Welcome to the 65th Pari Passu newsletter.
Today, we are taking a drive through the strategy and performance of one of the world’s most exciting and renowned brands, Ferrari. We have structured this post in the following sections:
Company History
Portfolio Strategy - General Public & Clients
Portfolio Composition - Cars & Lifestyle
Development & Distribution
Financial Information
Risks
Lessons
The metrics stated in this post come from Ferrari’s 2022 Annual Report unless otherwise noted.
Company History
Ferrari was founded in 1939 in Maranello, Italy by Enzo Ferrari, a former salesman, racer, and team manager for Alfa Romeo. Scuderia Ferrari, which Enzo created in 1929 under Alfa Romeo, is the oldest and the most successful Formula 1 racing team, and Enzo only started producing cars to finance his racing pursuits. He worked obsessively towards racing victory every day until he died in 1988, explicitly stating “I want to build a car that is faster than all of them, and then I want to die.”
Enzo was inspired to become a racer when he was ten years old. Unlike other automobile titans (e.g., Rolls-Royce, Porsche, Lamborghini), he had no engineering, business, or formal education of any kind. Following his discharge from the Italian Army in 1918 due to the Influenza Pandemic, his family’s carpentry business collapsed, and he attempted to work at Fiat - the premiere automobile company at the time - without avail. Enzo started as a test driver for Costruzioni Meccaniche Nazionali, a company that converted WWI trucks into passenger vehicles. He then joined Alfa Romeo as a racer in 1920.
Ferrari produced its current line of consumers cars beginning in 1947, following the end of WWII in 1945 and the establishment of the Italian Republic in 1946. From the initial models sold exclusively to kings and global CEOs, Ferrari has retained an intense tradition of exclusivity to date. In 2022, Ferrari made $5.6bn in revenue / $1.0bn in net income (18% margin) through the sale of just 13,000 cars. These cars range from $350,000 to $2mm+, and two-thirds of them are sold to clients who already own at least one Ferrari.
Similar to the flywheels of Amazon and TSMC, racing success generated short-term financial gains from prize money and initial deposits for new cars. Consistent racing success generated long-term financial gains through elevated demand for Ferraris, greater exclusivity of the Ferrari brand, and stronger Italian heritage. More capital allowed Enzo to attract and deploy the best talent and technology against his racing goals and continue to dominate. He never considered himself to be an engineer, driver, or designer, only an “agitator of men.”
Ferrari has primarily been owned by the Ferrari Family, Fiat (and Fiat Chrysler Automobiles by extension), and public investors. It had its IPO in 2015 (ticker: RACE) at a $9.8bn market capitalization ($52/share) when Fiat listed 10% of the company and distributed its remaining 80% to shareholders in 2016 (FCA investors received one Ferrari share for every 10 FCA shares they owned).
Today, there are four major shareholding entities:
Exor NV (24%): the holding company of Giovanni Agnelli (Fiat founder); Exor owns the plurality of Stellantis (14%), so the key individual shareholders have largely remained the same
Piero Ferrari (10%): Enzo Ferrari’s only living son and the current Vice Chairman
BlackRock (6%)
T. Rowe Price (5%)
In addition to Piero Ferrari, John Elkann, the CEO of Exor, serves as Executive Chairman. Benedetto Vigna, a physicist and former semiconductor executive, serves as CEO. Other executives primarily come from automotive or luxury backgrounds. There are 5,000 employees, with 91% of them based in Italy.
Portfolio Strategy
Throughout Ferrari’s financial reports, its core strategy is abundantly clear: “Different Ferrari for different Ferraristi; Different Ferrari for different moments.”
Let’s start on the macro level of who Ferrari sells to. Ferrari sells its products in four geographic segments: (1) EMEA; (2) Americas; (3) Mainland China, Hong Kong, and Taiwan; and (4) the APAC remainder.
In 2022, Ferrari achieved:
25% share in EMEA segment
18% share in Americas segment
37% in Mainland China, Hong Kong, and Taiwan segment
38% in remainder APAC segment
Ferrari sells its products to two groups within these geographies: (1) the general public (who will not buy a car) and (2) existing and prospective clients (who will buy a new or secondary car).
General Public Strategy
The general public is targeted through three channels:
Scuderia Ferrari, their racing team – note that this is essentially Ferrari’s marketing arm, however, the team has not won a F1 world title since 2008
The Lifestyle Portfolio, which includes personal luxury goods, collectibles, and experiences
Their eSports team and social media activity
Client Strategy
Ferrari’s clients are engaged through the car purchasing and personalization processes, as well as community events with the “Ferrari Family” that exist at the dealer, region, and headquarters levels.
Clients are segmented by driver type (Sports Car Drivers and Pilots) and loyalty status (Future Ferraristi, Ferraristi, and Collectors).
Sports Car Drivers will drive alone or with passengers over longer journeys. They like driving in a variety of locations and conditions and appreciate an elegant and understated design. Pilots drive alone on racetracks or challenging roads. They seek a high-performing and extreme sports car and an exciting driver experience.
Future Ferraristi is the entry-level loyalty classification that you enter into when you buy a Ferrari. After proving your loyalty, you can ascend to the Ferraristi and then the Collectors groups. While dealers have a close relationship with Future Ferraristi and Ferraristi, Ferrari’s corporate center keeps close tabs on the upper echelons of the Ferraristi and Collectors, as these are the ~500 clients that their most exclusive models are offered to before the public has ever heard of them.
Ferrari maintains a rich profile on each of its clients, including the driver and loyalty characteristics we described above and granular purchasing history notes. This level of control is reflective of Ferrari’s tradition of exclusivity. Non-collectors will never receive access to the complete portfolio, sales are strictly capped, and even if you are selected by the company to own a Ferrari, you’ll probably face a one-to-two-year waiting period until you are in the driver’s seat. There are many anecdotes of elites - who are not used to being told “no” - suing Ferrari for not letting them spend $2-3mm on a car. The power of desire.
Brian Lum, an Investment Manager at Baillie Gifford, artfully compares Ferrari’s client strategy to an as-a-service model. Clients initiate their relationship with the company by purchasing their initial car at the most basic tier, the Future Ferraristi. Ferrari then uses the loyalty structure above to incentivize “an element of regularity” in their future purchases, especially those for different uses (e.g., art collection, weekend trip, day-to-day driving, racetrack use), connecting to the core strategy above. Ferrari’s lifestyle portfolio and racing team expand the base of the pyramid, while things like client races (see the Ferrari Challenge), Casa Ferrari hospitality experiences, and increased opportunities for personalization stretch the top of the pyramid.
In 2022, 66% of Ferraris were sold to repeat clients. Among those clients, more than 50% of them have more than one Ferrari. The brand has achieved both a 25% increase in the average number of Ferraris owned per client and a 25% increase in the number of active clients since 2018. Today, 40% of first-time clients are under 40 years old.