Fact Pattern

Whilst 2022 has undoubtedly been a tough year, there was consolation in the fact that everybody was experiencing some form of adversity. Some of us lost our jobs, others worried about rental and mortgage payments, and the super-rich fretted over whether their new Rolls-Royce should be coated in exotic shades of ‘Purple Haze’ or ‘Salamanca Blue’.

It may therefore come as no surprise when Rolls-Royce Motor Cars announced on Monday 9 January 2023 that it sold a record number of cars last year. The UK-based carmaker sold 6,021 vehicles to be precise. This represented an 8 per cent rise over 2021 and the highest annual sales figure in its 119-year history.

Analysis

Despite the war putting a halt in Russian demand and sales falling slightly in China because of lockdowns and the government’s zero-Covid policy, Rolls-Royce was able to find strong support in selling a third of its vehicles in the Americas. Those vehicles sold for an average price of slightly over €500,000 when optional extras such as a personalised paintwork consisting of no less than 20 layers were included.

But perhaps more importantly were the sales figure pertaining to the Middle East. It represented the leading region for customisation spending with its flagship model, the Phantom, selling for more than €2 million once options have been fitted. This arguably confirms what Barclays analysts had predicted last week: that the Middle East was expected to become one of the fastest growing luxury markets in 2023, with LVMH and Richemont being in the best position to benefit. In light of recent events such as high oil prices spurring its economy and a rapidly growing tourism industry, perhaps the news is less surprising than it may initially appear.

Implications

Do not be fooled. Rolls-Royce’s strong performance last year was the exception, not the norm. Data released earlier this month revealed that US new vehicle sales has had their worst performing year since 2011, selling just 13.7 million new vehicles. This represents a decline of approximately 8 to 9 per cent when compared with 2021. But automakers have been building up inventory in a bid of cautious optimism that demand remains high due to years of tight vehicle inventories during the pandemic and supply chain issues. If automakers are wrong and demand is not as strong as anticipated, demand destruction may manifest where supply outstrips demand. In such a scenario, automakers would be forced to sell the excessive inventory at a steep discount thereby adversely affecting their revenues and profit or wind up with a fleet of unsold cars.