Saturday, 4 January 2014

EDITORIAL: Are watches too expensive? (Part 1)

For more than a decade the luxury watch industry has enjoyed a tremendous and lucrative boom. More people were buying more expensive watches than ever before. But things seem to have come to a head, and the business is at an inflexion point. Thus the relevance of a question frequently asked: are watches too expensive?

They are, but we still love them?

The general consensus amongst collectors, and even industry insiders, is yes. But how does that sentiment stack up against the actual data?

Figures from the Federation of Swiss Watch Industry (FHS) illustrate a significant price jump in prices. In 2004 the average export price of a Swiss watch was 440 Swiss francs, and in 2012, the last full year figure available, the price was 730 Swiss francs. That is an increase of 66% in nine years. 

Because most of the world's luxury watches are made in Switzerland, the country's export figures are a good proxy for the business as a whole. Additionally, the FHS figures cover all Swiss watches, including the most basic like Swatch watches. Consequently they like understate the price increase at the high horology end of the market.

Compare the 66% increase to the overall price index for the cost of producing goods in Switzerland for a similar period. According to the Swiss government’s Federal Statistics Office, the price index covers “goods which are produced and sold by enterprises operating within Switzerland”, sold both domestically as well as internationally, rose by approximately 5.9% for the whole ten years from 2004 to end 2013. 

The figure of 5.9% for the last decade is similar to the ballpark figure for the annual price increase in luxury watches for the same period.

But beyond the price increase, the absolute price level of a luxury watch is high relative to wages. Consider an entry-level complication from a high end brand, like the Patek Philippe Annual Calendar, which retails for about US$40,000, or the Royal Oak Offshore in steel which costs about US$25,000.

Assuming a buyer spends 10% of his annual income on one such wristwatch, that would mean an income of at least US$250,000. Just over 2% of households in the United States, the world's second largest watch market, meet that income threshold.

Only being accessible to the top of the income pyramid is not problematic if watches were rare. But they are increasingly less rare, because output has risen over the last decade, adding to the wristwatches in existence.

FHS statistics indicate the annual output in volume of Swiss watches rose by about 16% from 2004 to 2012. Not a significant amount in itself, but the effect is cumulative. Every additional wristwatch is an addition to the numbers already in existence. High-end wristwatches have a great deal of longevity - they are supposed to be heirlooms after all - and suffer a lower attrition rate than the other great boys’ toy, exotic cars, so watches ever made are still out there on someone’s wrist or in a display case. 

The growing pool of watches in existence fuels the growth of a secondary market, which is an alternative to buying new watches. Proof of the rise of the secondary market can be found in the watch sales by auctioneers like Christie's, which enjoyed a tenfold rise in sales over the decade.

All of this does not matter, as long as the consumer still believes in the product and keeps on buying, and buying. But the momentum that has kept the industry lucrative appears to be slowing. With sharp slowdowns in some of the biggest markets, namely China and Hong Kong, Swiss watch exports for January to November 2013 (the latest month available) are up only 1.7% compared to the same period a year earlier. In comparison, exports rose 10.9% from 2011 to 2012.

That is a sharp slowdown and those figures do not cover retail sales to the end consumer. Anecdotal evidence from industry insiders indicates that inventory is rising at retail level, meaning that even though exports rose by a sliver, sales to the end consumer are weakening. It will be several months into 2014 before the full picture is clear, but the signs point towards a turning point in the decade long boom.

So what happens now? Stay tuned for part two.


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  1. Interesting read, SJX! Looking forwrad to part 2.

  2. Could there be a consumer move towards cheaper OEM's or non-Swiss watches?

  3. Obscenely high prices, numerous new brands coming to market, large supply and lowering demand, equals bubble. Seems like we faced a similar situation here in the USA in the last few years. Many greedy corporations, shareholders and, unfortunately, taxpayers paid the price for that debacle. I personally look forward to the bubble bursting on this overpriced, lower quality product that has developed in the current watch industry. They are certainly alienating those that once supported them, such as local jewelers and the average consumers that could once aim to purchase one of their products after some saving. That is no longer the case. These brands are getting everything they can while they can. They forgot how close they came to extinction during the quartz craze, decades ago. They were lucky to come out of that period with any possibility of a renaissance in their future. Now the market is flooded with cheap "me too" brands that are junk as well as blue chip brands that are also overpriced (Yes you Patek, AP, Jaegar, Vacheron and Rolex). I understand that the luxury goods market marches to its own drummer, but the greed and ostentation of it all will ultimately consume the golden goose.

  4. Great analysis. While I don't expect watch prices to come down, I'm hoping watch companies do not implement another one of their price increases for the foreseeable future.

  5. At a watch show this year, a Piaget watchmaker told me that it takes 4 weeks to fully make a tourbillon movement... So I really do think theyre having a laugh when they price these things at $100,000. It's just really difficult to find where such prices are justified. Looking forward to part 2 :)

  6. Very true what you wrote JX. Nice article.
    I think the prices have gone way to far north that it has become unrealistic. I think the brands are now caught in a conundrum - do I drop prices and make the early adopters frustrated or do I keep bringing prices northwards? There is no longer price sanity for such watches when a simple three handed ETA encased movement is sold for US$4,000 and above. What we are all paying for is brand equity, not value.
    But a lot also has got to do with selfish buyers who try to prop up prices telling people how good certain watches are etc. especially in the secondary or grey market. Take for instance those AP ROOs and Panerais LEs... secondary speculation causes prices to go sky high.
    I hope the prices will moderate and in the longer term, come down to more sane levels. Secondary markets are getting so saturated that I think the prices will drop and so will the new watches.
    Looking forward to part 2.

    1. "What we are all paying for is brand equity, not value." I can't agree more. Watches are meant to be a hobby but when a watch can fund a big house or you kid's full college tuitions then it's no longer a fun hobby but a dangerous threat we should avoid haha Sure there are alwaya buyers who don't think twice when purchasing a new RM tourbilon, but MOST buyers aren't like that.

  7. I think it's just supply and demand. Raise the prices to the point that the demand is brought closer to the supply capacity. Then your production house won't be overworked, no unhappy customers complaining about lack of stock, increased profits without the extra work, don't need to increase the production capacity only to get caught with the excess when the market turns and so on. The price point to stop increasing is when the growth is brought down to a sustainable level. I remember just a few years back, most of the Patek boutiques didn't have physical stock of the full range of models. Now at least when you go a Patek boutique, they have the full spread of Calatravas and even some of the Nautilus model.

    But I think the prices have gone up way too fast, and now with China and Asia slowing down, it would be interesting to see what happens. In Singapore, I think the increased COE has affected sales somewhat, seeing less luxury watch on wrists when I go out, or maybe my eyesight is getting worse.

    Anyway, thanks for writing this and all your articles. Looking forward to part 2 too.

  8. Or you can be a Japanese watch enthusiast and see the price of watches decrease 25% the last 18 months based on the weakening yen. Time to look East fellows....

  9. I think the average person isn't going to spend 10% of their income on a watch. Those $25,000 watches aren't being bought by people who make $250,000 per year, they're being bought by people who make $2.5 million. And with the dramatic rise in CEO compensation packages in the USA, the number of people making that kind of money is increasing, even while the average wage isn't increasing. So, the price of watches isn't going up commensurate with overall average income. It is going up commensurate with average rich-person income. It will stop when the shareholders of the large corporations come to their senses.

  10. Three words: China, China, China. That's why your luxury watches went up in price like crazy in the last decade.

  11. If the photo shows someone's collection, then respect :)