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How Digital Technology Can Revolutionize The Traditional Watch Retail Market

How Digital Technology Can Revolutionize The Traditional Watch Retail Market Featured Articles

This article is contributed by Mr. Thomas Baillod, a watch industry consultant and marketing expert in Switzerland. More about Mr. Baillod after the article:

After decades of trying to increase their penetration in the markets, watch brands now seem to be backing off and starting to cut their networks of authorized retailers significantly, while predicting an improvement in their operating margin. In other words, the watch industry has finally started to realize that exclusivity is important in luxury watches and they absolutely must hold back from producing too much product. To keep balance sheets healthy (or at least to attempt it), the remaining players in the watch industry (brands, distributors, retailers…) are fighting for who gets to take home sales margin profits.

No intermediaries, only direct to consumer sales! Audemars Piguet’s announcement in the second half of 2018 was at least very clear. The strategy of François-Henry Bennahmias, CEO of the brand, was unveiled in the context of the announcement of his withdrawal from the SIHH. It highlighted a major trend for watch brands: to integrate their distribution network more and more.

Another example: in an interview with the NZZ (Neue Zürcher Zeitung) March 23, 2019, Jean-Christophe Babin, CEO of Bulgari, announced that he wanted to reduce his points-of-sale from 600 to 300. The remaining 300 stores now represent 85% of sales, and the man at the head of this Roman brand, who joined the LVMH group in 2011, is confident: By refocusing sales on half of its partners, he will allow them to better promote the brand, which should enable Bulgari to recover the 15% of lost business. Most of the major brands are currently doing this calculation and no longer hesitate to state it clearly and openly. But what they don’t necessarily confess is that, in most cases, they have a joker in their pocket.

If you are a consumer, then this article should help explain a bit of what is to come in the wristwatch sales space and should also help explain some of the current activity many watch buyers are probably experiencing.

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Margin Recovery

Let’s take a look at lifestyle brands to gain understanding. With no complexes and a past as short as their life expectancy, these brands take risks and try new experiments. During Baselworld 2018, the entire Daniel Wellington brand staff left the exhibition on Sunday morning, leaving only the bartender and DJ. From a fair already shortened to six days, the sales teams spent just three days in the booth, from Thursday to Saturday. What did they do during those three days? They drilled their network resellers and cut off all those who wouldn’t follow (or whom the brand didn’t want anymore).

It is impossible to obtain official figures for this disengagement campaign, but one hypothesis is enough to reveal the very nature of the wildcard: Let us suppose that, during these three days, the Swedish Filip Tysander, founder and owner of this brand, closed 20% of his network and that this led to a 20% decrease in his sales. Being very active in online sales through its official portal, the Swedish brand was reasonably able to expect, through this direct channel, to recover part of its sales.

Let’s be pessimistic by estimating that it’s only half, meaning 10%. This allows the brand to generate a 50% increase in his profit! How? By eliminating intermediaries — distributors and retailers — the brand can recover around 70% of the public price value of its watches and, thanks to this direct sales inflow, boost its profit by up to 400%. The calculation is quickly done, the profit being equal to the margin multiplied by the quantity. A loss of 20% of the volume is compensated by 50% of the additional margin, which leaves a profit of  30%. This probably allowed the bartender to feast on cocktails on the stand until Tuesday at the end of Baselworld.

How Digital Technology Can Revolutionize The Traditional Watch Retail Market Featured Articles

Digital Breaking Wave, The Targeted End-Customer

This new direct-to-consumer sales trend is currently shaking up the boards of directors of most brands and resonates like the new El Dorado of watchmaking, at a time when sales are down for many of them. In fact, the rush to the margins of the market has become possible because of the combination of two phenomena — the first, which served as a trigger, is conjectural; the second, irreversible, is structural.

In 2009, the economic air gap in the world economy was a wake-up call for the Swiss watch industry. Most of the brands were able to successfully absorb it, and six years of record sales followed. But the crisis that began in 2015 had a much deeper impact, as it officially persisted until the end of 2018. (Officially only, because unofficially not all brands have emerged unscathed.) The global economic downturn, the advent of connected wristbands (a term I prefer to “smartwatches”), and a change in consumer purchasing behavior are the main factors that may explain the reasons for this recession in watch sales — especially since, during these four years between 2015 and 2018, the digital groundswell, the same one that previously transformed marketing in a fundamental way, spread to distribution and changed the very foundations of traditional commerce.

