Marketeers differentiate between exclusive, selective and intensive distribution strategies (see Principles of Marketing, by John F. Tanner, Jr. and Mary Anne Raymond). Most luxury watch brands born in the pre-industrial era grew thanks to the exclusive distribution model (one retailer per area), and that model is still used by master watchmakers such as Vincent Calabrese or Philippe Dufour. During the industrial era, brands survived and strived thanks to the selective distribution model, with a limited amount of retailers that meets certain standards. This is typically the strategy used by brands like Patek Philippe, Rolex or Omega. In our post-industrial era, the business schools metric of profitability is mostly a double-digit growth, so CEO’s have been tempted to please shareholders by increasing profit through intensive distribution, with retailers on every building corner, as it can be seen in some streets of Geneva, Interlaken or Hong Kong.
By 2016 there were 1.2 billion watches in production worldwide, which meant that every human being on the planet could theoretically buy a new watch every 6 year, or change it the second time that the battery dies. Intensive distribution will soon reach the point where there are more watches in production than needed, and the decline in sales that started around 2013 might be an indication that this industry is reaching the ceiling of intensive distribution. At Woodshores AB, our postulate is that the traditional sales model of watches has reached its ceiling. This industry was born in the pre-industrial era where place of origin mattered, went through the industrial era where performance mattered more than origin, and ended up in the post-industrial era where brand matters more than performance.
Since a brand is now most of what matters, watchmakers have been investing a lot into marketing (advertising, brand ambassadors), while compensating distributors, agents and retailers with a fat commission. All these costs add up to the cost of simply producing the watches, and the billed is passed on to customer in the form of an inflated price. Theodossios Theodoridis at zeigr.com - Uhren-Blog & Magazin did the same research as I did on the price of the Omega Speedmaster Professional across several decades. This is a watch that is still being manufactured today as it was in 1969, so it allows to see how prices in the industry have exponentially increased, which can only be explained by a drastic increase in markup and commission to middle men.
Besides what all the marketing ploys can say, the main problem with an ever-increasing price is that at some point it simply becomes out of a consumer group’s reach, and it becomes accessible to a new group that may or may not be responding positively to a specific brand. During the year of pomp that preceded the Subprime Crisis, certain brands kept spending more into their products, to the point of spreading too thin:
- German watchmaker Maurice Lacroix, which was once a profitable private label factory, made significant investment in custom mechanical movements and they dropped their focus on Middle End and High Middle watches to play in the High End league. There was a novel chronograph announced for release at Baselworld 2007 that never made it beyond 3D renderings, and the company has been leaking cash since 2011…
- French watchmaker Pequignet was bought over by a former Zenith exec who decided to turn the brand around and focus on High End instead of the Middle End and High Middle segment that had helped built the brand. After bringing in new investors for backup the conpany was put in liquidation in 2016.
Watchmakers now operate based on a heavy setup that needs a lot of cash flow, so they have focused on the sell-in (coercing retailers to put the watches in stores) instead of trying to understand what customers want and focusing on the sell-out ( when a customer actually walks out of the store with a watch). Caught between a rock and a hard place, retailers have been offloading their unsold stock on the grey market. Overall, the watchmaker’s focus on sell-in has started to bite back, and I believe that it is one of the reasons behind the decline in sales.
Another major reason behind the decline in sales is that reality is now catching up with the market: we entered the Great Recession after the 2007 Subprimes Crisis, but the Chinese market opened up its gate to import around the same time, creating a vacuum effect that allowed watchmakers to get double-digit growth in the country. Now Chinese consumers have become more knowledgeable, and policy changes have made it harder for them to flaunt expensive watches, so the sales in China have stopped compensating for the recession, and much like shopping malls in the USA that are closing one after another, watchmakers are starting to get a hangover after the fun is over.
Where is the industry heading? Well there needs to be a radical change of the structure:
- It has become unsustainable to spend that much money into marketing and then charge it to the customer. Filip Tysander, founder of Daniel Wellington, has demonstrated that it is possible to build a brand image without spending in advertising, but instead by partnering with social media influencers and rewarding them in nature (free watches) or in commission.
- The second-guessing has become a serious liability leading to unsold stock, so crowdfunding business models such as Kickstarter have shown that you can simply ask consumers to vote with their wallet to help you decide what it put into production and what to skip. This is probably the closest that we can come to a supply chain intensive distribution model à la Zara (Inditex Group).
- Our post-industrial focus on brand at the detriment of performance has opened the door for players how can just rely on their name or their trendiness. Serious watchmakers are now fighting for he same shelf space that fashion watches and pop watches are competing for. It doesn't help that the entry price to watch manufacturing has been drastically lowered, with most watchmaking factories now offering turnkey solutions to budding entrepreneurs.
Thinking out of the box, one option would be to stop asking retailers to take the commercial risk of investing in stock, and instead to use them as showrooms for the experiential part. The customer would walk in, be able to look at the whole range of models put at the retailer’s disposition by the factory, and place an order to have the watch delivered to him/her within 48 hours.
The retail would not have all that cash frozen into stock, so they would not have to run sales or to offload products onto the grey market. Nor would they have the pressure to sell what they have at hand to release the cash, so the customer would benefit from a more impartial and neutral advise from the staff.
Commissions would be lower, and shipping costs would almost vanish since there would only be one delivery from the factory to the end consumer, which means that prices would also be lower so logically it would be possible to sell more watches.
The retailer would earn a commission on every sale, and the real-time feedback would help the factory to have a firsthand account of where the trend is heading. That way, factories would be able to wait until the last minute to assemble specific SKU’s as soon as it becomes clear that they sell faster than others.