Rolex’s new temple on London’s Bond Street is a seriously impressive space. Four storeys of green and gold grandeur, more than 7,000 square feet of space for moochers and GMT-Masters, and even the offer of an exclusive green-coloured cocktail for those prepared to climb the stairs to the first floor (yes, yes, there’s a lift, too).
It will, no doubt, be a whopping great success. Brian Duffy, chief executive of the Watches of Switzerland Group that will run the boutique, expects it to become his best performing store in the UK, which is quite something considering the scale of his “golden triangle” of multi-brand stores on Regent Street, Oxford Street and in Knightsbridge.
While Mr Duffy has never disclosed exactly what percentage of his business Rolex accounts for, he has said that with Patek it’s more than half, and that the majority of that half belongs to the Crown.
Questions will be asked about whether this store will cannibalise other Rolex outlets in London, what kind of allocations it will get in view of Rolex’s purchase of rival retailer Bucherer, and whether the anti-business Tourist Tax will limit its potential, and yet while I think we can safely say now that none of these is going to be an issue, what we can point to is that beyond it all, the most important thing about this new boutique is the franchise model upon which it is built.
I know, a column about franchising sounds dull-as but, if you will, stay with me.
Rolex, as many will know, doesn’t do retail. Or at least, not really.
According to Morgan Stanley’s oft-quoted annual industry review, 92% of Rolex’s revenues come through wholesalers. In fact, the figure is closer to 100%, but the report counts sales through Bucherer, which it acquired in 2023, as retail.
Even at 92% Rolex ranks seventh among Switzerland’s top 50 brands by percentage of sales through wholesale, assuming the calculations are right, and would mean that of its estimated 1.2 million annual watch production, 1.1 million pieces are sold by third-party retailers.
Now, enough about Rolex for a moment. We will come back to it, but let’s look at the rest.
Over the past decade, the strategy for most of the big-name brands has been racing to embrace the direct-to-consumer model. Cut out the middleman. Cut out the Duffies. Control the margin.
On paper, it’s got legs. Look at Richard Mille, the 21st century’s most successful watch company launch and the poster child for the DTC model, with 100% control over its margins.
Or Audemars Piguet, the fastest-growing of the old guard this past decade by an Alpine mile, which has reduced its wholesale from an estimated 35% in 2020 to 12% last year, again, according to Morgan Stanley.
It worked for them, so why wouldn’t it work for everyone else?
Almost everyone else has had a go at it. Of the so-called first luxury watch brands, Omega, TAG Heuer and particularly Breitling have all gone hard at DTC, reducing their wholesale operation by at least 10% over the past five years, or 25% in Breitling’s case, if Morgan Stanley’s numbers are anywhere near.
If the benefits of DTC for the brand are obvious (margin, controlled and fully immersive environment, ownership of the customer), those for the consumer are less clear.
Sure, if they’ve done their homework and decided on exactly what they want, then buying it from source will have an allure to it.
Likewise, they might feel reassured that the aftersales offer will be tighter (not necessarily) and that the branded freebies at the point of purchase will be better (normally, they are).
But what they almost certainly won’t realise is just how much more expensive their watch has become because of their decision to buy direct.
Not in the petrol pump price war sense – that Speedmaster Professional will have the same sticker price no matter which domestic outlet they choose. Instead, what they’re paying for is in the all-but invisible cost of a brand running its own retail operation.
In discussing the rapid price increases of the past few years, many factors have been cited by analysts (and hacks).
The cost of innovation and the irrepressible might of the Swiss franc are staples, as is the price of gold in the case of watches made of precious metals (hitting $3,000 an ounce for the first time in March).
Next in line could be export tariffs in the event President Trump’s trade war comes for Swiss horologists (still unlikely to my mind – there’s no US industry that would stand to benefit in lieu).
But what is the cost of opening and running dozens if not hundreds of boutiques?
How big does your margin need to be to account for the capital and operational expenditure of building, heating and hoovering millions of square feet of retail space? And who’s going to pay for it?
Well, we all know the answer to that. Except that it’s increasingly clear they won’t. Consumers are voting with their wallets, either turning to pre-owned (although 11 consecutive quarters of price decline suggest patience it wearing thin there, too) or not spending at all.
And how sustainable is a vast global boutique network, then? Too often, the solution is to whack prices up – again. Those water and business rates don’t pay themselves, right?
This, incidentally, isn’t a problem unique to watchmaking. Luxury fashion, the architect of the DTC model, has the same challenge, as the post-pandemic luxury recession continues.
Which brings us back to Rolex. Still growing. Still the most in-demand (watch) brand in the world. Still leaving third-party retailers begging for more. Still offering defiant residuals. And still, despite routine price increases, offering consumers fantastic value for money.
And it’s this that’s currently shaping the watch industry’s fortunes. Value. Too much of what’s out there doesn’t offer it, and the ball-and-chain hobbling brand efforts to reverse the trend is the stultifying cost of running DTC retail operations.
While we’re here, see also Patek, in growth last year and at an estimated 85% wholesale.
Brand insiders I’ve run the theory past in recent weeks agree. Some are already rowing back, closing their own doors.
Meanwhile, Duffy and his investors have seen it coming, announcing a £25 million buyback of their own shares, apparently comfortable in the knowledge that they, backed up by a model made crystal clear by their gleaming new franchised Rolex boutique, are ready to pick up the pieces.