Are Luxury Car Brands in The Luxury-Goods Business?
When we think of Ferrari or Lamborghini, the first thought that pops into our minds (unless you are an executive at a multinational company) is that these are luxury cars that are out of our reach.
Rightly so, luxury is anything that is available in a scarce quantity, which gives it some sort of exclusivity. If only a few thousand people can have something, like a Ferrari Enzo, then that is definitely a luxurious item. However, are these companies truly in the luxury-goods business?
What is a Luxury-Goods Business?
By definition, a luxury-goods business is one that commands a hefty price for a product that does not cost a lot to make, just because of the brand name and the quality/exclusivity which comes along with the product. For example, Versace is a luxury-goods brand, as whatever is made by the company is not for the masses (although the company now offers many products which are within the range of affordability by many).
In essence, a luxury-goods brand is one that has a very big profit margin, and the price for their products usually does not justify the utility which may ultimately be derived from it.
Having said that, some may argue that the networking opportunities afforded to a person who owns luxury items justify the costs of those items, for the most of us, they are just not worth all our savings which we have tirelessly accumulated over the years.
The Car Business
While the price tag on the Bentley is well out of our reach, one thing is for sure: it is difficult to make a case for the car that allows its categorization among the luxury-goods businesses.
The reason behind this is the profit margin. While for brands like Gucci it is easy to maintain a high profit margin, for car companies any aims for a similarly high profit margins are marred by the costs associated with the production of vehicles.
Since production costs are so high in the car business, combined with the fierce competition car companies’ face from competitors around the world, they are forced to work with lower margins.
That’s not all. While clothing brands face a lot of pressure to keep updating designs to remain relevant in the eyes of consumers, car manufacturers face a wide variety of issues to remain relevant in the market, such as changes in the legal limit of emissions their cars can produce.
The Changing Dynamics of the Car Industry
If we consider the challenges posed by costs and legal regulations alone, that is enough to lower profitability enough to take even the most exclusive car companies out of the league of luxury-goods businesses like the clothing brands we have mentioned above. However, there is the bigger challenge of the ever-evolving technology that looms in the air which all car companies must address if they plan on staying in the business.
As of now, electric cars have not really entered the luxury car business, excluding of course the few which Tesla may eventually introduce. The luxury car industry continues to enjoy its unique selling point of providing not vehicles for transportation, but experiences that enhance the lives of its drivers.
Unless electric cars can match them in providing a similar experience, these companies don’t have much to worry about. However, once we crossover to that point where electric car manufacturers like Tesla start offering such ultra-luxury products, it would be time to either innovate extensively or risk running out of business.
Looking Forward Into A New Era
With the IPO of Aston Martin, another renowned luxury car brand, it will now become more clear as to what the future holds for these luxury car manufacturers. Aston Martin is diversifying, much like the luxury clothing brands, expanding into the business of boats as well as real estate.
The move will allow the company to increase its net worth exponentially in the short term, as its asset base expands to welcome its new business units, and also help it command much higher profit margins. Seeing how uncertain the future has become, it remains a question whether other luxury car makers will follow suit. It all depends on how successfully Aston Martin executes its own strategy.
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