“Swiss watch brand Frederique Constant is hoping to limit the fall in sales to 25% this year,” its chief executive told Reuters. “That’s what we’re aiming for.” Niels Eggerding said in an interview in Zurich this week. The Citizen subsidiary’s “cut some jobs” and “many employees are still working shorter hours under a Swiss state-backed programme to avoid layoffs.” Well there’s something the mainstream watch press isn’t reporting. The beginning of the end for the traditional watch industry? . . .
Nine months into Coronageddon and we still don’t know how things are going to play out. The pandemic’s effects continue to shift. Two months ago, the Europeans were happy to lecture us on how their superior system managed the pandemic. Today, Paris is going back into lockdown. The uncertainty makes it very hard for companies to plan for their future and makes predictions almost worthless.
It doesn’t stop people from trying. Which brings me to a triplet of articles that were published over the last two weeks: Bloomberg, The Financial Times, and WatchPro. The gist of these articles: the outcome of Coronageddon might actually be good for the watch industry as a whole. Read closer and it becomes apparent that “good for the watch industry” really means “good for certain brands.”
A Flight to Quality
The winners are – alas, alack – the ones who always win: Rolex, Patek Philippe, Audemars Piguet, OMEGA. The stated reasons (as always): tradition, design, technology, heritage.
This behavior represents what’s known as a flight to quality. Coronageddon has made buyers more conservative. Instead of splashing out on a whim, buying something that catches the eye, the wealthy have retreated into known commodities: watches and brands with which they are comfortable.
This conservatism is both an indication of and accelerant for a declining industry.
We all know that the traditional watch market is in the midst of a secular decline. There’s little reason to expect that smart watches are going to give up the inroads they’ve made, that smartwatch buyers will return or migrate to traditional watches. The market is shrinking. Nothing on the horizon is going to reverse that.
That’s bad for a lot of manufacturers. Coronageddon is making it worse.
Declining markets tend to be very similar. Here’s what happens.
Consolidation – We’ve talked about this before. As weaker companies start to falter, they get picked off. Larger manufacturers scoop up the IP distribution, or customer lists and fold them into their own brands.
Increased focus on profitability – In shrinking markets, the benefits of expanding your reach are smaller (you get a bigger share of a smaller market) and harder (since competition has increased for the remaining customers). The classic strategic response to a declining market is to maximize profit the whole way down – essentially milk the market as much as you can, before shutting down or consolidating.
Concentration on core customers – By definition, declining markets, unless they’re very special, have very few new cohorts of customers coming in, so it makes rational sense to focus on your current customers. Going out and finding new ones is very expensive, which doesn’t make sense when you’re focusing on profitability. Which means, a) giving existing customers what they want and b) figuring out how to maximize revenue from each one.
Short-term and zero-sum thinking – Companies increasingly view each other as direct competitors since there are more of them chasing each dollar of the market. Decisions get made thinking about game theory and hitting the next quarter rather than long-term investment.
Put together, companies in declining industries become profoundly conservative. What does this mean applied to the high-end of the traditional watch industry?
Infinite varieties on existing designs. Watchmakers tweaking bestsellers instead of investing in new designs. Marketing focus on “heritage” or “history,” since there’s no future to speak of. Loud complaining about expensive marketing events.
Above all, the trend reinforces a relentless focus on ensuring that the “best” customers are taken care of, to the exclusion of everyone else. Sound familiar?
Many consumer industries have gone through this process, especially ones that cater to collectors or, ahem, enthusiasts. Model trains. Sports memorabilia. Cameras. AAA video games.
It’s a cycle: the industry notices the market shrinking and decides to focus on its best customers. Prices rise and companies focus more on collectors and rich enthusiasts because they have money and are much easier to identify and sell to than newcomers .
Products become more esoteric and less applicable to a general audience. New consumers are turned off, either because they can’t afford the cost of entry, the industry has become too inward looking or they simply can’t get allocation.
Eventually these newcomers decide to spend their money somewhere else, the original customers age out and the industry collapses in on itself.
The traditional watch industry is in deep denial. Even as they prepare to celebrate their annual awards show, they reassure themselves that as long as high-end brands are selling out, everything will work out. Maybe some of the small players won’t survive, but that only matters at the margins. There will always be new customers!
The best way to reality check: look at the product from the strongest manufacturers.
Rolex’s last all-new model was in 2012. The last all-new Patek collection was the . . . what? Twenty~4 from 1999? (Sidenote, yeesh, what a late-90s name.)
I’ll give Audemars credit for launching the CODE 11.59 – although they got so badly burned they fired those responsible and promised the board they’ll never ever do it again. And joined everyone else selling reissues and “inspiration” from their past catalogues.
And yet longstanding traditional watch industry consumers are OK with this. They shrug when brands try to do something truly different and go back to searching for Subs, courting Calatravas, and debasing ourselves to ADs for an allocation. Meanwhile, an entire galaxy of beautifully made and interesting watches are ignored and available at a discount.
The problem here is that this state of affairs goes on until it doesn’t. So what is an enlightened consumer to do? Take advantage of it.
Interestingly, declining markets are exactly the ones where contrarians can do well. Let all the people who get their opinions from HoDinkee debase themselves and go bargain hunting. There’s a galaxy of wonderful off-the-beaten path brands and models that can be had for a substantial discount (and even some of the big boys’ less-loved pieces).
So, enjoy being different! Embrace it. And if you want to go full hipster, Robert can talk to you about pocket watches, an industry whose predicted collapse was ridiculed. Right until it wasn’t.