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Ferrari Drives a Deal with the Devil

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The nature of the soul isn’t usually a topic of preservation on quarterly earnings calls, let alone whether or not an executive deserves to be shot. Yet Ferrari NV chief executive Sergio Marchionne was forced to confront both topics this week during a discussion with analysts.

Confirming my colleague Tomasso Ebhardt’s earlier report, Marchionne revealed that Ferrari is considering breaking with tradition by constructing a four-seat utility vehicle–a move that horrifies some purists.

Only last year, Ferrari’s CEO said you’d “have to shoot me first” before the Italian company would construct such a vehicle. But now Marchionne, a former student of philosophy, seems to be coming round to the idea of a utilitarian Ferrari. Though he was at pains to emphasize he still had “hallucinations”( worries) about the subject, he urged investors to trust Ferrari to come up with a idea that “doesn’t sell its soul.”

The CEO protests too much. In the 2015 IPO, Marchionne pitched Ferrari’s prancing horse as a luxury brand that merited a valuation more akin to handbag-maker Hermes International than a metal-basher like BMW AG. And he got it. Ferrari’s shares have more than trebled over the past 18 months and now change hands for 34 days forward earnings. Hermes is on 38 times, while BMW languishes at merely seven times forward earnings.

But Ferrari hazards becoming a hostage to that good fortune.

Flogging personalized sports cars to pamper plutocrats is vastly profitable, but there’s a limit to how many two-seater vehicles you can shifting, particularly in Ferrari’s rarefied price-bracket. To justify its rich valuation, Ferrari has to convince investors there’s still room to grow–which means attracting new clients, including ones that don’t salivate at the sound of a V-1 2 engine.

Ferrari’s IPO prospectus talked up opportunities to sell branded goods, but so far the company has constructed little headway. Reconciling Ferrari’s current line-up of racing-orientated merchandise with its aspirations in luxury goods has been the “single largest battle, ” Marchionne conceded. But that makes it all the more important for Ferrari to find a way to expand its automobile offering.

Luxury peers Rolls-Royce, Aston Martin and Lamborghini are all poised to launch SUVs. And no wonder: these vehicles tend to be extremely profitable and sell like hot-cakes. Porsche sold three times as many Macan utility vehicles last year than its flagship 911. As a result, Porsche’s operating profit margins weren’t far short of Ferrari’s. Questionable lookings and peculiar names–see the Lamborghini Urus and Bentley Bentayaga–aren’t an impediment to success, apparently.

A Bentley Bentayaga SUV.

Photographer: Jasper Juinen

Marchionne recoiled at the suggestion Ferrari’s new auto would ape Lamborghini’s design or Porsche’s volume-push: “Oh, hell no. Hell no. Hell no. We couldn’t. That would be obscene.”

Yet even selling a few thousand Ferrari utility vehicles would probably be very lucrative. If Ferrari doubled volumes from the roughly 8,000 vehicles it sold last year, “we could blow the hell of out of the Ebitda margins of Hermes”, Marchionne said.

If Ferrari CEO’s seems unusually pre-occupied with hell, who can blame him? Launching an SUV without destroying Ferrari’s exclusivity and brand identity is a huge challenge. Marchionne insisted the board hasn’t yet decided to proceed but he also said utility vehicles were “too inviting” to ignore. Indeed, a glance at the company’s galloping share price is telling: investors think Marchionne will give in to temptation. This Faustian pact already looks written–in Ferrari red.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Originally posted 2017-08-05 09:13:54.

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