Sunday, 19 January 2014

EDITORIAL: Are watches too expensive? (Part 2)

In the last decade, the retail prices of luxury watches has risen faster than inflation and incomes, they are getting more expensive quicker than most can afford. That is untenable in the long run. Already for 2013 watch exports from Switzerland are flat, a stark contrast with the rapid growth of previous years. Even though the outlook for the whole watch industry is uncertain – no brand will be immune from this – the outcome is likely to be positive for the watch buyer.

Several developments have given rise to the current situation, including consumer fatigue, especially in more developed markets that are saturated with watches, retailers and boutiques. And demand has fallen sharply in China, the largest market for luxury watches, after a crackdown on corruption. 

Watch production has increased apace for the last decade, with every additional year of production having a cumulative effect. Watches, arguably more than other luxury goods like bags or cars, have far greater longevity.

So what happens next?

One consequence is a reduction in retail prices, though this is as rare as pigs flying across a blue moon. In 2013 a handful of brands lowered retail prices, either in specific markets or globally. Audemars Piguet wisely reduced the retail prices of its precious metal watches, namely gold and platinum, by about a quarter globally. Lower metal commodity prices were given as the reason for the adjustment.

Patek Philippe unveiled new versions of existing models, but at lower prices in certain markets, including Singapore, one of the key markets in Asia. Whereas the grey or blue dial ref. 5960P chronograph with annual calendar is 134,500 Singapore dollars, the new version with a black dial is 113,400 Singapore dollars, about 16% less.

One reason given for these price adjustments is to introduce parity in watch prices. Because of the Swiss franc’s appreciation and subsequent depreciation in 2011, watch prices in Asia were significantly higher than in Europe. But more affordable prices certainly do not hurt in a slowing market.

But price reductions are the exception rather than the rule. Watch prices tend to be extremely sticky. Most brands will not reduce prices, even during a downturn. They would rather suffer a drop in sales than compromise the integrity of the brand. High prices, after all, are one of the key elements of a luxury good.

This is especially so for the high-end brands in the big luxury groups like Richemont and the Swatch Group, because brand equity is paramount, and also because they can afford to wait it out. It is no surprise that both Audemars Piguet and Patek Philippe are independent and family-owned, which gives them the flexibility and impetus to adjust pricing.

So instead of lowering prices, what most brands will do, is to provide better value for money. Products in the pipeline will be launched at less ambitious prices, like the new IWC Aquatimer in bronze which will retail for about US$12,000. While by no means a bargain, that sum is significantly less than was suggested when the watch was first pitched last year. 

Brands will also apply their creative talents to developing new watches that offer more bang for the proverbial buck. A common tactic will be to unveil models equipped with in-house movements priced close to the equivalents with ETA movements. The Cartier Tank MC, for instance, retails for about the same as the ETA-powered Santos 100.

Some brands will go further and reverse their strategy of moving up the price ladder. When times were good, the ambition of most CEOs was to increase the average selling price, thus boosting both the top line and profit. But with business slack, some brands will seek to return to the sweet spot they vacated not too long ago. To see what this entails, look no further than Zenith. Its products went from outrageously expensive to reasonable when Jean-Frederic Dufour took over.

But the consequences of a slowing market extend beyond the brands. All along the supply chain inventories will increase. Excess inventory often leaks out onto the grey market, which has a gradual and stealthy effect of downwards pressure on prices at retail and on the secondary market.

Whatever happens, the big brands and groups will survive, perhaps leaner and hopefully wiser. They are protected by strong balance sheets built up during the fat years, like Richemont which is sitting on net cash of over €3 billion. But smaller, independent brands will find the going tough and some will not make it. Some of the departed brands will be missed by collectors, and horology will be poorer for it. But fear not for the next boom will unleash another wave of new brands, and the cycle will begin anew.

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  1. Whenever the conversation of price comes up, I'm included to link to this TZ post from 2001 on entry level in-house movements:

    It was not long ago that USD1500-2500 would buy a solid, classic, in-house dress(y) watch or a very good ETA-based sport watch on a bracelet (think Speedmaster Professional). I would say that most middle-class men certainly could have afforded to save up for that one "good watch" at that price. Today, with some exceptions, the same price bracket (MSRP) frequently gets you a case made in Asia and "assembled" in Switzerland with an ETA 28XX.

