McLaren’s First Quarter and Updated Strategy

McLaren has recently released its financial statement for the first three months of 2020. Like other automotive companies, the business has been seriously impacted by the virus outbreak. Why, all things considered, other companies in the same market segment have performed reasonably well while McLaren suffered such a sharp decline in sales and revenue? And is the pandemic the only cause of this result?

MCLAREN IN 2019

McLaren had originally set a business plan called Track22 in 2016. The program was then updated and called Track25 in 2018.

The new plan set two main objectives: the addition of 18 new models between 2018 and 2025 and achieving the production of 6,000 vehicles a year. Along with these, other targets are the realisation of a 100% hybrid product line, the release of the P1’s successor, continued study of lightweight materials to produce the lightest vehicles in each product segment, evolving the driving experience, vehicle security, and expanding to new markets.

*McLaren Speedtail ©McLaren Media

After a very successful 2018, McLaren maintained good momentum in 2019 too. While the vehicle production and delivery were slightly lower revenues and margins were all significantly improved. The positive outcome was also a consequence of the strong improvement of McLaren’s F1 team which ended the championship as the 4th constructor in the ranking.

WHAT ABOUT 2020?

Along with the automotive business, the applied technology division was impacted too. As for the racing team, the delay in the championship caused losses that have been partially offset by higher sponsorships revenues.

According to McLaren’s statement though, a consistent part of that -68% in sales was actually planned. As other manufacturers in this space have done before, the company put in place a plan to preserve exclusivity and stimulate demand. The strategy took into account a delivery volume of just 4,000 units over 2020, with the potential revenue’s reduction balanced by a higher percentage of limited production cars from the Super and Ultimate series (765LT, Speedtail, Elva), priced between £200,000 and £300,000 and above £500,000 respectively. The reduction was planned at around 400 units for Q1. This would have also given the opportunity for dealerships to de-stock and create demand.

MCLAREN Q1 2019-2020 Y-O-Y

McLaren Q1 2020 *Revenues and EBITDA in £ Million
**Click on the chart to enlarge

The Covid-19 impacted the company already in early 2020 with some disruption in the supply chain that caused delays. Later in March, the closure of dealerships exacerbated the situation even more with the impossibility of delivery.

WHICH MEASURES HAS MCLAREN TAKEN?

To outweigh the losses, last week the company announced it would layoff 1,200 employees in a restructuring effort as reported by Reuters. The job cuts will interest all three divisions, applied technology, automotive, and racing.

Other steps taken regard a £110 million reduction in CapEx through delay or cancellation of activities that do not carry 2020 return potential. Other additional expenses for marketing, events, motorsport, travel, racing, IT, and facilities management have been reduced too. The focus will entirely be on current products (Speedtail, 765LT, and Elva) or new models to be delivered in 2021 instead. Further cost-saving measures are achieved through the Government’s Job Retention Scheme, furloughing part of the staff and a temporary salary cut agreed by those who kept working.

The business is expected to underperform in Q2 as well, during which, in western countries, the majority of the ‘Lockdown’ period happened.

At the beginning of April, McLaren CEO Mike Flewitt announced that the £1.4 million speedster Elva production run would be reduced from 399 to 249 units. The official reason put forward for this decision is a demand by a majority of valued clients for more exclusivity for this vehicle.

*McLaren Elva ©McLaren Media

Regarding the Elva, some speculated that the real motivation was the concern about the allocation of all 399 slots in a niche segment that has become quite crowded. As of now, Ferrari is already delivering around 500 Monza units, divided between SP1 and SP2. Aston Martin entered the competition with 88 Speedster V12s.

In general, this choice by the automaker seems necessary to reduce risks in an uncertain period and to give more value to a key model for its 2020 lineup. Finally, regardless of the real reason, the units’ volume reduction ties well into McLaren’s updated five-year plan both in terms of overall numbers and brand exclusivity.

EDIT: In September McLaren announced that the Elva production has been further reduced to just 149 units, making it one of the rarest McLaren ever.

BACK TO THE BIGGER PICTURE: SOME OBSERVATIONS

Why then McLaren suffered so much in this Q1 compared to its Italian peers Ferrari and Lamborghini observed here?

First of all, as highlighted, the situation was not caused exclusively by the Covid-19 outbreak. It was pre-existing, and the management well aware of it took steps in advance to limit the potential damages to the business.

Another necessary premise to make is the substantial difference in terms of tangible and intangibles from the companies that had a positive first quarter. McLaren is not part of a larger group like Lamborghini or Porsche, and despite its long history in motorsport, as an automotive company, it is effectively active since 2010.

portal group mobile *McLaren Technology Centre ©McLaren Media

Thus, it does not possess yet the brand equity of other long-standing luxury performance automotive manufacturers such as Aston Martin or Ferrari.

As for the vehicles lineup, the introduction of too many models does not seem to be the issue. Ferrari’s success with its expanding range of products is the best example. McLaren’s somewhat confusing variety (for some) though could take away part of that exclusivity.

Two different strategic factors applied by competitors instead could very well play an important role in how things have played out in this first quarter. The first is the presence of a high-selling vehicle like Lamborghini did with the Urus following the SUV popularity trend. It is visible in its 2019-2020 Y-O-Y sales figures, where the Urus not only almost maintained last year’s level but also sold almost twice the units of the other two models combined (Huracán is an exception mainly due to the recent introduction of the cheaper RWD analysed here).

lamborghini q1 *Click on the chart to enlarge

The second factor is a specific strategy to maintain high perceived exclusivity and pre-owned value. Companies’ concern is to avoid brand dilution with cheaper and too common vehicles while still increasing the sales volume. Here is where Ferrari excels. The Italian automaker preserves the resell value of its cars and sustains demand by not overproducing its models. Sought-after special editions are accessible only to clients who have a history with the brand and get the first allocations for any new model. In turn, even more ‘regular’ cars produced slightly below demand are available to new clients only through the pre-owned market which helps to maintain perceived scarcity and avoid depreciation.

McLaren with its revised plan’s new target of just 4,000 units for 2020, the dealership de-stocking priority, and previous statements claiming they will not produce any SUV, is embracing the second strategy.

Q2 will arguably be impacted too heavily by the pandemic to properly evaluate a strategy’s success, as the rest of the year could. Nonetheless, the renewed and more focused 5-year plan seems the right direction to bring sustainable growth to the brand while also boosting its status and perceived exclusivity.

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