issues and downturns as beauty products.

Instead I'm simply stating that looking at automotive sales numbers in a vacuum is silly. Its obvious by the dates you choose anything beyond single factor analysis isn't your specialty. So, yes I agree - when it rains - things do get wet. Good luck with your investment.

Interesting 1967-1970 is considered the golden age of American muscle.

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Yes, hence I said

hmmm...

For someone pontificating about Ferrari, I find it odd you didn't understand the context of 67-70.