Horological Meandering

Here is the "big picture" in my view:

1) Elevate the item from accessory to icon of lifestyle/luxury:

As mechanical watches move from a personal accessory to tell time to a symbol of accomplishment and a luxury accessory they need to drive this by a sense of exclusivity. The exclusivity was driven by the move to vertically integrated manufacture which really started about two decades ago. Only larger, well capitalize companies are in a position to afford such a strategy, particularly in volume.

2) Capture second wave of revenues:

A downstream benefit of this approach is captive service/repair revenues beyond the initial transaction cost. Let me illustrate the concept. Let's use an Omega Seamaster for my illustration. The watch retails for $6,200 and likely sells to an AD for about $3,500. The watch likely costs Omega $400-500 to make (internal cost-of-goods). So Omega might gross about $3,000 on a watch like this. Now let's look at service. Today SGUS will charge $525 for a full service in today's dollars. They will get this extra revenue every 5-years or so. Perhaps 50% of what they charge is profit on a watch like this given their overheads. So this becomes an important and steady source of revenue because you begin to get all the prior year's accumulated sales in for service. So say they sold 100,000 Planet Oceans in one year and grossed ~$300M in sales. Now imagine that 50% of owners are compliant on service 5 years later. You start to get ~$12.5M in service revenue each year. As Duke Ellington said "nice work if you can get it".

3) Continue to drive exclusivity and profits through control of distribution channel:

The final leg of the picture is beginning to play out. The luxury conglomerates are moving towards capture more profit and driving exclusivity through direct boutique and internet sales. Let's continue to illustrate using SG's Planet Ocean. Today, as we previously illustrated, they likely gross about $3k per watch on a steel model. Now, lets eliminate the AD and stop any discounting that may have occurred and capture the full difference of $6,200 to the $500 it cost to make ($5,700). So they can now sell about 1/2 the number of units and make the same profit (albeit lower downstream service revenue).

That's unfortunately here I see things going. Perhaps it is a more sustainable model for the Confederation Helvetia, but I don't have to like it.

I suppose it is their business, and they are free to run it as they see fit. 

It really is the 3rd aspect of the strategy that bothers me the most because it values profit over loyalty and long-term partnership. When the industry was in ashes 30 years ago, a network of independent Jeweler partners (ADs) took shared risk, and helped the conglomerates build the brands to where they are today. Dealers with multi-decade relationships as partners are finding themselves in recent years being either cut off from access popular models, finding direct sales boutiques opening next door or abruptly discontinued as ADs. It is no longer a partnership. The conglomerates have a long-term plan and ADs in established markets are a necessary transition bridge until a new network of boutique and web based sales can be established. Contracts are year to year and an adversarial relationship exists today. Many dealers feel as if they are doing business with a competitor. 

Personally, I find most boutiques (not all) to be vapid showrooms of luxury lifestyle staffed with metro-sexual models and not resource of trust, product knowledge and place for a long-term dealer/client relationship. Its as if one is walking into a consultant's MS PowerPoint presentation. There is only so much champagne and cappuccino that one can drink in bathroom less downtown Meccas.

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