How Digital Technology Can Revolutionize The Traditional Watch Retail Market Featured Articles

Three Fundamentals Upset By The Internet

How can digital technology revolutionize this traditional model? The digital space modifies three fundamental parameters: notions of time, space, and information. It eliminates the first two and makes the third plentiful and free, whereas information was previously scarce and expensive. However, if we analyze a consumer’s purchasing act, we find precisely these three parameters, since the customer goes to a store (space) at a given moment (time) to receive information on a product (service). The first and the last parameters are the most expensive; they are the ones that generate the most margin, together with the stock.

By combining digital with online stock availability, brands can eliminate the main cost factors, while providing customers with choices across their entire collection that the retailer will never be able to compete with. And, most importantly, direct sales provide brands with the key information they have sorely missed: sell-out knowledge. This information enables the brand to know its sales in real time in the markets and thus to optimize its commercial operations, its marketing campaigns, and its production: the Holy Grail.

How Digital Technology Can Revolutionize The Traditional Watch Retail Market Featured Articles

Who’ll Move First?

If this concept offers so many advantages, why didn’t the brands adopt it sooner? First, because there was, until very recently, no alternative to selling in a physical space. Several luxury brands tried to open their own stores in the 2000s, but they quickly realized that they were leaving their core businesses and that retail required a particular know-how. This changed with the advent of the Internet. Internet users gradually became consumers. And even if online sales have taken time to democratize, the average shopping basket has never stopped gradually increasing.

When Internet users were finally ready to acquire watches online, the brake came first from the brands. Selling is a matter of territory, and they did not particularly appreciate the fact that retailers were encroaching on the territory of other colleagues in the surrounding area. It’s even worse when you go up to the level of distributors, who by contract are prohibited from exporting to another country. Yet, ironically, it is often the brands that have indirectly led intermediaries to defy online sales bans. They simply pushed them to do so when they systematically provided them with stocks that were clearly above their sales capacity.

It is difficult in this context for watch brands to apply to themselves what they refused to their partners and sell officially online, especially since the first brand to step out of line would have been immediately sanctioned by the reseller network. It was taking a tremendous risk. But with the crisis that began in 2015, the watchmaking industry as a whole has experienced a kind of generalized savings. There has been a pause in resistance at all levels. The competition for the end-consumer could begin, and the margin battle was launched.

How Digital Technology Can Revolutionize The Traditional Watch Retail Market Featured Articles

And What About The Customer Experience?

What about service, in-store customer experience, and physical contact with the watch? As shown in the graph, a brand that sells directly could decide to allocate half the price of a watch to the customer experience. By extrapolating this margin to a luxury watch sold for CHF 40,000, a direct sale would allow the brand to spend CHF 20,000 to provide its customer with an unforgettable experience. Which retailer is able to compete with such an investment?

In this context, what will happen to multi-brand retailers? Jean-Claude Biver said, in Spring 2018, “Specialize or lose to watchmakers selling direct.” The games are over, and the race for specialization will force many retailers to convert. But they certainly haven’t said their last word. Digital will perhaps be their best partner when technology allows the connection of the retail network, the traceability of the service, and increased sales in stores.

Watch Distribution In The Secular Business Model

The centuries-old business model associated with watch distribution is based on a network of intermediaries who successively own and transport the stock of watches to the end-consumer. Offering potential customers a permanent stock of watches that patiently awaits their visit to a store is a very expensive business model, and therefore very greedy on the margins. The retailer, the last link in the distribution chain, bears the three main costs: the rental costs of the store (the location), the salaries of the employees (the service), and the watches owned (the stock). This largely justifies the high margins they have to charge. In addition to being expensive, this approach also induces a fundamental bias: The business model of watch brands consists, above all, in selling watches to intermediaries (the so-called sell-in) and leaves it to intermediaries to sell them to end-consumers (the sell-out). Traditional watch retail is, therefore, an industry that sells and thinks “wholesale” and delegates the link with the end-customer.