    In 2001, the JLC Master Grande Taille listed for USD 2,300. Let's say the current equivalent is the Master Control, which now lists for USD 7,200 (per Jaeger's U.S. website). That's a more than 300% price increase in just over a decade! Alright, so we can assume the case of the current Master Control is bigger (more materials) and materials costs are up, labor costs have increased a bit, and there has been some inflation, so perhaps there is some justification for a bit of a price increase. However, I bet Jaeger's facilities are now more automated than they were in 2001, CHF is up against the USD over that time period, and they are probably doing better volume today than they were in 2001, given the explosive growth in emerging markets (especially China) since that era. So while some price increase might be justified, 300% is kind of insane.

    There are a lot of beautiful watches on the market right now, plus a near constant stream of new models. There are also a lot of newcomers to the watch world who are looking more for fashion or status statements, and they are also driving up costs, especially by feeding the trend for Hublot, Panerai, and AP ROOs. I'll actually also put vintage Rolex in there--perhaps the greatest bubble in the watch world. However, there are only so many buyers and collectors out there (remember that many people are only buying "one good watch" rather than collecting) so I do agree that there must be a supply glut. These days you can buy almost anything you want on the secondary market, so at a certain point you have to wonder "why buy new?" I don't think I'm alone in the collector community in basically eschewing brand new watches and generally sticking to the secondary market or looking at brands that offer a lot of "bang for the buck" (Nomos, Zenith, Sinn, Grand Seiko).

  2. Coincidence, I suppose, that I was recently involved in a discussion of pricing with a retailer friend.

    I just completed purchase of a JLC Master HomeTime - pink gold on leather strap (which is what gave rise to the discussion). The watch, as I first ordered it, was on a leather strap with a deployant buckle. That is the way the watch is shown on the JLC website, it is the configuration the reference number is keyed to, and it is the way my retailer friend carries the model on his catalogue.

    No matter where my friend tried to source the watch with that reference, it was coming up unavailable. The model is fairly popular and should not have been difficult to find. My friend finally contacted his JLC representative, who happened to be attending SIHH at the time. The rep went to the production people at JLC, and quelle surprise! JLC now ships that model only with a tang buckle, which carries a different reference number. There was, of course, an adequate supply of the model with the updated strap/buckle combination. I received the watch a week later.

    The interesting part of all that is that the substitution of the strap/tang buckle for the strap/deployant reduced the price of the watch by US$1,500, from $21,900 to $20,400. A notable saving. JLC apparently are making this sort of adjustment on several of their precious metal models. The change was of no consequence to me, it was the watch I was interested in - not the buckle style.

    I suggest that these sorts of adjustments are going to become more frequent among the high end manufactures. They will be compelled to do these sorts of adjustments to regulate the accumulation of inventory and to support their price model. They have already made one significant adjustment to the flow of inventory - by closing many long time retailer connections in favor of boutique sales. Moving to a boutique sales model with fewer independent retailers gives the manufactures greater control of the ultimate sale price of the watches and puts the accumulated stock under their (forgive me) watchful eye. So long as they are maintaining a satisfactory rate of product movement they are not compelled to make dramatic changes in production schedules which might result in the need for adjusting staff head count.

    Minor alterations to the peripheral aspects of the product (the presentation case, the strap/buckle, perhaps the dial design or materials) can also be used (as JLC did with the HomeTime) to make a significant adjustment to the price of the watch without de-contenting the meaningful part of the product - the movement and case. There are a lot of technical competitive changes in the mechanical content of products that are demanding continued investment in R&D and new production processes. These peripheral changes are the response to a challenge - how to keep costs from escalating still further when the market is not responding with increased purchasing power.

    Very interesting discussion - please keep up the great work.

    Hamilton Bermuda

    1. Hi JM,

      Thanks for the thoughtful reply.

      You are spot on - such minor adjustments will allow for, and can be reasons for, reductions in the price. There will also be (and some brands are already doing this) less obvious routes to save money. Take for instance the logo printed on the watch dial. Using an identical logo (in size, type etc) for every dial, regardless of size, means only one printing plate is needed. But that removes some aesthetic appeal, but it's barely noticeable for most potential buyers.

      - SJX