Red Weekly Special | Zhang Jingshu
A recession is not necessarily good for cheap consumer goods. In fact, every financial crisis in the past has been a great "positive" for luxury companies.
In 2021 under the influence of the epidemic, many industries and enterprises are in a difficult situation. But interestingly, the sales of top luxury car brands, such as Rolls-Royce, Ferrari, Bentley, Porsche, Lamborghini, etc., have all hit record highs in 2021. The author's research found that in the context of the economic recession, contrary to the "lipstick effect" of public perception, the demand for high-end luxury goods such as Ferrari has further increased. The growth of demand has also made ferries of luxury car companies such as Ferrari firm, gross profit margin and return on investment stand out among many car companies, and the super profitability has fed the company's high R & D investment, which in turn has made it continue to maintain a leading edge in the industry.
Recession "good" luxury goods companies?
In the economic depression, people due to the reduction of future income expectations, first cut the consumption of those commodities, such as buying a house, buying a car and traveling abroad, so that there may be more "spare money" than in normal times, to buy some "cheap non-essential items", such as lipstick, etc., to meet people's strong desire to consume, thereby stimulating the consumption of these cheap "luxury goods". This is what is commonly referred to as the "lipstick effect".
However, the theory is beautiful, the reality is bone-deep, too many economic theories have been falsified, and the lipstick effect is no exception. Klline & Company counted 20 years of data from 1989 to 2007 and found that lipstick sales sometimes increased with recessions, but sometimes with improving economies. If you track the correlation coefficient, lipstick sales more often increase with the improvement of the economy, and the recession decreases. This may be contrary to the "lipstick effect" in everyone's cognition!
So the question is, recession, what is good? The author believes that to answer this question, we must first clarify a question: who is good for the economic depression?
Historically, since the Great Depression of 1929, the Fed has learned to behave. As former Treasury Secretary Geithner said, any economic crisis is a crisis of confidence, and the easiest and best way to resolve it is to inject liquidity.
Interest rates are to asset prices like gravity is to objects, and the lower the interest rate, the higher the asset price. The proprietees themselves are those who have money, which is often referred to as the 1 percent; so the logic here is that every time there is a recession, the central bank comes to the bottom, lowers interest rates, pushes up asset prices, and makes the rich rich richer, exacerbating the gap between the rich and the poor. Over the past decade, the number of the rich has grown at a rate of 6 percent per year. This rapidly growing crowd became the backbone of consumers in the luxury industry in the recession.
A typical example is the 2008 global economic crisis, Chrysler and GM motorcycles both suffered heavy losses, but Ferrari's car sales fell by only 5%, from 6587 to 6250, and in 2011 directly set a record, selling 7001 vehicles. What is more interesting is that in 2008, although Ferrari's sales in the Middle East fell by 5%, the turnover was basically flattened, reflecting the company's strong pricing power.
The author found that in fact, every financial crisis in the past has been a big "good thing" for luxury companies.
Luxury properties of luxury cars are highlighted
The core logic behind this "magical phenomenon" is actually a product of the economic recession - the central bank releases water - the rich are richer, the product of this chain of consumption logic. Some investors may have questions, "Luxury cars are also cars, why is it so unique as a cyclical product?" ”
To use a phrase often said in the market, the white horse is not a horse, and the luxury car is not a car. A very simple argument, if luxury car companies and Volkswagen companies are similar, then their business models, pricing profits, financial data, should have a certain degree of similarity. But from Figure 1, we can clearly see that Ferrari's gross profit margin is completely out of the dust, and it is completely different from a business model with several other traditional automobile and electric vehicle companies.
Figure 1 Gross profit margin of major car companies (%)
Source: Bloomberg
From Figure 2, we can see that Ferrari's return on investment is also outstanding, especially after Ferrari spun off from Chrysler in 2016. In fact, if we calculate Ferrari's excess profit margin (defined as ROIC less weighted average cost of capital), Ferrari's excess profit margin over the past five years has been 15%, Mercedes-Benz 10%, Porsche 9%, Maserati 9%, and other traditional car companies are basically between 0-5%. So, more precisely, a luxury car is seen as a luxury rather than a car.
Figure 2 Comparison of Ferrari's ROI with that of traditional car companies
The "scarce" Ferrari Moat is deep
As Ferrari's founder, Enzo Ferrari, when he founded The Scottria Ferrari in 1929, said, "Ferrari is an illusion". Although people dream of owning this special car, only a few lucky people can have it.
In the 15 years from 2004 to 2019, Ferrari's revenue grew by an average of 8.1% annualized, with sales increasing by 5% and the remaining 3% achieved by pricing increases. Ferrari's grasp of the concept of "scarcity" is at its peak. In 1991, Ferrari sold a total of 4487 vehicles; in 2017, a total of 8394 vehicles were sold, an average annual increase of only 2%, which is the annualized growth rate brought about by the increase in the number of vehicles sold in recent years.
For example, ferrari sold only 40 FXXK-style sports cars for the whole of 2014, which sold for $1.1 million for street cars and $3 million for track-only sports cars. None of these cars had been booked before they could be produced, and all the buyers already owned at least one Ferrari.
More than 65 percent of the more than 10,000 cars Ferrari now produces each year are purchased by those who already own at least one Ferrari. That said, Ferrari has built a very strong consumer network, a highly exclusive "rider's club".
In addition, Ferrari's reputation and brand building are largely inseparable from the race of Formula One. In Formula One, Ferrari is synonymous with "the powertrain of the technological top". Scuderia Ferrari was the only F1 racing team to pay for instead of paying for it, but the organizer paid for him to participate. As of 2019, Ferrari has won a total of 16 Constructors' Titles. This award can only be won by the team that has the most points in the game for chassis and engine.
Why is Ferrari's technology so advanced? The reason is simple, Ferrari is more profitable and can put more revenue into technology research and development. Ferrari invests 15%-18% of revenue in scientific and technological research and development every year, while the proportion of general car companies is 6%-8%. More investment in scientific and technological research and development ensures better product quality and customer experience, forming a benign feedback chain.
Taken together, the implication of the above analysis is that as the behavior of central banks becomes predictable at the moment, the prediction of asset appreciation and rising wealth of the rich due to recession rate cuts has become more reliable. The logical chain here is far stronger than the "lipstick effect" that cannot be confirmed by statistics. So when we see Bernard Arnault, the boss of the Louis Vuitton Group, replace Bezos as the world's richest man on May 24, 2021, it's not so much of a fuss.
Behind the times to create heroes, a giant, there is indispensable a macroeconomic soil that carries it. This may also have reference significance for Chinese entrepreneurs, especially in the context of carbon peaking and carbon neutrality, in order to overtake in the international market of electric vehicles, if you want to take the high-end route, I am afraid that you must deeply understand the growth environment of high-end cars as luxury goods. For example, traditional high-end cars such as Ferrari are cultivating brands, investing in research and development, focusing on quality, building consumer groups and corresponding consumer awareness, and using the economic downturn cycle to seize market share.
(This article was published in Red Weekly on March 5, and the views in this article only represent the author's personal position, not the position of Red Weekly, and the reference to individual stocks is only an example of analysis, and does not make trading recommendations.) ）