In the spring of 2018, Richemont’s accounts revealed that a two year program of buying back watches from its distributors and retailers had cost the group €481 million.
The buy-backs came in the wake of a 2015 crackdown in China on officials greasing the wheels of industry with lavish gifts.
That anti-corruption drive was partly responsible for Swiss watch exports to China dropping from CHF 1.65 billion in 2012 to CHF 1.29 billion in 2016, although the great impact was seen in Hong Kong, where wealthy Chinese chose to shop.
Exports to the former British colony halved from CHF 4.4 billion in 2012 to CHF 2.4 billion in 2016.
Richemont’s chairman Johann Rupert has been praised since signing-off on what would have been a tough decision to tackle the problem of excess inventory, and has been credited, in particular, with laying the groundwork for Cartier’s growth in recent years.
He saw the build up of stock at Asian retailers as a direct threat to maintaining recommended retail prices across the world.
“The Specialist Watchmakers continued to focus on optimizing their distribution network and adapting their structures accordingly. Our approach to the grey market remains uncompromising,” Richemont chairman Johann Rupert stated in his commentary accompanying the end of year financial report for 2017/18.
“Over the period, we implemented further inventory buy-backs and strengthened the approach to managing sell-in versus sell-out at our multi-brand retail partners,” he added.
Swiss watchmakers appear to have short memories because, as retail sales slowed down across the world last year, and hopes of a boom following the eventual lifting of covid restrictions in China and Hong Kong fizzled, factories kept on churning out similar volumes of watches, average prices kept on rising, and exports around the world set an all-time record.
The folly of these facts is being felt today and the industry is, belatedly, responding.
Production is being trimmed.
Manufacturers — from component suppliers to makers of finished watches — have sent workers home and taken advantage of generous support schemes that see the Swiss government paying some of the wages of non-working employees in order to keep their jobs alive.
There is also mounting evidence that brands are throttling back on supply, particularly to China and Hong Kong.
September saw a spectacular drop in Swiss watch exports to these Asian markets
Exports to mainland China dropped by an eye-watering 50%, year-on-year to CHF 128.9 million in the month. To Hong Kong, exports declined by 35% to CHF 128.9 million.
That suggests a strategy of more accurately matching supply to demand.
It could be I am being too generous to the manufacturers.
Have they really stopped trying to force watches down the throats of their authorized dealers (who fear they could lose brands if they do not keep buying), or have these retailers taken the rational decision to stop buying watches that their customers do not want to buy?
I suspect the latter and have heard examples of this in the UK and United States where authorized dealers are not only refusing to buy watches they can’t sell, they are demanding brands buy their watches back.
In one instance, I was told over one million dollars’ worth of product was returned by a multibrand retail group and a full refund demanded from a major brand.
It is worth reminding ourselves that, back in 2015, the secondary market was still an opaque wild west of dealers trading watches through physical stores and offices. Aside from auction results, there was none of the data we now receive from the likes of Watchcharts, Chrono24 and Subdial, which track and publicize the rise and fall of prices and inventory levels with reasonable accuracy.
It was also harder for manufacturers to monitor sell-out (sales to the public), so they measured sell-in (B2B sales from brands to their retail partners). This is no longer the case.
What the watch industry is trying to achieve right now is a soft landing where sell-in remains as high as possible without flooding the market with goods that do not sell-out. When this happens, retailers flush their excess inventory into the gray market, where they will be sold at ever-more-desperate prices.
Plummeting prices on the gray market make it even harder to sell at full retail prices, so demand is undermined still further and the vicious cycle continues.
Discounting by official retailers is on the rise right now, both in plain sight and under the counter.
WatchPro has received numerous anonymous tip-offs that show authorized dealers, even in the comparatively disciplined US market, dropping their prices with the approval of brands.
This is hardly surprising. According to Luxury Watch Barometer, which analyzes data from 2,351 points of sale in the United States, March, April, May and June sales per door were down by 9%, 16%, 4% and 1% respectively.
July was a terrible month with a 13.2% year-on-year decline in sales.
August stabilized with flattish sales per door compared to the same month in 2023.
Fred Levin, founder of Luxury Watch Barometer reports that inventory levels were a little higher by the end of summer, but the robustness of the American market, in general, means it goes into the key holiday season in a healthier position than Europe or Asia.
The value of Swiss watch exports to the United States has risen by 5% for the first nine months of 2024, which suggests supply and demand are roughly in balance.
However, there will be concerns that discounted stock on the grey market, which does not recognize international boundaries, will impact full price sales in the United States.
Before I leave you with the impression that trouble is baring down on the US market, I will point out that 2024 is still on track to be one of the biggest years on record for the global watch industry, judging by both retail and wholesale data that I see.
However, global supply MUST be managed so that it does not exceed demand to any great extent, or the official channels will be swamped with watches they cannot sell because the same watches are being dumped on the gray market and advertised very visibly at 50% off.
In a price war between the primary and secondary market, the primary market for all-but the big 3-4 brands, will lose.