London was, by far, the greatest luxury watch market in the world in 2016, and Aurum holdings’ leading retail brands: Goldsmiths, Mappin & Webb and Watches of Switzerland, account for half of those luxury sales by value, according to the group’s CEO Brian Duffy. Has the company been lucky enough to be in the right place at the right time, as the Brexit vote depressed the value of sterling, or can Aurum claim it has become a world beater thanks to its massive investment in skills and the environment of its stores? WatchPro’s Rob Corder spoke to Mr Duffy to get his insight into how it feels to be at the centre of the luxury watch universe.
Sales of watches costing over £1000 have risen by over 25% in the UK this year. The London market has outperformed the rest of the UK, with YTD sales of all watches up almost 24% compared to a rise of just 1% outside the capital. All of this success is in the context of a global market where Swiss watch exports have declined by 11% so far this year.
Aurum Holdings’ retail brands are at the epicentre of this luxury watch boom, particularly in what it calls the golden triangle of Watches of Switzerland stores on Brompton Road in Knightsbridge, Oxford Street and Regent Street in London’s West End.
WatchPro wanted to know whether growth in London and the rest of the UK can be explained largely by the devaluation of the pound, which has made prices over 25% lower in Britain than the rest of the world, or whether the quality of our retail environment and the experts working in our greatest stores, should get far more credit for the success.
Who better to ask than Brian Duffy, CEO of Aurum Holdings, which accounts for half of all sales of luxury watches in the UK?
WatchPro: Can you bring us up to date with the most recent financial performance results?
Brian Duffy: Our sales were up 13% last year (financial year 2015-16 ending April 2016). The profit number is not that easy to understand because of our financing structure. We have not ever talked about that number, but overall FY16 was a tougher year for us and the industry.
Overall, with price reductions and challenges with sterling being strong for most of the year, and UK high street footfall being down. Despite all of that, we gained market share, grew our business and progressed satisfactorily from a profit standpoint.
WP: I see from the reports filed with Companies House that the only financial information recorded is a technical document showing income and the cost of borrowing, and for FY16 showed you broke even. Are you saying that operationally you did better than that?
BD: We had a refinancing during the year. We expanded our terms to support the degree of investment we have been making. That had a one-off charge. I would say that any reporting of the profit number is misleading.
WP: In terms of revenue, do you give a figure on that?
BD: Revenue for financial year 2015-16 was £455 million..
WP: That financial year was also the period when there was a massive investment in your retail estate.
BD: Yes, for the past three years we have been on this investment elevation and upgrade programme and FY16 included Oxford Street (Watches of Switzerland). We embarked on a re-launch of the Mappin & Webb brand centred around a complete renovation of the Regent Street store. That was completed this year, in June 2016, but the investment went in before that. In the same month we completed our golden triangle for Watches of Switzerland with a huge expansion and relocation into a new store in Knightsbridge.
So, a lot of what has been a three year investment programme came to conclusion and fruition. The golden triangle of stores in Knightsbridge, Regent’s Street and Oxford Street is a big deal to us and is now complete.
Mappin & Webb relaunched with the investment we made in Regent Street plus the big investment we made in an advertising campaign featuring Gabriella Wilde.
We have also renovated over 90% of our Goldsmiths stores in the past couple of years. There is a big degree of new investment and some degree of catch-up.
All these investments have given a positive return and point to the right formula for this business. We are selling luxury goods and we have to provide a luxury environment and when you do the business responds.
WP: Do you mean that in spite of that massive investment going in over three years, you have actually been operationally profitable as well?
BD: Yes, absolutely. This has been a three-to-four year programme of investment and we are ahead of targeted returns at this point. We never take anything for granted, but we have undoubtedly proved the success of an investment and elevation strategy.
We have the best shareholder in the business, in my opinion, which is Apollo [Global Management]. They have been completely supportive from the beginning for this strategy. They have understood it in detail and let us get on with it. They have been great.
WP: Is there any truth to the rumour that Apollo is planning to sell Aurum Holdings?
BD: I think things were misreported, including by your publication. All that did happen, which is what was reported on Sky, was that Apollo took some advice as to what the state of the markets were at the moment; both public and private, and what might be the market’s view of the business that we have developed. They literally just took advice; that is all that has happened. The way it was reported was that a sale was imminent, which was a distortion of the situation.
WP: Private equity is always in the business of getting its money back.
BD: You are right. Ultimately they buy and sell companies, so it is perfectly reasonable for anybody to assume that at some point they would look to sell on this investment. But what happens is that there is a process to a sale, and before that process starts you are not for sale. No process has started here.
They [Apollo] has taken advice from people who are closer to the market than they are to see what their view of things would be. But there has been no decision, and it is not that big a deal. We keep everyone, all stakeholders in our business, informed about what the situation is. I do think it was a little sensationalised.
