Ferrari’s success as a luxury brand is due to five secrets

Shares in Hermès have risen 13% this year, while LVMH shares have remained flat and Kering has fallen 18%.

However, there is one luxury company that has overtaken Hermès in terms of growth and brand awareness: Ferrari.

This year, Ferrari surpassed Hermès for the first time as the world’s most valuable luxury company as measured by an equity multiple, which measures growth and earnings prospects. Ferrari’s shares now trade at 50 times earnings, compared with 48 for Hermès and 23 for LVMH.

The legendary automaker, founded in 1947 by Enzo Ferrari to finance his racing team, debuted on the New York Stock Exchange in 2015 at $60 a share. It now trades at $410 a share.

The company is valued at more than $75 billion — about 1½ times the market capitalization of Ford or General Motors, which make millions of cars each year. Ferrari produced just 13,663 cars last year.

Ferrari, of course, is not a traditional luxury company. It makes cars and has a racing team, a merchandise company, an auto restoration business and many other businesses that bear little resemblance to a maker of $1,300 scarves and $800 sandals.

Yet Luca Solca, luxury analyst at Bernstein, argues in a recent research note that Ferrari and Hermès are similar, as both occupy “the top of the price pyramid” in their categories and are “perfectly positioned” to benefit from rising global wealth.

To better understand what makes Ferrari a luxury brand, CNBC traveled to Ferrari’s headquarters in Maranello, Italy, to interview the company’s CEO, Benedetto Vigna.

Vigna is an unlikely luxury king. He spent most of his career at Geneva-based semiconductor maker STMicroelectronics, where he led the microelectromechanical systems and sensors group. For example, he helped create the screen sensor technology used in iPhones.

His appointment as Ferrari’s chief executive in 2021 was a sign that technology would be essential to the supercar maker’s growth and, in some ways, the future of luxury.

In an interview at the company’s $200 million E-Building, Vigna discussed the upcoming electric Ferrari, the company’s commitment to sustainability and the current global demand for Ferraris.

The main topic of the conversation, however, was what makes Ferrari a leader in luxury, and what lessons other companies and executives serving wealthy clients can learn from Ferrari’s rise. Here are five key takeaways:

As Solca notes in his research report, Ferrari and Hermès are both selling “less than the market would accept.” Much less.

Analysts estimate that Ferrari could easily sell two or three times its current production based on orders. Ferrari’s appeal was based on scarcity and exclusivity.

Even if you can afford a Ferrari, with an average price of $380,000, it’s nearly impossible to place an order.

The wait for a Purosangue, Ferrari’s pseudo-SUV, and other hot models has now reached three years, the longest in its history. Ask any Ferrari dealer what their biggest problem is, and they’ll tell you: “Not enough cars, too many frustrated customers.”

But CEO Vigna said the scarcity is part of Ferrari’s brand promise.

“We must remain true to the strategy of our founders, which is to always sell one car less than the market demands.”

His strategy is to increase profits by making more money on each car, rather than producing more cars.

“We always want to put quality of revenue over quantity,” he said.

Ferrari’s production increases have lagged far behind the growth in potential buyers over the years. In 2010, the company produced 6,573 cars, meaning that production has doubled in the past 14 years. In the same period, the world’s population of billionaires has more than tripled (and so has the population of $30 million+ and $100 million+ people).

Vigna said seeing a Ferrari on the road should be like seeing a rare and exotic animal. The imbalance also gives Ferrari a unique position in the automotive world: its cars tend to increase in value over time.

According to Vigna, it’s even better if customers have to wait for it.

“Waiting is part of the experience,” he said.

During CNBC’s visit to the factory, a Ferrari customer took delivery of a new maroon 812 Superfast. He looked to be in his 70s or 80s. When he saw the car and posed with it under Ferrari’s legendary entrance gates, his face lit up and he turned into a 10-year-old on Christmas morning.

Ferraris are special because they are still special.

