There’s a tsunami approaching the luxury watch business and people need to see it
Time and tide
Over the last three years, the luxury watch industry has been in a crisis mode. Every player from premium brands to mass market new entrants were faced with one same problem: a declining appetite for luxury mechanical watches. And it couldn't have come at a worse time – not that there's ever a good time for this.
The local retail scene was already facing its biggest challenge ever. Orchard Road, and arguably Singapore as a whole, has lost its appeal as a shopper's paradise due to various reasons. Competition from other cities in Southeast Asia and the proliferation of online shopping are often cited as two key reasons. More details were covered in our earlier story on the local fashion retail scene here.
But how did we end up in such a state? Look around. There's never been more watch boutiques and retail stores populating our malls than today. Companies have actively, even aggressively, marketed their wares online and off, with ever more creative brand campaigns. More people today are acquainted with luxury brands and educated about the products they create – social media makes sure of that. Brands that used to be mainstream are now household names, and brands that used to be exclusive are now mainstream.
So what went wrong?
Key Market Behaviour
For starters, the entire industry simply grew too fast. Local horology blogger, Zach Toh who goes by the moniker Watchculture, recaps how watch collecting started in Singapore: "The boom period began in the late 1990s and lasted well into the 2000s. I got into watches in 1997. At that time, prices were quite reasonable but from 2000 up to 2007/08 before the crash, watch prices kept going up, especially big brands."
The luxury watch market was a very different environment 20 years ago. There were just a handful of collectors and the luxury offering wasn't as diverse as it is today. There was also very little real horological discourse because the Internet Age was not in full swing.
Toh continues: "The 2008 crisis didn't really affect the watchmaking business because another previously untapped market was on the rise: China. Growth continued when Chinese consumers started buying and they were spending a lot of money on watches."
In other words, the entire industry was being propped up by one market alone, and when that market shrunk, the domino effect began. Toh offers an explanation: "China's president Xi Jinping started a nationwide crack-down on corruption and in 2014, the practice of gift-giving among government officials was wiped out. This affected the entire industry and ended the era of double-digit growth. Business had been so focused on China that they neglected to develop Europe and the US, and so many are paying the price today."
"For a while, the entire industry was being propped up by one market alone"
Kevin Tan, who is a forum moderator on PuristSPro and a co-founder of the local watch collecting website Deployant, concurs, but has another perspective to add. As an economist, he's noted a few other reasons why the industry is on the decline.
"It's a relative issue. Look at Australia. A lot of brands and retailers are doing very well in the last two to five years there simply because Australia is 10 to 15 years behind us. Watch collecting has just opened up, so brands are recording good sales. Singapore on the other hand is saturated. The market is not growing as fast as the money that's being invested."
He elaborates: "If there are 10,000 collectors in 2007 and come 2017 there are 15,000, you have a 50 per cent growth in the market. But the avails –the number of brands, number of shops opened – might have gone up 200 per cent, so there are more resources directed at a smaller crowd and that's always a big issue."
This isn't something new; since the boom period described by Toh, brands have been pouring in investments. In the earlier days, it wasn't a problem because average prices rose prolifically due to strong demand. That having sustained the market for as long as it could have, Tan's evaluation is that this strategy has run its course.
The Price Is Not Right
Rising prices have always been the bane of a watch collector's existence but today the issue is much more pronounced than before. An average entry-level luxury timepiece from a leading brand today is more likely to cost between six to eight thousand dollars, as compared to the three to five thousand of the early 2000s. Rolex sports models have all exceeded $10,000, with a basic Submariner priced slightly above $12,000 – and Rolex is considered the poster child for affordable luxury timepieces.
A local watch collector in his 60s who opted to stay anonymous agrees. "I think prices have been too high, and maybe that's why they seem to be going down, whether overtly or subtly. Of course it's more than that. Watch collectors are mainly older buyers who are a dying breed, pun intended, and new buyers are young, many don't have a lot of money. I think that's why brands like Parmigiani and Girard-Perregaux are coming up with new entry-level models, offering what is called affordable luxury, which I find is a contradiction."
Famous for complicated timepieces, Parmigiani introduced the simple and cheaper Metrographe collection in 2016 to reach out to a younger audience. Similarly, Girard-Perregaux which is famous for its ultra high-end creations has relaunched its Laureato line, redesigned for a younger clientele. Neither have been especially successful.
Tan raises another salient issue: "The market is so fragmented now that for the new guy coming in, there's no value proposition at all to start so high. Omega's newer Speedies are all around $8,000. Where's the value proposition? Where are the $2,500 models 10 years ago? They're gone. I'd say that the industry is a victim of its own success, as prices had been rising and rising."
