Why does a famous sports-car maker need an SUV in its lineup?
That's a question many Porsche fans were asking when the first version of the big Cayenne SUV was added to Porsche's lineup in 2002.
The Cayenne seemed like an un-Porsche product for a lot of reasons. Not only is it not a traditional Porsche sports car, it's built on VW bones: The Cayenne shares underpinnings and much of its engineering with VW's Touareg SUV (and Audi's Q7).
But it has done very well. In fact, it's arguably one of giant Volkswagen Group's (NASDAQOTH:VLKAY) most important products, for reasons that have nothing to do with image -- and everything to do with profits. In fact, the Cayenne might be the most profitable SUV in the world.
A little car company that generates huge profits
To understand why the Cayenne is so important to VW, we first need to understand how important the Porsche brand is to the VW Group. We can do that with just two numbers: In the first quarter, Porsche accounted for 1.7% of the VW Group's total passenger-vehicle sales -- but 31.7% of its passenger-vehicle profits.
Put another way, the VW Group sold about 2.4 million vehicles in the first quarter, of which just 38,663 were Porsches. But those Porsches (plus Porsche's captive-financing arm) generated almost a third of VW Group's operating profit from passenger-vehicle sales.
Porsche is a big part of why VW's profits are among the best in the business. VW Group's first-quarter pre-tax profit was 2.86 billion euros, or $3.97 billion. Ford (NYSE:F), by comparison, made $1.4 billion before taxes.
Porsche makes a ton of money because Porsche's history and the strength of its brand give it tremendous pricing power. And Porsche sells a ton of Cayennes, at least by Porsche standards.
A lot of money for a lot of Cayenne SUVs
Porsche doesn't provide global sales by model line on a quarterly basis, so it's not clear exactly how many Cayennes it sold in the first quarter. But we do know, from VW Group's annual report, that 49.4% of the Porsches produced last year were Cayennes.
That percentage might fall a bit with the debut of the Macan, the Cayenne's smaller sibling, which Porsche is in the process of rolling out around the world. But the Cayenne is still Porsche's best-selling model and probably represented about half of its global sales in the first quarter, in the neighborhood of 19,000 units sold.
We also don't know for sure how much Porsche makes on every Cayenne, but it's safe to say it's quite a bit. Porsche's factory in Germany installs the Cayennes' interiors and does some final finishing work. But aside from that, Cayennes are built on the same assembly line as the Touareg and Q7, at a huge VW plant in Slovakia, and they share much of the same structure and systems as their more mundane siblings -- and the same economies of scale.
But they sell for considerably more than the Tourareg and Q7 -- usually a lot more.
In the U.S., a Touareg starts at $44,570. A bare-bones Cayenne isn't much more, $49,600, but who buys a bare-bones Porsche? Almost nobody: Porsche's options lists are famously long (and famously expensive), and include some things that are standard equipment on most other luxury brands' offerings.
How can Porsche get away with that, anyway? Porsche says that their huge options lists offer their customers -- many of whom may have dreamed of owning a Porsche for years -- an opportunity to get exactly the vehicle they want. It's a level of customization that is unique outside of tiny ultra-luxury brands like Bentley or Ferrari, they say. And they're right.
But you'll pay for the privilege. Want a bare-bones Cayenne -- but with an automatic transmission instead of a manual one, and in a color other than black or white? You're already up to $53,390 -- unless you want a red one, in which case it'll cost you $55,740. Memory seats? Two-tone leather? A Bose stereo? Keep checking those boxes; none of that is standard -- all of it will cost you.
While you're checking all those boxes, are you sure you really want the bare-bones Cayenne with just 300 horsepower? There are several more enticing models -- Porsche offers nine different Cayenne models in the U.S., including hybrids, diesels, and several higher-performance and luxury versions -- and your dealer will make sure you try driving a couple from further up the ladder.
At the top of the heap, a loaded Cayenne Turbo S will run you well over $160,000, which is a very big jump from $49,600.
How much of that difference is profit? Porsche isn't saying, but it's an awful lot.
How does Porsche make so much money? Like this.
The Cayenne isn't Porsche's only hugely profitable model, of course. Porsche has been using this basic formula for years, and it works very well.
Here's another example: Porsche's North American unit made a point of saying that over a third of the 911s it sold in the first quarter were Turbo or Turbo S models. A basic 911 starts at a bit over $84,000, while a Turbo starts at $151,100 -- and a loaded Turbo S model can easily break $200,000.
Unlike the Cayenne, the 911 isn't based on a more mundane VW model. But the basic principle still applies: How much more can it cost to build a 911 Turbo versus a regular 911? Again, we don't know for sure, but it's safe to say it's nowhere near that much: There's a lot of profit in that spread.
The secret to VW Group's fat profits: Luxury models built on mass-market bones
The markups aren't quite as extreme, but the approach VW uses with its (much larger-selling) Audi brand is similar. Audi's sedans are built using VW platforms, components, and many VW parts, but those mass-market bones are carefully hidden behind stylish sheet metal, well-appointed interiors, and more-elaborately tuned suspensions -- details that justify a significantly higher price tag, and greater profits per car.
As important as Porsche is to the VW Group's bottom line, Audi is even more important. Audi accounted for a little over 14% of VW Group's passenger-vehicle sales in Q1, and 59.7% of its profits.
Together, Audi and Porsche are the not-so-secret "secret" behind VW Group's fat profits. And the example that VW has set with its luxury brands is a big part of the reason so many of VW's rivals are making huge investments in their luxury brands nowadays.
Special free report: Will this stock be your next multi-bagger?
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks one stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year, his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252%, and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.
John Rosevear owns shares of Ford. The Motley Fool recommends Ford. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.