Ask any Ferrari fan or owner what makes a Ferrari a Ferrari and he or she will likely say: the design, the engine sound, the handling, the power, the brakes or the 100 years of racing history behind that bright yellow logo.

According to Vigna, a true luxury product is defined by one key feature: emotion.

“Ferrari is a luxury company because it is a company that delivers a unique product. It connects with the innermost part of people, the emotional side,” he said. “A luxury company is a company that uses technology, innovation, storytelling, heritage, everything, with the ultimate goal of feeding that emotional side that we all have.”

Vigna said that Ferrari will never produce vehicles that people need only for transportation.

“When I get invitations to speak at conferences, I don’t go if I hear two words: utility or mobility. We don’t make a utility product. We make an emotional product,” he told CNBC.

It’s similar to what LVMH Chairman Bernard Arnault calls “desirability.” It’s not enough to make a high-quality product, or an expensive product, or a product with more features or functions. It has to tug at the heartstrings.

Looking at Ferrari’s rising prices, you’d think pricing is based on profit demands and Wall Street’s obsession with margin growth.

Still, Vigna said the base price for each model is actually set about a month before launch — in an unusual process.

“The way we define price in our company is very simple,” he said. “A month before the car is ready to be revealed, we go to the track — me and a few people — and we drive it for a day or a day and a half. And then, with fresh emotion in our bodies, we define the price. It’s me, the CMO and the CFO who define the price. We share the emotion.”

Clearly, those emotions are building. The least expensive Ferrari in 2012 was the California, with a manufacturer’s suggested retail price of $195,000. Today’s entry-level Ferrari, the Roma, starts at $273,000, or 40 percent more.

Ferrari is launching more limited-edition and special-edition cars that command much higher prices: the SF90 XX Stradale starts at around $900,000, and all 799 coupes and open-top Spiders were sold out when it was revealed. The SP3 Daytona, with just 599 examples made, starts at $2.3 million.

Perhaps the biggest profit-booster is personalization. These days, Ferrari buyers increasingly want custom paint, leather, fabrics, stitching, exposed carbon fiber and other personal touches that make it their own. Those personal touches can add $100,000 to $500,000 to the retail price.

Vigna said his “value over volume” strategy will allow Ferrari to grow profits by double digits with only a modest increase in the number of cars produced.

Ferrari will never admit it, but dealers will tell you that customers have to pay a high commercial price to get access to new Ferraris and especially limited editions.

It’s similar to the path Rolex buyers must take to eventually get their hands on a new Daytona, or the path Hermès customers must take to eventually get their hands on a Birkin.

In short, you start by buying a base model (and sometimes less popular). Then you can buy a slightly more attractive model, or two or three. As you attend Ferrari events, show support for the brand, even participate in a Ferrari racing program, you can eventually qualify for more expensive and even limited edition models.

Nearly three quarters of all Ferraris are sold to existing customers, which means it’s hard to start at the bottom.

“Ferrari and Hermès reserve their most desirable products for their most loyal customers,” Solca said. “This essentially ‘bundles’ access and reinforces desirability.”

Luxury companies often reflect the growing inequality in the economy. Even well-paid and respected workers work every day to create products they will never be able to afford or experience.

Vigna has tried to build a bridge between these two worlds.

Shortly after becoming CEO, he discovered that many Ferrari employees had never driven a Ferrari. The company brought employees to the test track to take a spin and experience firsthand how important their work is.

Last year, he also announced an employee stock program, giving any employee the opportunity to become a Ferrari shareholder and receive a one-time gift of free shares worth approximately 2,065 euros ($2,229).

While common in the U.S., employee stock programs are rare in Europe. Vigna said he learned to appreciate employee stock plans — and the importance of employees sharing shareholder benefits — while working in Silicon Valley.

“This proposal came from the team and was approved immediately, by me and the board of directors,” he said. “People are the heart of the company. You have to motivate them all. If you give shares, they all feel part of the company, like owners of the company. All companies have people. Only a few companies are made up of people.”

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