How Digital Technology Can Revolutionize The Traditional Watch Retail Market Featured Articles

How Margins Are Subdivided & Distribution Keys

This theoretical example is based on the sale to international distributors of a basic Swiss-made watch, a three-hand automatic model. The production cost for such a model is around CHF 175. Since the brand takes a reasonable margin of 50%, it adds CHF 175 to it, which can be calculated by its gross profit (CHF 140.–) and marketing budget (CHF 35.–) equivalent to 10% of the resale price to intermediaries. (Note that, in general, the distributors will replicate the CHF 35.– in marketing expenses, bringing the marketing budget to a total of CHF 70.–.) The CHF 350 obtained is called ex-factory value and represents the brand’s turnover. The intermediaries in our example represent 65% of the final price, or CHF 650. This brings the watch to an in-store selling price (excluding tax) of CHF 1,000.00. In the event that this brand decides to sell directly, it can theoretically multiply its profit by 5 (+ 400% increase), while increasing its marketing budget by 14% (from CHF 70.00 to 80.00). If, on the other hand, its priority is to maximize the customer experience, it can dedicate half of the watch’s price to marketing, while doubling its sales.

Intermediaries, The Counterattack Is On The Move!

Pioneers of online watch sales, intermediaries — retailers in the lead — now find themselves trapped in the Pandora’s box they have opened. The well-established watch brands that first fought this trend are now rushing into the loop. They are directly addressed to end-customers. Retailers have not yet had their last word. The digital revolution also brings them new solutions.

Two hopeful trends:

> Augmented reality: The user experience is the key to a successful sale and, thanks to his or her mobile phone, the customer can have an enhanced experience in-store with displays that come to life, watches that tell you a story and that you can try on virtually.

Commissioned service: More and more retailers are providing a service to customers for which they are not paid, as they come in to try the watch in-store, only to buy it online later. New systems are being implemented such as Meotion, in order to be able to qualify the interaction with the customer in-store and earn a commission even if they later buy it online.

A version of this article originally apeared in June 2019 in the French publication JSH Magazine.

Thomas Baillod — Member of the JIMH board of the Journées Internationales du Marketing Horloger, market expert Thomas Baillod founded the Watch-Trade Academy, an organization entirely dedicated to teaching watch sales. Offering online courses, conferences, and consulting, Baillod is in tune with the digital advances that may help the retail network,  for which he is building a global database.

 

 

 

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  • H.S.M.

    Welcome to 2019. I am glad You guys made it in time.

  • Jared

    I think Boutiques is really the only way to go for the future for watch brands(with online sales as a backup option for markets where you don’t have any boutiques).

    Think about it, you build a ~$10,000 watch and then give it to an AD to sell. What happens then?

    In most cases, unless you have a hot watch(which you don’t need help selling), your watch just ends up sitting in a case with 100 other watches(unless you are big enough to demand preferred placements like Rolex where you get your own section of the store). The AD does very little to actually promote it(oh they’ll put it in their magazine, but they have no real incentive to push your brand). So chances are that if a person buys this watch, they buy it because they were already planning to buy it in the first place, they just went to the AD to try it on.

    But here is the issue, if they go in to try that watch on at the AD, your watch is sitting next to 100 other watches:

    1. the buyer might see something else that they like more(not too uncommon considering your watch is likely sitting next to some watches that cost 10x what yours does, and puts yours to shame)
    2. the AD might push another brand that gives them a better margin
    3. the AD is also usually completely clueless about the watch since they can’t be expected to know 1000 watches…so they won’t really sell your watch on the real advantages.
    4. the AD experience is not consistent, with a lot of time the ADs are hurting the brands
    5. and for all this the AD essentially ends up doubling the price of your product for lets be honest, not that much work

    With a boutique on the other hand?

    1. with how much profit they were giving up to ADs, they can afford to run a boutique in most cities as long as that boutique sells 5 watches a month. Even crazy expensive real estate markets like New York or London, the cost to run a small boutique is what $50,000/mo? So lets say 10 watches a month would cover the rent
    2. that boutique gets you free advertising and raises the value of your brand, as well as give you a local point of contact/service with your customer
    3. your watches are sitting next to your other watches. If someone doesn’t like watch X, you can then try and sell them into buying another one of your watches. You keep the buyer in the ecosystem, instead of losing them to another brand
    4. you can keep much better inventory at your boutique. So while an AD might have a couple of your watches, at a boutique you can have your entire line up available, in all possible sizes, where you can find the right watch in your line up for any customer.
    5. you can afford to give a better buyer experience, with your staff actually knowing the product.
    6. you can do more events and establish yourself within the local community of watch collectors
    7. you can stay firm on your price if you want AND have a lot more flexibility with your prices if you don’t.
    8. you eliminate the gray market completely, if someone wants to buy your watch, they have to pay the full price
    9. you have a better feel for the pulse of the market since you know the actual foot traffic.
    10. You have direct customer lists. Which means when you release a watch, you can reach out through your boutique network to past customers to push the new watch on them

