Ferrari’s success as a luxury brand comes down to five secrets

Hermès shares are up 13% this year, while LVMH shares are flat and Kering is down 18%.

There is, however, one luxury company that has surpassed Hermès in terms of growth and brand awareness: Ferrari.

This year, Ferrari overtook Hermès for the first time as the world’s most valuable luxury company, in terms of its stock multiple, which measures growth and earnings prospects. Ferrari shares now trade at 50 times earnings, compared with 48 for Hermès and 23 for LVMH.

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

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

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

Yet in a recent research report, Bernstein luxury analyst Luca Solca argues 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 the rise of global wealth.

To better understand what makes Ferrari a luxury brand, CNBC traveled to Ferrari 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 micro-electromechanical systems and sensors group. He notably helped create the display sensor technology used in iPhones.

His appointment as Ferrari’s new CEO in 2021 was a sign that technology would be at the heart of the supercar maker’s growth and, in a sense, the future of luxury.

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

The main topic of discussion, however, was what makes Ferrari a luxury leader and what lessons other companies and executives serving wealthy clients could learn from its rise. Here are five key takeaways:

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

According to analysts, Ferrari could easily sell two or three times its current production depending on orders. Ferrari’s appeal is based on rarity and exclusivity.

Even if you can afford a Ferrari, which has an average price of $380,000, getting an order is nearly impossible.

Wait times for a Purosangue, Ferrari’s pseudo-SUV, and other flagship models can now be as long as three years, the longest in the company’s 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 rarity is part of Ferrari’s brand promise.

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

Its strategy is to increase profits by producing more of each car, rather than by producing more cars.

“We always want to focus on the quality of income rather than the quantity,” he said.

Indeed, Ferrari’s production growth over the years has lagged far behind the growth in the number of potential wealthy buyers. In 2010, the company produced 6,573 cars, meaning that over the last 14 years, production has doubled. Over the same period, the global population of billionaires has more than tripled (as has the number of people worth over $30 million and over $100 million).

According to Vigna, seeing a Ferrari on the road is like seeing a rare and exotic animal. This imbalance also gives Ferrari a unique position in the automotive world: cars generally increase in value over time.

Vigna said if customers have to wait, that’s even better.

“The wait is part of the experience,” he said.

During CNBC’s factory tour, a Ferrari customer took delivery of a new brown 812 Superfast. He appeared to be in his 70s or 80s. When he saw the car and posed with it under Ferrari’s historic front doors, his face lit up and he transformed into a 10-year-old on Christmas morning.

Ferraris are special because they stay special.

Ask any Ferrari fan or owner what makes a Ferrari a Ferrari, and they might say the design, the engine sound, the handling, the power, the braking or the 100 years of racing history behind that bright yellow badge.

According to Vigna, a true luxury product is defined by one main characteristic: emotion.

“Ferrari is a luxury company because it offers a unique product. It connects to the most intimate part of people, to their 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 Ferrari will never produce vehicles that people simply need to get around.

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

It’s a bit like what Bernard Arnault, the chairman of LVMH, calls “desirability.” It’s not enough to make a high-quality, expensive product or one with more features. You have to touch the heart.

Given Ferrari’s soaring prices, one might think that pricing is based on profit demands and Wall Street’s obsession with margin growth.

Vigna said, however, that the base price of each model is actually set about a month before its launch, in an unusual process.

“In our company, we set the price in a very simple way,” he explained. “A month before the car is ready to be unveiled, we go to the track – me and a few people – and we drive it for a day or a day and a half. Then, with a new emotion in our bodies, we set the price. It’s me, the marketing director and the financial director who set the price. We share the emotion.”

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

Ferrari is increasingly launching limited-edition and special-edition cars, which command much higher prices: the SF90 XX Stradale starts at around $900,000, and all 799 coupes and convertible Spiders were sold at its launch. The SP3 Daytona, of which only 599 are being produced, starts at $2.3 million.

Customization is perhaps the most important factor in increasing profits. Today’s Ferrari buyers increasingly want custom paint colors, leather, fabrics, stitching, exposed carbon fiber and other personal details that make their vehicle their own. These personal touches can add anywhere from $100,000 to $500,000 to the sale price.

Vigna said his “value over volume” strategy means Ferrari can grow profits by double digits with only modest increases in the number of cars it makes.

Ferrari will never admit it, but dealers will tell you that customers must climb an expensive sales ladder to gain access to new Ferraris, especially limited editions.

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

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

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

“Ferrari and Hermès reserve their most desirable products for their most loyal customers,” Solca said. “This has the effect of consolidating access to products and increasing their desirability.”

Luxury companies often reflect the growing inequality in the economy. Even well-paid and respected employees work every day to make products they can never afford or try.

Vigna sought to connect these two worlds.

Shortly after becoming CEO, he discovered that many Ferrari employees had never driven a Ferrari, so the company invited its employees to come to the test track for a spin and get a first-hand sense of the importance of their work.

Last year, he also announced an employee shareholding program, giving every employee the opportunity to become a Ferrari shareholder, receiving a one-off grant of free shares worth up to around 2,065 euros ($2,229).

While employee stock ownership programs are common in the United States, they are rare in Europe. Vigna learned to appreciate employee stock ownership programs—and the importance of sharing shareholder profits with employees—while working in Silicon Valley.

“This proposal came from the team and it was approved immediately, by me and by the board,” he said. “People are at the heart of the company. You have to motivate each one of them. If you give shares, they will all feel that they belong to the company, that they are owners. All companies have employees. Only a few companies are made up of employees.”

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