"The industry is a victim of its own success"
One brand that has achieved unprecedented success is Tudor. Since its rebranding in 2012 with heritage inspired pieces, it has become popular with watch collectors and trend hunters alike. Toh and Tan have both acquired new Tudor watches, stating that this is one of the few brands really exciting watch buyers today.
Says Toh: "They market their products at an acceptable price. Collectors like their design direction and can easily buy without serious consideration."
Another reason for continued price hikes is the industry-wide focus on producing in-house movements. Since the Swatch Group began curtailing movement supply to non-Swatch Group brands, brands have to start finding alternative solutions or make them on their own. But starting entire production lines is no small endeavour and production volume is a real issue – if manufactures don't produce enough movements, they stand to lose money on every watch they sell.
Not everyone is happy with in-house movements though. Not only are they more expensive, sometimes significantly more expensive, they are not necessarily more reliable than third-party movements.
Less Innovation And Creativity
According to Tan, every watch collector has his own unique path and buying cycle. Once a collector reaches the 10-year mark, he becomes a lot more demanding. He's not going to buy just another chronograph; he might look for a split seconds. But the problem is that a split seconds is four, five times the price of a chronograph – not an easy fact to accept. Because of this, nobody is brand loyal in watch collecting.
"Nobody is brand loyal in watch collecting"
Alvin Wong, editor-in-chief of the local watch magazine, Crown, shares an objective view on this matter. "I think both sets of buyers are looking for similar things – a sensation of the watch calling out to them, an item that is an extension of their tastes and personalities, and the sense of money well spent. Casual watch buyers (by that I take it to mean people with limited budgets and knowledge) would probably go for more well-known brands and models. Big time collectors may be after greater exclusivity, or technical and artistic sophistication, so they look at independent brands like Laurent Ferrier, Urwerk, or more elevated brands like Lange and Greubel Forsey."
On innovation and creativity in watchmaking, Wong shares that it is a thin line that companies are treading. "I appreciate that many brands are trying their best to be creative within a very stringent framework, especially for classic brands like Patek and Lange, who push the boundaries of movement construction and material technology while still staying true to what a wristwatch ought to do. It is when brands try to be unnecessarily clever in the name of 'innovation' and 'creativity' that one needs to be wary."
Throughout the boom years, every complication, and combination of complications, imaginable were made, in crazy designs and plastered with precious stones. Because business was good, companies had the money to invest in technical innovation and the confidence in finding customers who would pay to buy them.
Toh observed that in quieter times, brands shift to a more conservative product development strategy. "With the slowdown, brands are making watches dictated by the market and now they're on to vintage fever. Also, because vintage watches were mainly simple, time-only watches, investment dollars going into these watches will be lowered considerably."
Tan has bought a number of neo-classic watches. His famously eclectic tastes have led him to recent acquisitions like the Jaeger-LeCoultre Reverso with green marble stone dial, the new Panerai bronzo, and a Rado Captain Cook. He quips: "I think all the low-lying fruit has been plucked and re-plucked until all the branches are gone, let alone the fruit, so there's really nothing exciting anymore. Maybe the independents. That to me is the only bright spot in the whole horological space."
"All the low-lying fruit has been plucked and re-plucked until all the branches are gone, let alone the fruit, so there's really nothing exciting anymore"
Watches are perceived as neither purely a consumable nor investable good; they're both. As such, they're typically acquired, especially in Singapore, based on the belief that they will appreciate in value.
This makes it very difficult for prices to truly go down. In fact, the golden rule in the luxury watch business is never cut prices. Some brands have done it, albeit surreptitiously, and there's a limit to how low they can go without triggering alarm bells.
Tan offers his perspective: "Lange for example reduced the case size of the 1815 down to 38mm and reduced the price correspondingly because of less materials and all that. But to a collector who's been collecting for 10 years or so, it smacks of cynicism [sic]. Everybody is just finding an excuse to cut their prices."
This is a double whammy for the industry because, in trying to cut costs, brands don't invent new ranges or create technical innovation. The risks are too high. Rather, what they do is to take an existing product and dumb it down just to establish a lower list price.
Indeed, brands habitually release new products that are just stainless steel versions of existing popular gold models. With Patek Philippe being the only exception, this strategy alienates the watch collectors, many of whom already own the precious metal model. Such novelties simply do not interest them.
Because buyers perceive watches as an investment good, there are some similarities between the watch industry and the property market. Before a person buys, he wishes that prices would go down. But the moment he's acquired the item, he wishes that prices would go up. This is why the problem of high prices is not such an easy one to solve.
"As a collector, it'll be bad for me because the total value of my collection will fall. If brands readjust prices, say, back to 1997, that would be interesting. But nobody will have the courage to do that," Tan ventures.
