Aston Martin was founded in 1913, over 30 years before Ferrari, and has been a British icon ever since James Bond debuted the DB5 in the 1964 Goldfinger movie. Unfortunately such heritage doesn’t guarantee equity value appreciation. Over the last 107 years, Aston has gone bankrupt 7 times and has lost over 80% of its equity value since listing in 2018.
We interviewed a Former Head of Sales at AML to understand how Lawrence Stroll can turn around Aston Martin. Could this time could actually be different? After taking control last year, Stroll and Moers were clear about the first strategic objective:
There's one important topic that I'd like to mention, we are not running wholesales to cover our production capacity. Everything is retail-driven and stock-driven. That's one of the most important steps that we took last year. We have right sized our business to demand, not capacity. Tobias Moers, Aston Martin CEO, FY 20 earnings call
Aston’s shift from a wholesale to retail-driven model is pivotal for the turnaround and worth explaining. The customer of most auto OEM’s is the dealer, not the end customer. A core selling point of Andy Palmer’s Second Century Plan was that AML would produce 10,000 cars, just like Ferrari. However, the big difference is AML is wholesale-driven, not retail-driven like Ferrari.
A wholesale distribution model is typically how a mass market auto company operates: OEM’s set a production target, produce vehicles, and then push the cars out to dealers who are incentivised to sell the product to end customers. When the vehicles don't sell, the OEM can pressure the dealer leading to price decreases. For a luxury brand, this can significantly damage the brand equity.
This is what happened to Aston over the last 3 years. The Second Century Plan was about producing 10,000 vehicles without enough focus on how the cars are sold. Manufacturing was running at full capacity without enough customer demand to buy the cars. Dealers were forced to take vehicles which led to large overstocking of Vantages that couldn’t sell. This comment from our interview highlights the historical disconnect between supply and demand at Aston:
Aston was producing like hell; it was producing a lot. This is the first thing that Stroll has changed. He has cleared the stock and they have started to see the market in the way that Ferrari does… During my time, there was pressure on the dealers to take cars. This is something that Ferrari is not doing. The way that Ferrari sells cars is that they have the orders first and then the cars arrive. There is always demand from the dealers to have cars and they sell the cars with a profit that no other brand is doing.
Unlike Aston's wholesale model, Ferrari’s retail-led model is very different; it is end-customer order driven. Ferrari’s product quality, heritage, F1 performance, and strong residual values drive consumer desire which builds the order backlog. With a long order backlog, Ferrari can better manage supply and demand. Vehicles are effectively built-to-order. This is a far superior operating model that is reflected in the numbers: Ferrari’s inventory turn is double Aston’s and its EBITDA margin is closer to AML’s gross rather than EBITDA margin. We’re reminded of this quote from our interview with a Ferrari executive that exemplifies their unique culture:
The protection of the residual value, the pre-owned market, for us, is a priority. As the founder of the company always said – and I want to repeat it, because it very clearly explains the philosophy of the company – we should always sell one car less than the demand; we will never sell one car more than the demand. You will never find a Ferrari dealer or a Ferrari manager, like myself, pushing. We never push. - Former Ferrari EVP
Stroll and Moers have made progress in the transition to a retail-led model: over 1,500 wholesale cars have been cleared from dealers and there is now a ~6 month backlog for the DBX. More retail orders leads to tighter inventory control, higher pricing, and improved margins. This higher cash flow can be reinvested into product refreshes and now F1 to further fuel customer orders. Stroll is looking to replicate Ferrari’s powerful feedback loop.
However, just shifting to a retail-led model is only part of the story. Product is king in the luxury goods game and Aston has a great pipeline. The DBX SUV is now over 50% of annual volume and built on a separate platform that requires little capex to add DBX derivatives. Within the next 12 months, Aston is also launching the Valkyrie hypercar which is the foundation for the mid-engine Valhalla and Vanquish. Given the new relationship with Mercedes-AMG, all products are built with new AMG technology which infuses German engineering with Aston's British heritage. If the distribution model is right, it’s hard to argue products like this and this won’t sell.
Moers has also been relentless about cutting operational costs. In one year, the Gaydon facility has gone from 400 to 100 cars in production and 70 to 23 assembly lines. Aston is sourcing AMG engines and other materials to improve performance and reduce COGS. Moers claims operational efficiency has improved over 30%. The situation for the business seems to be really changing: retail-order driven, refreshed products with AMG tech, a new F1 team, and lower operational costs. Maybe this time could actually be different for Aston.
A second-order effect of higher retail order intake is a higher personalisation and option take rate. Wholesale vehicles are standard stock models with no add-ons or extras. It’s very complex and expensive to personalise stock that is sitting on the lot. Retail orders are cars that are not produced yet; customers can customise colours, add-ons, and personalise it to exactly what they want. Not only are the options over 70% gross margin but this radically improves the customer experience. A retail model allows customers to personalise the product to feel really special. Ferrari even builds the buying process around this:
We have an area of the showroom dedicated to personalization, with a nice sofa and all the samples that you can choose from, such as color. It’s quite an experience, actually. I would say that, if you come in with a precise idea of which car you want, it’s easy. When you don’t know what you want, we take you through the overall experience and we develop your awareness of the brand and we develop your demand.
Aston Martin’s new F1 team is an important strategy to create consumer desire. Grand Prix’s are also marketing opportunities to make clients feel part of the brand. Even after 7 bankruptcies, it’s hard to believe the Aston Martin brand is tarnished. F1 is expensive but brings Aston back to its racing roots and will increase the desire around the brand.
When we look at the numbers, it’s clear Stroll is in this for the long-term. Management have medium-term targets of 10,000 units, £2bn in revenue and £500m adjusted EBITDA. With an annual capex and R&D bill of ~£260m and £120m interest costs, the FCF is slim. Also, one big difference between Ferrari and Aston is how the company treats R&D: Aston capitalised 97% of R&D in 2020 whereas Ferrari expenses ~80%. If we expensed 80% of AML’s R&D, the EBITDA margin would be closer to 5% than 25% guided by management. Even if it’s not particularly interesting for you at today’s £2.4bn market cap, it’s an interesting story to follow. After all, you can’t buy 107 years of history.