Thursday, December 5, 2019

It May, In Fact, Be Worse Than You Think

I've been holding off on this one for awhile because, well, it's Christmas time and I hate to be the one to say that maybe Santa doesn't exist.  And while it is easy to say that all is well, it isn't.  If you stop to read the tea leaves, it is pretty clear that 2019 was not the turn around year that everyone was hoping for, and it is not highly likely that 2020 is going to be looking much better.

As mentioned previously, a major brand in a major group is planning layoffs.  Actual retail sales are, actually?  Not that great.  And everyone is scrambling trying to figure out how to right the ship.  Now the old indicators of ill winds are still there - low sales turnover, a plentiful selection of "new-used" (read new, sold directly to the grey market by the brand) watches and the favorite easy fix of under prepared executives - layoffs.  But there has been a new phenomenon that has been at work, subtly undermining the business as a whole.  
Shamelessly Borrowed from the World-Wide Info-web
The trade-in program.  

As shared previously, I started my journey in the watch business with a stint at Tourneau in San Francisco back in 2003.  At the time (and I believe to this day) there was a "Trade-in, Trade-up" program.  It was a pretty easy concept for the customer to understand, you trade in your watch (providing it was one the manager wanted or approved of) and you'd get a credit towards a new one.  I suspect it was (and presumably is still) an attractive option for someone who wants something new.  And a few smaller brands adopted a similar program, and these were usually brands that were owned/operated by a retail jeweler who had an established business selling "estate" jewelry.  Now it is important to understand a few things here:

1.  There was a very strict formula as to what you would get in trade.  Remember, this is a business and the people taking your watch in trade will want to be able to realize a fairly significant profit.  
Therefore you would receive 10% to possibly 20% of the total price they hope to receive when selling your watch on to the next customer.  It is a numbers game, and they know that the reality is that they may be sitting on the watch you traded in for quite some time and will potentially have to dump it for either a small profit, or simply break even.

2.  For these brands the risk is smaller, and they are "self-contained" meaning that in principle?  They are not losing anything in the bargain to a "middle man".

But what has emerged recently is "big-boy" brands offering trade in programs.  This is not the brand offering a "warm-fuzzy" we love you Mr. And Ms. Customer and we want to make your life easier by taking your unwanted/unloved watch off of your hands so that you can get what you really want.  What it is really saying is that sales are poor, they are not showing signs of getting much better, and we need to figure something out QUICKLY.

Let me put it another way, Mercedes can offer and confidently stand by a Factory Authorized pre-owned vehicle.  And by that same token, so could Rolex.  And in fact?  If a brand were doing a trade in program for THEIR OWN watches that they would then stand behind?  Absolutely!  But that is not what is happening here.  Brands are partnering directly with used (or not - so used) watch outlets. And this is where it gets even more difficult to understand.  If a brand takes in one of their own watches and re-sells it?  Then all of the cash stays with them.  But when they partner with someone else?  Well, let's just say that "someone else" is going to want their cut.  This probably looks something like this:

Customer wants to buy brand X's watch.  Sees that there is a trade-in program with affiliated used watch vendor and promptly fills out the paperwork and sends his/her watch in.  Watch is received, evaluation is confirmed (most likely yes, even if it isn't, because you don't want to lose the sale), and a percentage of what that trade in price is forwarded to the brand.  Why only a percentage?  Well it's pretty easy to understand, the used "like new" outlet needs to cover their nut, and that dollar amount for trade in has already been set.  So if used watch outlet is keeping, let's say, 75% (fair is fair after all, they have mouths to feed), then 25% of that trade in price is going to the brand, which means that the remainder of that amount needs to be made up/accounted for somehow, right?  It's not that complicated, the brand simply discounts that particular purchase up to the point that the total is accounted for.  

How can Brand X afford to do this?  It is actually much easier than you might think.  If Brand X operates on the old school method of selling directly to distributors, then they are used to selling watches at 25% - 35% off to the distributor, who then sells it on at 50% off to the retail partner.  In other words?  There is a large amount of pie to carve the discounts out of.

And it's not just the big boy brands.  In doing research on ochs und junior and the sudden departure of the entire working staff, I came across something interesting on the ochs und junior website:

Trade up

Essentially, you can trade in ANY watch (I am assuming within reason) to put towards a new ochs und junior.

Think about that for a minute - a brand that resolutely stood by the policy that the price was the price and not subject to negotiation is now hanging a used-car banner out front?  While I can safely say that Beat Weinmann and I are not what would be described as friends, I can honestly say that I know him well enough to say with confidence that this is not something that he would have been on board with.  His belief was that if you wanted to buy an ochs und junior you could either drag your ass to Lucerne and do it in person, or you could jump on a series of Skype calls.  And it would seem, with the benefit of hindsight, that this method with a heavy focus on a few "select" media outlets, zero retail outlets and "friends of the brand" / partnerships that were esoteric at best, and perhaps more accurately deemed baffling, it did not lend itself to a sustainable or mildly scalable sales platform.  We may never know what caused the final separation of the founder (and his entire staff) from the brand he founded and the mother ship (Ulysse Nardin) that funded it, but my suspicion is that money played a fairly significant role, and that it was most likely not a completely amicable parting.

In many ways, ochs und junior is the watch business in a perfect microcosm:
Image was very important.  A bit like U2's The Edge trying to look humble while he is vacationing in the French Riviera ; )
The image was one of subtle (but selective) luxury.  The tone was more often than not subtly patronizing.  And if you wanted an ochs und junior, you would put up with it and pay the price of entry. And when you think about it, this is not so different than the watch world at large.  While ochs und junior postured itself as the antithesis of big luxury brands, it had its own velvet rope and its own stratification.  And ultimately, it paid the price for not being able to punch its weight.

As was once posited by that other great commentator of the watch business, Omar Little of The Wire -

No comments:

Post a Comment