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:

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