    As far as retailers are concerned, they should smell the roses and drop their margins. Way less manufacturers will want to risk going their own way with boutiques if they only have to give a 20% wholesale discount to the ADs instead of 50% like it is now. Because if you don’t, all these brands will switch to the boutique model sooner rather than later. Its pretty hard not to, when their CEOs are thinking “I can DOUBLE our profits if we cut all these parasites loose”.

    • seoulseeker

      I agree that boutique only is the way to go. It allows much stronger control over the grey market, since most grey market pieces get there through ADs.

      This means stronger pricing controls, better resale value, better brand perception. And the experience for the customer is always 100% under the brands control.

  • BNABOD

    I am still puzzled about brands selling online yet the price is exactly the same as in store minus possibly tax and that is changing quickly ….so why bother w online buying if you can’t negotiate a discount unless you go grey which is an entire discussion all together. Seems to me the brands are stuck . Sell online at a discount and piss off your network or sell at the same price online or in store and you lose customers because what’s the point….boutiques in this case is really your only option if you have zero desire to discount anything ….
    maybe an online sale w the ability to make an offer or connect w a x brand rep that will then negotiate the price is the way to go while keeping boutiques only because unless you are Rolex or PP (for some models) or AP (for some models) your prices are way too high…

    • Rob Crenshaw

      This is not entirely true. Ball started the direct online sales er, ball rolling maybe 5 years ago. I bought one because it was considerably cheaper than the Ball watches at the local dealer, about $900 versus $3000. They continued with this strategy up until now, and yes the prices have increased, but still not to the in-store prices. The local dealer has long since dropped Ball, they could see the writing on the wall that there was no point in trying to sell similar watches for 2-3x the online price directly from Ball.

      So your point is valid *unless* the brands drop prices, and the end goal is to eliminate dealers.

      • SuperStrapper

        Ball is the exception, not the rule. But the update they made to thier model is really great and I wish more brands followed suit.

  • Berndt Norten

    Who would accept having to wait one to three months for their $25,000 automobile to be serviced? And yet the Swiss watch companies get away with this sort of treatment of their customers. Expect higher margins, not lower prices, if the middlemen are eliminated

    • Sheez Gagoo

      It’s even worse. Some major brand wanted 450.-for a broken clasp. That’s why I bought a Seiko for almost the same money.

  • Mark B

    You are correct. And the article, while well written, completely ignores the issue of retail sales discount practices. Which most retail buyers have come to expect.

    • Mark Lewis-Jones

      Even with retailer discounts, they still cannot compete with the B2C model. For brands which are not being showcased in retail stores (and how can they with more than 600 Swiss brands in the market) the manufacturer does not have to sell at a retail price that would be necessary for a retailer. They can sell at a reduced retail price tot he consumer, and still enjoy vastly more healthy margins. This is not an immediate harbinger of the death of retail, but we will continue to witness an evolution in the watch distribution model as the tendency continues toward greater profits for the manufacturer, and the tendency to more online sales (which will leverage ER and VR to reinforce their interactive customer experience capabilities). This is the way of the future. We will continue to see disruption in the industry. So rather than complain that the world is changing, retailers must also become as innovative as possible, and working with their portfolio of brands, also effectively leverage the digital tools available to extend their reach and build their communities, in an effort to continue growing their businesses.

  • ray h.

    It appears that they only want to sell to the fewest number of people they can get away with ? Like an old man who really wants to retire but can’t shake all his clients. The whole industry feels like slow motion attrition.