"The problem of high prices is not such an easy one to solve"
Too Much Of A Good Thing
Between the retailers and the brands, there is a lot of unsold inventory and at every sign of a recovery these watches come out to the market, either on the grey market or at friends and family sales. Throughout the growth years, companies have steadily produced more watches year after year and these watches have a continued presence not just on the primary market but also the auction and resale market. Tan predicts that there is a massive stock overhang and people are not seeing it.
Also, the watch industry has boxed itself into a corner. Tan evaluates: "Modern watches are basically indestructible. The build quality is superb, so they're going to last a long time. Brands may not be creating new stuff but a lot of old stuff is still for sale because overall numbers keep increasing every year.
"It's unlike the car industry where things ultimately get destroyed. Even the most luxurious cars get scrapped. But nobody scraps watches, not even the cheap ones. So this means everything had been piling up because they're not being displaced. Now, all these old stuff has accumulated and that's a big problem."
Most collectors have a limit to how much they can hold in watches. Once they reach that ceiling, they trim their collection in order to buy new ones. All these preowned watches then go to new collectors who don't mind buying preowned. But when the secondary market stops buying, either due to uncertain economic times or the popularity of smart watches, collectors have no one to offload watches to.
Says Tan: "There's a tsunami coming that the watch industry does not see. All these watches that they've built to the best of their abilities are coming back to haunt them."
"All these watches that they've built to the best of their abilities are coming back to haunt them"
A brand like Patek Philippe makes anywhere between 40 to 60 thousand watches a year. Over the past 10 years, at least 400,000 watches had been produced. In a saturated market plagued by a financial downturn, who will buy them? Every year the number grows. Emerging markets like India and China can pick up some of the slack and buy up the stock but the question remains if this is a viable solution.
Already, the number of Chinese tourists to Singapore have steadily decreased, showing luxury companies the importance of a strong domestic market and the dangers of over-reliance on tourists.
What Buyers Want
Singapore is a small but mature luxury market. Consumers here have been well introduced to brands, even the obscure ones. They are also well acquainted with mechanical watches and are recognised as one of the most progressive markets. Yet, this also means that collectors here are more demanding. They're not buying blindly anymore, so what's the next big thing?
If Tan were to hazard a guess, it's customisation. Today only a handful of brands offer it on the standard collections. Across the pond, in other luxury segments like fashion and leather goods, customisation is huge. It may also help to ease the slowdown in watch retail because if a watch has been engraved, it is less likely to end up on the resale market.
At the moment, not many brands offer the option to customise your watch and those that do require a long lead time – two to three months. Local boutiques are pushing for it but brand headquarters are not expediting the orders fast enough, which shows that the industry isn't reacting to what the modern customer wants.
From Retail To E-tail
Luxury watches have always been exchanged over the Internet but till now it's been preowned timepieces. In 2016, IWC made the official announcement that all of its watches, from entry level models to tourbillons, will be available for sale via mrporter.com and net-a-porter.com. Zenith, too, retails on that site, along with Oris and Bremont, and the number kept growing. Today, Bell & Ross, Baume & Mercier, Junghans, TAG Heuer, Montblanc, and even Ressence has joined the list. The website even has a dedicated section for fine watches that it keeps separate from the non-premium brands.
This clearly indicates that market leaders believe that the consumer is now ready to shop for fine timepieces online. We don't know if online sales is booming, but we do know that retail sales isn't. Brands and retailers need to seriously figure out a digital strategy because the limitations of the traditional brick-and-mortar method have been all but uncovered.
But there's no need to plunge face-first into the digital sphere either; rather, brands and retailers should rethink their business model and introduce new ways of consuming timepieces. Online shopping is perceived to be in competition with retail sales. While this is true to a degree, when properly managed, it may complement the overall business. Apple has done this successfully, where its stores act as showrooms and all transactions are digitised. Companies need to integrate e-commerce as a part of their overall strategy and not perceive it as something that erodes foot traffic.
With ever rising rental costs, boutiques need to bring in revenue but when the revenue is streaming in from an additional point, does it really matter if the salesman wasn't the one who closed the sale?
Toh who is a baby boomer adds: "Nowadays people don't really value the retail experience. Millennials especially. They prefer to shop online for the best price. Maybe retailers can think of some way to value add from there. They cannot ignore this anymore. Even people like me shop online because the prices are good and it's easy."
There are strategies for when times are bad, and strategies for when times are good, but this is the first time since the 1970s Quartz Crisis that companies have had to rethink their game plan so drastically. And it's inevitable. Like the media industry that's seeing traditional media products folding one by one while digital and social media are growing with vigour, luxury watchmaking needs to return to the drawing board and reinvent the business.
Like it or not, this is the new normal. The market may bounce back, but definitely not to double-digit growth of the mid 2000s. Luxury e-shopping might become a thing eventually but whatever happens, the onus is on companies to keep horology alive.