Experience D’Orth

 

ARE THEY CARS….OR COMMODITIES?

    by bill orth

                   With the release of three desirable new models over the past twenty months, Ferrari’s decision to keep the cars in short supply in North America has again resulted in predictable premium pricing when these cars are offered in the open market.  As unpopular as it is inevitable, it may be helpful to explore this reality, its history and to present one alternative perspective from which to look at it.

               We’ve all seen the price escalation that began on the popular Ferrari models most recently during the late ‘90s during the high tech boom.  The last two years of 355 production saw pre-owned Spiders (in the right colors and with low mileage) bringing their original sticker prices and sometimes more.  The 550 Maranellos quickly escalated to $20,000 over their original MSRPs and when the all-new 360 Modena was introduced, it blew the top off of the market.  Coupes commanded $35K over MSRP and when the Spider debuted in 2001 they hit $100K over MSRP for a brief time period.  Over the next three model years the Spider leveled off at around $70K over for, again, a car with mileage in three digits, desirable options and the right colors.  The new F430 has followed the same pattern, although the premiums have been a bit higher, and we expect the “360 pattern” to remain predictive of the cars’ market values—ie: the premiums will gradually drop off as the cars age and more are in the marketplace.

               This month’s release of the fantastic new 599 GTB Fiorano has upped the ante again.  The few cars that have recently sold at market did so at premiums of $150K +  over MSRP!  And again, it is anticipated that this amount will gradually drop off as more cars enter the market and next year’s model arrives.  The harsh reality of the situation is that unless someone has a strong preexisting relationship with a Ferrari dealership and/or had the foresight to pre-order one of these hot models years before they ever materialized, the only way to have one is by paying “market price.”  While this certainly isn’t pleasant for most enthusiasts, let’s dissect the phenomenon a bit, draw some parallels with other industries and see how well we all remember the lessons of EC101.

               First, referring to that long-ago economics class we all snoozed through, it is inescapable that when more buyers are chasing an article than there are examples available that the price will go up.   This is doubly true when the item is of high prestige and the interested buyers are relatively affluent.  People sometimes ask me why Lamborghinis—which are similarly Italian, exotic, ultra-high performing and technological wonders—do not also command huge premiums over their MSRPs.  Without even getting into the objective area of competition history, past and present, and the subjective “pedigrees” of each marque, its just simply that VW builds too many of them.  Is Ferrari capable of building more cars with which to meet the demand?  Certainly.  Do they want to?  Apparently not.  Will this management decision eventually be bad for the company’s image and subsequent success?  They think not, but I guess we’ll see.

               (Actually, while some of the above material suggests that premiums are a recent factor in Ferrari commerce, in fact it is not.  Recall the rampant escalation of prices following Enzo Ferrari’s death nearly twenty years ago.  In 1988, when a new Testarossa listed for about $165,000, many were sold at $100,000 over that figure—in 1988 dollars!  Shortly thereafter, another frenzy accompanied the F-40 introduction.  Although listed at roughly $390,000, the market price for one of these supercars was one million.  (Ditto for the F-50 and the Enzo, as well.)

               Next, it seems appropriate to me to draw comparisons with this reality and that of other industries.  How many of us wish we had bought Microsoft or Google stock ‘way back at the beginning?   If we didn’t, but would like to have some now, we have to pay today’s price—not the IPO number.  How often have you read a savory description of some fresh-caught seafood delicacy on a menu and saw the sobriquet: “market price?”  If the availability and price of a fish varies by the day, and therefore what the restaurant has to pay for it, is it inappropriate to see similar influences on the price of a Ferrari? 

               So, if we will accept—at least for the moment—that certain new Ferraris have assumed the identity and behavior of a commodity instead of that of an automobile, what does that mean in practical terms to a Ferrari owner?  I think that such an owner must first decide for himself which identity he prefers his car to adopt.  If he wishes to participate in the value escalation and perhaps enjoy a significant profit for having  endured the years-long waiting period, he must then act as though the purchase is simply a step toward another transaction—the profitable reselling of the car.  This means that the original owner must research the market to determine what will maximize the appeal of his investment in the eyes of the premium-paying public.  Color choices must reflect demand, not personal preference.  Options must be chosen that further increase the general appeal—not cause prospects to look for another car with “better equipment.”  Lastly, when the auto finally arrives, if one is looking for maximum return, recognizing that the premium level can be expected to steadily drop off over time, the car must be sold promptly—not kept and enjoyed for awhile.  Recognize too, that those who are paying big premiums are doing so to secure what they can consider a “virtually new” car.  One with more than several hundred miles on it cannot command the price level of a 100-mile example.  So, the “investor’s” new Ferrari really isn’t his at all; he ordered a configuration not of his own design and shouldn’t even drive it!  But he stands the best chance of reaping the greatest possible return in place of any actual driving pleasure.

               The alternative approach, that of looking at your new Ferrari-to-be-ordered as a car—not as an investment—means that decisions can be much more personal.   A non-traditional color combination can be selected, along with out-of-norm accessories if so desired.  When the car arrives, it can be driven at will and truly enjoyed dynamically.  The only downside is that whenever the decision is made to sell it, all dreams of a big payday have to be forgotten.  Case in point:  Last year, I had a client pay the necessary $100K over MSRP for a nearly-new F430 Spider that was a textbook example of the right options & colors.  However, he thought it was a car, and has proceeded to put nearly 9,000 miles on it!  When asking me what its present trade-in value is, he was shocked to learn that nearly all of that premium “value” had been erased.  No matter how attractively outfitted a one-year-old Ferrari may be, it will not enjoy much demand with what most folks consider to be four year’s worth of mileage on it. So, which will you want your Ferrari to be? 

               Other cautions to keep in mind are the different standards used by various brand enthusiasts.  Ferraristi, as we all know, prize originality in their cars.  Most aftermarket accessories like wrong-size wheels, crazy stereos and customizing of any kind are an instant turn-off.  Corvette and Porsche buffs are even more paranoid about exact correctness, particularly in their more classic models.  Lamborghini owners, however, celebrate individuality and custom presentations.  At the annual Concours Italiano in Monterey, the Lambo area is an Easter basket of non-standard (obnoxious) colors, custom-dyed leathers, big chrome wheels and stereos that could be heard on Jupiter.  And that’s what they like.  When one of these customized Gallardos is offered for sale, potential buyers rarely recoil in horror; the more unique, the better.  Pantera aficionados also love to alter their cars, and a Pantera gathering will rarely have a truly original car at all.  Everyone worships his own icons and that’s fine.  But when you’re talking Ferraris, you’d better keep it stock or suffer punishing depreciation.

               My final caveat is that, just like hem lines, styles in Ferraris sometimes change!  Primarily, the popularity of certain colors will wax and wane over time.  Recent examples are Yellow and Titanium.  Six years ago, yellow was as popular as traditional red, and the new Titanium became an instant hit.  Today’s trendy black was rarely ordered, and we sold many silver and blue Ferraris.  Today, red is still #1, with black nearly as popular. Yellow, blue and silver are out of phase at the moment. The moral to this story is to think about what your ownership period is likely to be.  If a resale will occur very quickly, choose what’s hot now and avoid those that aren’t.  If a longer time frame is planned, and you are concerned about future desirability, you may need to consult a fortune teller….or stick to what has always been popular!   Of course, if you think it’s a car, and are going to keep (and use) it for a long time, pick whatever you happen to like!

 

 

-           -  -  Bill  Orth  - -