Articles and News

Los Angeles, CA--Ariel Adams, Editor of aBlogtoWatch recently penned an essay on the current status of the watch industry and we quickly asked for permission to repost it for the readers of The Centurion.  If watches are part of your business or you would like them to be, read this highly insightful piece in its entirety fron one of today's true watch market experts.

Below is Ariel's essay. If you would like to join his private mailing list, email him at ariel@ablogtowatch.com. Also feel free to visit aBlogtoWatch.com.

Assessing Today's Watch Market--an Essay from aBlogtoWatch

Fellow watch industry professionals,

Today, it seems to be the norm that relatively small watchmaking companies in Switzerland and France act like major multinational firms with arms in many countries and direct control of many markets. This is a modern phenomenon, and major cracks are starting to form in many luxury brands’ ambitions to capture more margin and market share through direct control of foreign markets.

In the 1990s, things were very different, especially in the United States. While much of my direct experience and education relates to the U.S. market, my theory is that much of what I am about to say applies equally to many other traditionally strong watch market countries around the world. In the 1990s, America was very strong economically, inflation was low, and luxury consumerism had spread to vast swathes of the middle-class market. Powered by the incredible ability for strong department stores to market locally and promote aspirational lifestyles, luxury watch sales boomed for those brands lucky enough to be in front of consumer eyes.

At the same time, the strong United States market was mostly unknown to many important names in traditional watchmaking, given that these companies had virtually no presence in the market. To get watches into the United States in the first place, most experiences first required a local distribution partner, someone willing to invest in large inventories of watches, import them into the United States, and then actively build a market to put them in front of customers and sell them.

An important factor that allowed this to happen in the U.S. was the then strength of the dollar against the Swiss Franc. In much of the 1990s, one U.S. dollar could get you around 1.5 Swiss Francs. Soon after the turn of the century, one U.S. dollar could get you nearly two Swiss Francs. This meant that distribution companies in the United States had very strong buying power and could earn compellingly strong margins. These margins led to the creation of vast networks of well-paid sales people, marketers, and advertising campaigns that fed vast volumes of watch demand and subsequent sales in the United States.

By 2004, Europe had adopted the Euro, which changed the economic landscape for both the U.S. dollar and the Swiss Franc. Not long after the world experienced the 2008 financial crisis, the U.S. dollar tanked even further against the relatively stable Swiss Franc, which has been a strong currency ever since. This is relevant because it addresses the relative power and authority that the U.S. dollar has on the Swiss watch industry in the U.S. market. The weakening of the U.S. dollar also helped usher in the modern era where watches sold in the United States benefited foreign firms doing business in the U.S. more than they benefited local distributors. To watch retailers and distributors in America, this time period was a great tragedy. To corporate managers in Europe at the companies controlling the major names in luxury watchmaking, this led to what was often referred to as “margin recapture.” In other words, business people in Europe felt that they were “leaving too much money on the table” in America, and wanted more of it for themselves back home. These managers believed that they had learned enough to do it themselves from studying U.S. watch retailers, and that they could use modern communication tools to directly interface with America’s network of department stores and wristwatch retail environments.

To steer market control away from local American distribution partners, brands simply ended contracts for sale and established their own subsidiaries in host countries in which they wanted to do business. This includes the United States and most other countries that allow for subsidiary ownership by foreign organizations. Inherent in this model is that headquarter offices have, by default, complete decision-making authority, and that only the money they allow to stay in a market will stay there. This is vastly different from the previous model in which watch brands sold products in bulk via wholesale to the United States (as well as many other markets), and ended their control of their products once they collected their money and shipped the goods to local market distributors.

The crucial part of this story has to do with what local distributors do when goods enter their market, which is different from what wholly-owned brand subsidiaries do. Let me remind you that luxury watch popularity in the United States was first created by U.S. companies marketing and distributing those products via U.S. stores. There was really very little involvement by the watchmaking firms in local markets, who mainly focused on continuing to sell watches via wholesale to a variety of distribution partners.

In addition to much less of that money going to local partners and people in the United States, there are a few other interesting problems the luxury watch industry hoped to solve by taking control of major foreign markers such as the United States. The first was to end what brands felt was brand value erosion. Luxury watchmakers often reacted with anger when American stores typically relied on discounting to motivate customer sales. This was often a cultural confusion given that the Swiss believed discounting negatively reflected on the desirability of their brands and didn’t realize that consumers who purchased items at a discount felt both empowered and important as a result. Putting customers in a good mood was often a key sales strategy of American retail that was mostly culturally segregated from traditional notions of Swiss or French luxury. This would not be the only misunderstanding that European managers had about doing business in the United States.

One area in which Swiss watch brand managers did have good reason to regulate how their goods were presented in the market was when the occasional rogue actor took advantage of different demand and pricing by country and intentionally competed with other distributors around the world. For example, a watch brand’s distributor in South America might decide to compete with that same brand’s distributor in the United States. They would attempt to bypass their territorial limitations and undercut prices in another country. I’m not sure if this actually had a negative effect on overall market sales, but it does go to the heart of showing distributors that the watch brands they work with are valued partners. Too often, watch brands would turn a blind eye, even when they had direct evidence that their own distribution partners were not playing by the rules. Once a brand controlled both its South and North American distribution, there was no opportunity for as much intermarket competition to really occur.