  • Garrett Hu

    Discounting is frowned upon by luxury brands but yet so many of us have come to expect discounts from our authorized dealers. Boutiques can try to counter that by offering the first service free that you will need 5 years from now, maybe a free strap, a watch winder among other brand giveaways but when you buy a $10,000 watch, you can potentially get 20-30 percent or more off. That’s $3,000 in savings…I don’t think the boutiques can give you enough stuff or booze to make up for that. So why not embrace the fact that customers not only get to wear something semi exclusive but also the feeling and experience of getting a great deal! Offer them a loyalty discount, start with a 10%, then repeat customers get 15%, the. 20% maybe up to 30% after the 3rd or 4th purchase. Create a club with real value at different tiers offering exclusive events and discounts for accessories and service. The issue now is the boutiques are like the DMV, no one has a relationship with the Boutique, there is no loyalty because frankly there is no special treatment, nothing unique. Getting a discount is not just because people want a deal but it also makes them feel special, “ the AD took good care of me” feeling that I got a great deal and it’s a beautiful watch puts a bigger smile on my face and in return I’ll come back again and again.

    The boutiques I have been into offer good service, maybe a beer on the house but it offers no logical reason to buy at a boutiques, actually it makes it okay to use them to try on watches then buy them elsewhere because it’s a brand boutique and I’m still buying one of the brands watches so the company still gets the revenue somewhere down the line.

    By the way, if you have been in a watch brand boutique lately, anyone one of them…it’s completely dead. I don’t see people buying anything, in fact I don’t even see people looking.

    • Raymond Wilkie

      Everything Garrett said.

    • Mikita

      “I don’t see people buying anything, in fact I don’t even see people looking.”

      Exactly.

  • Independent_George

    This reads like a re-write of the PowerPoint part of a marketing-consultant’s sales presentation. I have a sudden urge to stop by the conference room for day-old croissants and lukewarm coffee.

    • FS1900

      I liked the part with all the insights.

  • Emeric Delalandre

    Here is an idea.
    Brands now need showrooms, not ADs anymore. It’s way more interesting for them to directly sell to the final customers (better margin, data collection, mastering of the prices, service, warranty, etc).
    Customers now need places to try the watches before placing an order (in store or online), if and only if brands assume their role and deliver quickly (it’s impressive, your pizza comes in 15 minutes while your watch arrives 3 months later…). Most already know which models they are about to purchase before entering a store, they just go there to make sure or because it’s the only place they can have them.
    So… let’s transform the AD into showrooms, let’s transform the way they make money (shift from an intermediary that buys and resells with a margin the watches to a place that exposes demo products and earns a margin when the customer finally decides to purchase a product thanks to him to the brand)… let’s bring the first-hand automotive distribution business model to watchmaking. Meotion.

    • SuperStrapper

      It’s called showrooming, and it’ll happen quicker than you might think.

    • Jared

      the problem is that ADs won’t want to give up those margins…so they’ll still expect the same profit margin on the watches they sell

      because right now those margins are MASSIVE. there is a reason you have ADs like David Lee who has a dozen of the rarest Ferraris just from slinging watches. That guy has something like 60 million dollars worth of cars all from being an AD.

      its basically similar to real estate…it takes the same amount of effort to sell a $1,000,000 house as it does to sell a $5,000,000 house. Yet they get 5x higher commissions for doing the same exact work. Same with watches, you don’t have to do 10x more work to sell a $20,000 watch as you need to sell a $2,000 watch.

      there is a reason you have at least 50 stores selling watches in every city. Because its an easy business to be in. Just hold inventory, get a few fans, then every time they are ready to drop $10K on a new toy, show them what you have and let them pick one. Boom, you made a sale.

      And how do you think manufacturers feel? They work like dogs, spending hundreds of hours to craft each watch…and then send it to the AD, who makes one call “Hey Pete, I got this new Patek in…you want it?…awesome!” and get to make the same amount of money as the manufacturer on the sale? And whats worse, they also end up making more profit on that watch than the manufacturer, because unlike the AD who just sells the watch, the manufacturer has to drop money on advertising, repair service, hosting events, paying ambassadors etc etc etc.

    • Mark Lewis-Jones

      With the additional margin to invest in customer experience (as the author pointed out), and also strengthen their digital platform, the short answer is to invest in regional watch industry events (for example, Watches and Wonders Miami), and temporal pop-up shops; a traveling road show of sorts, in targeted cities.

  • spice

    Why do people return to the same place to purchase, wherever and whatever that may be? Good service for a quality product that has reliable support, all at a fair price.

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