WP: So, if I asked you the same question six months ago, or in six months from now, the answer would be the same?
BD: The answer six months ago would have been no, we had not gone out and taken advice from anybody. At this point, advice has been given. The impression from the article was that Aurum is for sale, and that is not right. There would need to have been a process started for that to be true, and that is not the case.
WP: One of the reasons that the suggestion Apollo might sell seemed credible is that it has been such an extraordinary year for watch retailers, particularly at the luxury end of the market, particularly in London where all the wealthy tourists come to shop. You seem to be in the centre of the centre of the centre of the hottest watch market in the world right now.
BD: That is true, we have had a great summer. A lot of the headwinds we have faced for the past couple of years have turned into a tailwind. There has been a bit of catch-up; the amount of tourism that has come; the price advantage that we have enjoyed here because of the currency; that has all translated into what has been a strong market since Brexit caused the devaluation of the pound.
We are in the centre of this market, we do lead it. We have a little more than 50% of the luxury market, so we are the biggest single beneficiary. We also have the business at Heathrow, where again we are the biggest player there. It has been positive, and it is very good to get prevailing conditions going your way.
What has happened since the summer is that there has been a succession of price increases – I think quite rightly. The brands look to have compatible and comparable pricing, particularly in Western markets, and the UK was way below if you accept that $1.25 to the pound is the new norm.
The price increases have come through, but business still remains buoyant. The UK domestic market has been the biggest surprise. Most people would have been predicting that concerns about Brexit would have dampened domestic demand, but that has not happened at all.
WP: Are you talking there specifically about the luxury watch market? We know that sales at the fashion/lifestyle end of the watch market are down this year.
BD: Yes, I am talking about Swiss watches, and particularly the higher end. But across the board business has been robust. One area that has not been so strong is the fashion business, but that is not so big for us, especially within out stores. Watch Shop online business is the largest part of our fashion watch business, and they have done well and gained market share. But, nevertheless, the overall market for fashion has been difficult.
WP: Do you think the dip for fashion is just about different comparisons to the boom years when Michael Kors was at its peak, or could it be that smartwatches are having an effect as well? What is your analysis?
BD: Factually, the Michael Kors business has stopped growing. You see the GfK numbers so you will know what is happening there. They were a big part of explosive growth a couple of years ago, so therefore year-on-year there is an effect on the comparisons this year.
I don’t personally think that smartwatches have had any noticeable impact on the market. To the extent that they are being bought, I think the effect is incremental. I think it could just be people buying from us that might otherwise not have bought at all because we certainly cannot detect anywhere a negative impact on our business at any price point because of Apple Watch or any other smartwatches.
WP: It feels like the watch industry from a brand perspective has a credible position now with smartwatches and is better prepared if the market does move in that direction. Retailers also seem better prepared than two years ago when the fear was that they might lose watch customers to mobile phone shops.
BD: There is an industry challenge, which is that retailer margins on smartwatches are too low. The price points that have been set are making margins too low to be sustainable. Every brand that is doing smartwatches is positioning them with a retailer margin that is well below a typical watch margin for any normal price point.
WP: How would you describe the London market compared to the rest of the UK?
BD: There is no doubt that biggest single impact on the market over the past six months has been the tourism boom that has come from the devaluation of the pound. It is particularly good when talking about year-on-year growth because it is compared to a period last year when the pound was relatively strong and the UK was disadvantaged, particularly against the eurozone countries.
Overall, year-to-date, we are travelling at around +25%. If you look at the nationwide regional business it is more like +10% and it is significantly more than that if you look only at the luxury world.
So, with the price advantage here, and with the tourist business responding to that, there is no surprise that the market in London and for luxury has been so strong.
What has been a surprise, and has taken everybody by surprise, is that the domestic business has been improving quite significantly. I think that what this suggests to me, and what is clearer and clearer to me, is that this is the best market in the world for luxury Swiss watches. We get it, we appreciate it, we really value Swiss watches for what they are, and the UK therefore performs so well.
WP: I am glad you make that point, because the quality of the retailers we have in the UK is something I feel strongly about and is under-reported. There is too much focus on the impact of the falling pound, and too little focus on the incredible strength of the very best UK retailers in terms of skills, knowledge, experience and the environment in their shops.
BD: I totally agree, and if you wanted to do more on that and really fly the flag then I would happily support that. We have spent a lot of time in the US over the past couple of years and the UK market in terms of stores and brand presentations compares very well to the US and also to other Western markets that I have seen.
WP: And it is that quality that the UK is going to have to deliver in 2017 to maintain growth over a year as exceptional as 2016. The comparables are going to be that much more difficult to beat and maintain our position among the top countries in the world in terms of Swiss watch imports.
BD: Yes, and do you know what, I think if anybody did the arithmetic on which is the biggest importer of Swiss watches on a per capita basis, I think the UK might come out very high.
