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What do Entry Level Watchmakers and Watch Retailers have to fear?

by Jonathan Ho on October 12, 2016

During the early stages of internet retail or e-Commerce, it was natural for consumers to not make high priced purchases on the web. Coupled with the high craft, highly artistic nature of luxury goods, the tactile experience and bespoke shopping experience through superior customer service meant that mono-brand brick and mortar shops remained dominant points of sales. By early 2010, e-Commerce was beginning to pick up steam, seemingly immune to even periods of economic recession.

Is the threat to brick and mortar watch retailers coming from e-Commerce?

By Q2 2016, US Department of Commerce announced that e-commerce sales were $97.3 billion out of $1.2 trillion total US retail sales, an increase of 15.8% when compared to Q2 2015. Statistically speaking, while internet sales represent only 8% of total sales for now, the other 92% of sales which take place in stores. That said, multi-brand stores like Macy’s are finding it tough to adapt to changing economic conditions, announcing closures of up to 100 of their shops like e-tailers like Amazon continue to post stellar growth figures. What does bode for high-end businesses like luxury watch retail?

One can often get surprisingly good discounts from eCommerce retailers like Amazon.com

One can often get surprisingly good discounts from eCommerce retailers like Amazon.com

While the watch industry defines luxury watches as timepieces from notable brands over US$2000 in value. The truth is the proliferation of quartz watches within the US$150 range like Daniel Wellington and Kickstarter brands with mechanical movements costing US$500 and up have served to re-define (at least from consumer perspectives) the luxury watch segment comparative to median gross domestic product – in laymen’s terms, cheaper watches providing perceived value greater than what is traditionally offered are changing perception on what it means to be “high-end” – when compared to TAG Heuer and Longines, a Kickstarter mechanical watch, even one with a Japanese movement will be perceived favourably when you can spend a smaller percentage of your salary on a similar offering.

That said a recent 2014 survey of e-Commerce luxury retailers like Net A Porter has revealed that consumers are really willing to purchase high-end products on the web, and at mark costs.The biggest statistic was that online high end sales rose by 20% to around US$10.1 billion, this was even when total sales of high-ends goods grew by only 2%. A closer look at men’s shopping portal Mr. Porter, found that of all the luxury watch brands in the entry segment, only Braun, Bremont, Junghans and Zenith are offering online sales; But even then, only La Chaux-de-Fonds manufacturer TAG Heuer runs its own online sales presence.

TAG Heuer was a pioneer in the industry to offer their website as a point of sale.

TAG Heuer was a pioneer in the industry to offer their website as a point of sale.

Naturally, unlike luxury items like handcrafted leather goods, haute horlogerie shopping is an entirely different proposition. It’s harder to purchase a US$4,800 chronograph without first researching and handling the actual product in a physical store for high priced items, most consumers wouldn’t purchase them on the web; they’d always choose tactile buying experience and the customized client support that monobrand brick and-mortar shops supply. Even then, the proliferation of grey market dealers often mean that a US$4,800 chronograph might be acquired for US$3,000.

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Threats from the Grey market?

Typically, a grey market trades products through legal distribution channels that were never intended by the original manufacturer. Grey markets usually arise when an imported product is more expensive or previously unavaiable to the country which they are being imported – For example, Japan Domestic Models (JDM) Seiko Presage or Cocktail watch collections are available in Singapore through grey market dealers and online platforms for 20% less than what is actually available from official portals like Seiyajapan.com.

Astute collectors have been getting their fix for Japanese Domestic Models of Seiko Presage and Seiko Cocktail watches from SeiyaJapan.com

Astute collectors have been getting their fix for Japanese Domestic Models of Seiko Presage and Seiko Cocktail watches from SeiyaJapan.com

While a threat, policing grey market trading is not a simple matter even when official manufacturers and retailers seek to limit the damage to their loyal distributors and retailers because these options usually run counter to competition law, especially in the European Union. Even regulations like first-sale doctrine in the US can result in years of litigation in the courts and by then, the damage is already done, yet, because no official figures are available for the grey market, the damage is likely limited to a very small percentage of the total market. Even then, serious watch brands like Rolex and Audemars Piguet and those of the big groups, namely Richemont, Swatch and LVMH are unlikely to find the threat of grey dealers particularly pressing given the strict allocation of stock to their individual territories. Thus, what remains under threat for brick and mortar shops is the lower priced segment of watches.