Now, many years after a lot of watch brands changed their distribution practices, we can observe some of the benefits and detriments of these decisions. Indeed, brands have been able to better control discounting, though I’ve never seen evidence to suggest that less discounting has actually helped anyone really increase their bottom line. Brands have also been able to ostensibly increase their margins and earn more money, but again, aside from greater shareholder value, it isn’t clear how margin recapture has appreciably helped brands sell more watches to more people, especially when compared with traditional models.

Owning market distribution also comes with incredible risk and responsibility. The risk begins with the appreciable expense of importing a high number of goods into a market (buffered by retailer orders, of course). The risk then extends to the responsibility of positioning those watches in front of customers and convince them to buy. These two areas are probably where the ambitions of Swiss horological imperialism have failed the most. One could say that Swiss eyes are bigger than their stomachs. What I mean is that they were, in large part, overzealous and overconfident in their ability to make as much money as local American distributors, or to create even larger markets. Only a small number of extremely fortunate names in luxury watchmaking are more popular today in the United States under brand-controlled distribution than they were when they had third-party distribution.

Part of this has to do with how a brand itself treats its products as more “precious” than a third-party distributor. If you make a product and stand behind it, then you are likely to have both an ego about it and want your goods to be considered the best. The problem is that same mentality often bars companies from thinking like smart salespeople or marketers. Brands with aspirational products often deceive themselves into thinking that rather then being “the next best thing to something more expensive” (as many consumers feel), they feel that their products are powerful status icons unto themselves (even if very few consumers agree).

European control of much of America’s watch market has also limited the size of the market. Subsidiary teams are often small, and thus can only properly serve a small number of retailers, media, and clients overall. They also stick to large cities that they know and are loathe to engage in local marketing practices that they do not immediately understand. The problem is that what works in Switzerland does not work in the United States, and what works very well in the United States might not work at all in Switzerland. The issue I am presenting is that no matter how much faith you have in your own product or how exceptional your product is, you will never be as good at explaining that product to someone foreign as someone more familiar with that culture or community. This is the huge conundrum faced in parts of the luxury watch industry that have so much control over their foreign markets. The conundrum is that distant managers can’t possibly handle market nuances from afar, and no local authority exists in most watch markets to stand in and make better decisions. I’m pretty sure this is a major reason why Rome fell. Romans attempted to extend their empire further than they could rule it. Rather than allowing more local allies and partnerships, the Romans conquered all that they could, and lost it just as quickly when their strength was no longer felt.

The purpose of this essay is not to entirely argue against the practice of having a local subsidiary, or to suggest that working with distributors and forgetting about the product after it is shipped is a good idea. Rather, I am wondering if the challenges faced by many watch brands today are still best suited to aging business models. These are questions we should all be asking. Consider, for example, that many watch brands are trying to sell their watches one by one directly to consumers – and are having a really hard time at it. While there are some notable exceptions, the direct-to-consumer model has failed for most brands. The reason is simple, and related to the high cost of acquiring a customer. I think, in most instances, when it comes to making demand for a product and selling it, local distributors who understand market nuances nearly always do better than foreign entities who try to manage from afar. Not even the most well-equipped luxury watch brands today have nearly enough employees in the United States to handle the potential size of the entire market. They settle for a small slice of the potential American market and only grow if they invest – which historically speaking, they only do very modestly.  I suspect the same is true in many other countries.

I am of the opinion that risk should be both respected and rewarded. Watchmakers take risks when designing and making new products. Those efforts should be respected by consumers and retailers, alike. Retailers and distributors put risk into purchasing inventory and then hope to create an atmosphere where those items sell. To do that best, history tells us that the people selling the products should be at least someone separated from the people who make those products. When you combine them, egos and unreasonable expectations can take hold.

I am particularly worried about our current post-pandemic era in which I believe that marketing and sales support should be as nimble and local as possible. When under direct brand control, those functions get stymied and slow down. Brands may feel as if they have control, but at what larger market cost? I guess what I am asking the luxury watch industry to question is whether control is worth the cost of potential profits. Are many watch brands fundamentally losing out on larger market size, more watches being sold, and fewer quarter-to-quarter worries by maintaining that the only path forward for them is one where local partners have less economic incentives to act, and often no authority to innovate? For an industry that talks about innovation so often, is it not worrying how few people are actually given the permission to innovate?

The next few years will see market conditions return to something more akin to the pre-pandemic past. Watch inventory supply will be high, the number of brands wishing to market a luxury name versus a product with a good value proposition will be up, and there will be even less independence in watch retail. This means that in the United States and around the world, the watch industry will face a buyer’s market. It will not be a seller’s market for any but a few brands who invest in the expensive effort of maintaining hype. Success, in most instances, will rely on a mutually beneficial relationship between a product maker and a retail partner where both sides contribute to demand creation and fulfillment. Most watch brands will simply be unable to both produce superlative products and also sell them on their own. The era of cutting out the middle person has, unfortunately, cut out so many that major parts of the industry no longer work. To reverse this trend, brands need to be willing to share money, give up control, and respect those with whom they need to do business in all places but home.


Yours Truly,
Mr. Ariel Adams