WP: The scale and market share of Aurum Group when it comes to Swiss watches is almost unique in the UK. It gives you the sort of power in the market that is more typically only associated with the mega brands like Rolex. Retailers will do anything they are asked to do to keep Rolex, but the shoe must be somewhat on the other foot with Aurum Group because Rolex needs you just as much if not more than you need Rolex.
BD: First of all, we are the oldest retailer of Rolex in the country. In 1919 Goldsmiths was the first ever retailer of Rolex in the UK. So we have almost 100 years of history working together and we are the biggest Rolex retailer in the UK. Personally, I think it is one of the best luxury brands in the world. I think it is fantastically well managed in terms of the product, marketing support, sponsorship, store presentation. It is our biggest business. They do set very high standards. We do have efficiency because the size of our Rolex business means that we can resource it correctly. We have dedicated marketing, merchandising, and store development for Rolex. As a result we have what I believe to be a very collaborative and smooth partnership that works for both of us.
You can never stand still as a Rolex retailer. The bar is always being raised, and you have to respond.
WP: Looking forward into 2017 and beyond, how do you view challenges like rising prices when you are buying Swiss watches with a weaker currency?
BD: We all buy in pounds, so the currency loss this year has been with the brands. As a result, they have responded with a price increases that mean that, with the majority of the brands, we now have comparable pricing with Europe. The Swiss franc continues to appreciate against the pound and the euro so you could speculate that will result in further price increases in the future.
But we think that, now the big price adjustment has been made for most brands, we will return to more regular, but modest price increases.
In this industry, if you look back over the past 30 years, regular price increases have been normal as the products have been enhanced, as the materials have improved. The total volume of watches did not go up, but the price and value did go up. We see that normality returning and anticipate regular price increases, but more modest price increases.
WP: Will those price increases be caused by economics and geopolitics, like we have seen this year, or by improvements in product?
BD: It will be the latter. As soon as you have restored parity or acceptable comparisons between prices in different markets then everything is back to normal. The price rises seen in the UK this summer have achieved that for most brands with reasonable comparables between the UK and Europe now. There are some exceptions, for example Swatch hasn’t put its prices up at all and they remain better value here than in Europe, although I am sure that will be addressed.
Once the correction is made for the devaluation that happened post-Brexit, then I think what you will get is a return to the historical normality of regular, probably annual, but modest price increases.
One of the attractions to consumers is that luxury watches hold their value over time, and one of the reasons for that is that prices go up for new watches.
WP: Your plan to open a Watches of Switzerland store in New York in 2018 is an exciting step. Is it part of a broader expansion outside the UK?
BD: Yes, it is. We have a very big market share in the UK, particularly in the luxury sector. We do think that this market is the best in the world for presentation of luxury watches, and we have been looking at what retailers do in other markets. What we have found is that the biggest area of opportunity we believe is in the US. There hasn’t been the same investment in multi-brand retail in the US as there has been here, led by us.
There is a lot of development in retail in the US. The area of New York where Watches of Switzerland is opening, Hudson Yard, is almost like a new city being built in West Manhattan, with huge increases in residential population, working population and potentially tourist population. There is a fantastic new mall that has lots of reasons to visit socially, for shopping, restaurants, bars; the whole area around it is all landscaped.
It is completely new. There was no business happening in watches and jewellery at all in that area of West Manhattan, because none of this existed.
There are other examples around New York and around the US of major new developments, which has given us the opportunity to talk to landlords about what we could bring. They are very impressed. We have had a number of retail landlords visit us over here and we have taken them around the golden triangle stores where they are very impressed by the standards of retailing. They are very interested in having us as tenants, and then we have to do the job to get the brands to agree to come with us.
On Hudson Yards the response from the brands has been great. We have the best location at the entrance of Hudson Yards. We have not announced any other brands that will be there other than Rolex, but I would say we have the pick of the luxury Swiss brands and it is going to be fantastic. We are already working on a couple of other live projects that we will be delighted to announce down the line.
WP: Hudson Yards looks impressive, but the big bucks are in uptown Manhattan – Madison and 5th Avenue, or perhaps downtown near the financial district. Are these not the equivalent locations to the golden triangle in London where I would expect to see Watches of Switzerland?
BD: Obviously uptown: Madison, 5th Avenue, 57th Street is where there is a concentration today. We have seen a complementary opportunity to those in Hudson Yards. We think there are a couple of others that would also be complementary. You mentioned downtown around the financial district. There are two new malls down there around the area of Ground Zero: The Oculus and the Brookfield Malls. There are some other opportunities too, but of course if we got the right support to open uptown where the concentration of luxury is in New York, we would look at that.
We believe there is a huge opportunity to increase the size of the market for luxury watches; to come in and actually elevate the market, to improve standards and increase business for everybody. It is not as if we have to come in and steal market share. Quite the contrary, what we plan to do and where we plan to do it is very complementary to the existing market.