The Threat to Watch retailers and Entry-level Watchmakers likely to be Kickstarter

With increasing education and watch review websites like Hodinkee and Deployant, there’s more awareness than ever for watches from microbrands. More importantly, the cost of these microbrand watches, when combined with exhaustive reviews from reputable watch review sites means that the fear of making a poor purchase decision is significantly less than what it used to be. Furthermore, it used to take at least US$100,000 to US$200,000 to start your own microbrand but micro-funding sites like Kickstarter and IndieGoGo have significantly lowered the barrier to entry. Meanwhile, costs for operating a physical retail store have gone up – rents, operational costs and other marketing expenses far outstrip the costs involved from advertising on Facebook or even running a successful social media campaign like that of SevenFriday. While no central source of financial data (they are not conglomerate groups like Richemont or Swatch and thus publish no Financial Reports) currently exists for Kickstarter brands, there are currently 162 brands within the Swiss-made watch category on Kickstarter all fully funded (to a tune of average $300,000 per brand with some achieving $1,120,000 sales the first month). When you expand the search to include watches with Japanese movements, the number increases exponentially. Thus we can surmise that with stagnant incomes and increasing income gaps, these Kickstarter micro-brands are not only serving an undersupplied niche but there’s also a good chance they’re undercutting entry-level watchmakers from Switzerland and Germany.

As Kickstarter micro-brands get more creative and inventive or even provide solidly constructed timepieces at fractional costs to what entry-level watchmakers offer, they would be the clearest threat to the established order of things.

As Kickstarter micro-brands get more creative and inventive or even provide solidly constructed timepieces at fractional costs to what entry-level watchmakers offer, they would be the clearest threat to the established order of things.

According to a study between McKinsey and the Altagamma Foundation: 40% of luxury purchases are in some way influenced by consumers’ digital experience—for example, through online research of an item that is subsequently bought offline, or social-media “buzz” that leads to an in-store purchase. This means that in order to survive in the new environment, traditional retailers need to build a compelling digital presence, engage and influence consumers through targeted use of social media. Just as importantly, they cannot blanket all of Facebook, they need to focus on a carefully chosen set of digital-performance metrics.

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Retailers and Brands need develop cohesive content strategies

Increasingly, the online experience goes beyond a pretty website or banner ad, e-tailers like MrPorter.com have wrapped their products in a well produced stream of content. Thus, a cohesive content strategy is important to not just convince but influence a consumer to “add to cart” and complete the purchase. But don’t get crazy, according to the same McKinsey and the Altagamma Foundation report: only about 4% of the shoppers we surveyed reported downloading a luxury-brand app. Indeed, only about a quarter had downloaded any mobile apps at all. This means that the app is a bonus and not a necessity; social media is still the primary tool where information is disseminated and much of the convincing is done.

Combined with an intriguing watch, SevenFriday ran a successful viral campaign which soon developed a life of its own as fans took wristshots which inevitably joined the brand with an aspirational albeit affordable lifestyle.

Combined with an intriguing watch, SevenFriday ran a successful viral campaign which soon developed a life of its own as fans took wristshots which inevitably joined the brand with an aspirational albeit affordable lifestyle.

The luxury category generates the most social media buzz by far: when watches are combined with cars to a tune of at least 2,000 posts per day, the influence is immense. The best real-life case study of this phenomena again happens to be SevenFriday. Ready-to-wear apparel comes in at a distant second place, followed by fashion accessories.

Ultimately, there is no consensus of whether the brick and mortar store will completely disappear, just as cinemas have not disappeared in the face of Netflix nor DVDs in the face of movie downloads and iTunes; what is truly outstanding that a clear social-media strategy with an online presence is a necessity in the long run even if the market is not developed enough to make it important in the short term. As physical retailers continue to be squeezed on margins from online retailers, is it not wiser to adopt a counter strategy of building your own online presence to counter? There are plenty of avenues to do so at minimal cost (Amazon, Lazada, Carousell, eBay, ETSY, etc) – one need only have the will and determination to invest time, effort and (some) money.

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