Ferrari’s Fashion Show: Diversification in Luxury Automotive Marketing

As Ferrari’s Chief Brand Diversification Officer Nicola Boari told Reuters “Nothing will change in our brand strategy” except for the products and message directed at a younger customer base that is in his words instrumental to the core business.

In this respect, particularly interesting is the way in which the fashion collections will be delivered in the future. Ferrari will not adopt the model used by fashion houses. Instead, following an annual collection, the company will release its collection in ‘drops’ sold through dedicated Ferrari boutiques, like it has been happening with brands like Supreme and Kanye West’s Yeezy. The method consists in the release of a highly limited quantity of products from a collection with a relatively short advance. This formula has created the ‘hype’, or urgency for scarce goods that has proven extremely successful among the young audience.

Here, more companies are adopting the same model. Nike, Gucci, Adidas, Louis Vuitton, and Burberry have since tried their own clothing drop. Despite being popular, success is not ensured. Much is played by how the brand is perceived and if its message is aligned with the audience it is trying to attract.

According to the report by McKinsey, the fashion industry suffered a 93% drop in profits in 2020. And a recovery with actual growth compared to the 2019 levels is predicted to come around the end of 2022 and the first months of 2023. Ferrari, however, has placed pretty high expectations on this program. According to the plan, it should account for 10% of the overall profits within 7 to 10 years.

In terms of sponsorship, commercial, and brand (thus including a wide variety of activities), revenues always accounted for between 14 and 15% of the total, with a more significant decline in 2020 going down to 11%.

WHAT HAS CHANGED?

While these steps might seem expansions, they are actually refocusing, and consolidation moves. And as some fear that Ferrari might end up diluting its brand, this plan aims exactly at the opposite.

Back when it was announced by Louis Camilleri, in fact, the CEO claimed:

“Our current offerings are too stretched and are in danger of diluting our very precious brand equity,”

The result of this initiative is a 50% reduction of licensing agreements and a 30% reduction of product categories offering. Meaning that some lower-range product lines will disappear as well as some licensed retailers leaving space to fewer locations and a reduced but more luxurious range.

ASSESSING THE NEW STRATEGY

In Harvard Business Review, Markides (1997) defines some guidelines for brand diversification under questions to which decision-makers should have a clear answer.

Along with extensive research and financial assessments, the definition of some crucial characteristics highlighted by these six questions can be decisive in hedging the risks connected with diversification strategies. Going into detail, they are:

• What can our company do better than any of its competitors in its current market?
• What strategic assets do we need in order to succeed in the new market?
• Can we catch up to or leapfrog competitors in their own game?
• Will diversification break up strategic assets that need to be kept together?
• Will we be simply a player in the new market, or will we emerge a winner?
• What can our company learn by diversifying, and are we sufficiently organised to learn it?

I thought it would be interesting and potentially insightful to see how these questions would apply strategically to Ferrari’s new venture.

1.  WHAT CAN OUR COMPANY DO BETTER THAN ANY OF ITS COMPETITORS IN ITS CURRENT MARKET?

The first question can be somewhat deceptive. Because when thinking about what Ferrari does best, one could be led right away to think about luxury and performance cars. And while that would not be completely wrong (of course), it would also not be the right answer for the question. 

Markides himself states:

“Before diversifying, managers must think not about what their company does, but about what it does better than its competitors”

So, there are countless factors under which one can judge an automotive business, many objective ones and some quite subjective. Is it performance? Is it design? Pricing? Product range? Sales strategy?

Where Ferrari excels arguably more than any other firm (and not just in luxury automotive) is Branding. And there are lots of arguments in favour. In the last few years alone, Ferrari has been named multiple times World’s Strongest Brand by consultancy Brand Finance. Its history and heritage are renowned in the whole world and its influence spans across many industries. Not only automotive and motorsport, but entertainment, cinema, and, of course, fashion and more.

In a survey I conducted among over 300 luxury car owners, the Ferrari brand was ranked highest for its importance in the purchase decision.

BRAND IMPORTANCE FOR THE CAR’S PURCHASE DECISION RANKED BY LUXURY CAR OWNERS (1-10)

The Ferrari brand value and its desirability are also reflected in the low depreciation rate of the majority of its cars. Even though, this is also thanks to its production and sales strategy.

Such brand equity is surely relevant when it comes to haute couture.

2. WHAT STRATEGIC ASSETS DO WE NEED IN ORDER TO SUCCEED IN THE NEW MARKET?

As far as strategic assets go, to make it in the fashion business, Ferrari certainly has already significant expertise. Adding to it, comes the knowledge of partner Giorgio Armani, one of the most iconic names in the fashion industry, and the new Creative Director Iannone that brings too many years of experience in the industry.

The brand as mentioned in the previous paragraph plays a crucial role too. Ferrari is already synonym with high-end luxury, and top-notch craftsmanship and refinement. This refocus should consolidate even more its position as a fully-fledged luxury brand, more than just a luxury automotive one.

In addition to that, Iannone will also oversee the design and image for all the other non-automotive activities such as the design of the flagship stores that will host the collections drops.

“A triad of materials – terracotta, red high-tech glass, and white bricks – will dominate the stores’ design” he said to Vogue, to represent three Ferrari’s pillars, Heritage, Technology and Craftmanship.

The one strategic asset that might represent a risk is an intangible. The knowledge of this new audience that Ferrari is looking to communicate with. There has been a gradual shift in its communication, which is visible via social media and suggests an awareness of this potential issue. Ferrari could, in fact, lack the core values and communication strategy to properly align its offer with the targeted young audience.

3. CAN WE CATCH UP TO OR LEAPFROG COMPETITORS IN THEIR OWN GAME?

With this latest move, certainly, Ferrari has taken a step ahead of its competition in automotive. Even though, as said, every other company in this niche can boast a high-end apparel product line, none quite compare with this one.

package. Using the brand’s unique characteristics even for these products is surely a way to set it apart from the competition.

4. WILL DIVERSIFICATION BREAK UP STRATEGIC ASSETS THAT NEED TO BE KEPT TOGETHER?

Being an overall strategy that has been employed by Ferrari and many competitors for a long time, diversification in the fashion industry, as well as entertainment and other ventures does not seem to present such risk.

These days, some expressed concern over a potential loss of focus by the brand, losing sight of its core business in favour of diversification. However, as explained by Louis Camilleri in 2019, this plan is set out to achieve the opposite.

5. WILL WE BE SIMPLY A PLAYER IN THE NEW MARKET, OR WILL WE EMERGE A WINNER?

Ferrari can count on a series of assets that are virtually impossible to imitate by any other company in the world both in automotive and fashion, and this probably represents its biggest strength.

The brand equity, the company’s history, and the reputation achieved give it a significant competitive advantage, as long as it plays within its field. Ferrari has always been a brand for a selected niche and while this remains its driver, it has a high chance of ‘winning’, even in a relatively new niche.

Instead, trying to become a luxury brand ‘for many’ (a definition that might sound counter-intuitive) could represent a risk, or at least would require a longer time to establish.

*Ferrari driver Charles Leclerc wearing pieces of the new collection. Source: FT