In December last year self-described leaders in the field of investment research Morgan Stanley, published their 44 pages ‘DTC and the Bullwhip Effect’ report suggesting “A bumpy transition ahead for Swiss watch industry”, in its long fight to regain market share and sustained recovery. Let’s take a look at the main points about the Bullwhip and the DTC or direct to consumer distribution model, then perhaps understand what’s happening here.
What is the bullwhip?
Morgan Stanley believes there are some drastic changes and industry challenges to overcome. The phrase used was the Bullwhip Effect, in an attempt to describe the cause and effect of this seemingly endless slowdown, but how does it work? The main thrust of the Bullwhip Effect is the surprisingly artistic explanation by Morgan Stanley to illustrate the overproduction of timepieces between customer order and manufacture. Essentially, it’s likening the amplification of the wavelength from a snapping whip to align the compartmentalized supply chain.
It seems somewhat incongruous to the point that a diagram is needed to drive the idea home. You can see from the illustration below, courtesy of ablogtowatch.com how the idea pans out.
In all its glory this model describes the failings and lack of communication that is universally understood to be insensitive even towards ‘friendly’ companies. This leads to confusion between supply and demand that eventually produces an oversupply impossible to be absorbed organically through customer sales.
Reading the report the main premise seems to be based on investment recommendations in relation to the surplus overstock of The Swatch Group AG and Compagnie Financiere Richemont SA, and what to do about it. That being said, it still speaks volumes to the problems felt throughout the industry.
The traditional conservative model.
There is no surprise to know the Swiss watch industry is or has been, the epitome of conservative traditional moving steadily and purposefully through the steps of production. This made them slow to react to market forces that were all-encompassing and absolute. The Chinese slow down in part caused by the crackdown in corruption, the slowdown in European tourism in the shadow of global terrorism, it all adds up to a headache that was never expected or fully understood by the industry. While manufacturers were working to produce goods and keep skilled mechanical artisans in work hoping their problems would disappear, the perfect storm was coalescing.
The results of the overproduction as Morgan Stanley suggests has lead to approx. €16bn (£14.5bn) worth of stock that not only remained unsold but found its way into the hands of third-party retailers. This includes the grey market discount stores that the Swiss watch industry loves to hate, and in some cases despise so much, they find it more appealing to destroy stock than let it sell this way. One example of this is the Richmont group buy back of €200m of unsold watches in 2017 that was destroyed in preference to letting them sell at discount, cheapening their brand value.
Changing of the guard.
Regardless of the doldrums suffered across the watch industry over the previous years, the Swiss Made mark is still the only true contender for mechanical luxury timepieces. Last month Geneva’s annual watch fair The Salon International de la Haute Horlogerie (SIHH) opened its doors to dealers, collectors and the public alike, showing their newest, most expensive, and innovative products that are unlikely to be available in any boutique. This year was dominated by Richmont group owning brands such as Vacheron Constantin, Jaeger-LeCoultre, IWC, Piaget, the list goes on.
In what could be proof the Swiss Watch Industry is in a battle for its life and addressing real concerns, this year saw the introduction of a lab showcasing at SIHH. The purpose being, the introduction of watch technology using robotics, 3D printers, and artificial intelligence. It’s a far cry from the handcrafted precision-engineered Swiss Made artisanship we might be used to, but it shows the industry has started taking notice of the demands of the modern world.
The march of digital ‘devices’ across the industry hasn’t taken anything from the prestige of the mechanical timepiece but that doesn’t mean there aren’t some pretty weighty problems to overcome. As we all know, change is one of the few constants in this life and even the bastions of tradition and conservatism are beginning to change. Proof of this seismic movement must be the agreement between the behemoths of the watch world, SIHH, and Baselworld, setting future exhibition dates alongside each other, reducing competition stress.
The precursor to change.
The Swiss watch industry is just that, an industry that has seen the need to adapt. With lost jobs, unsold stock, buy-backs, the oversupply represents a painful realignment that’s been a long time coming. With a new found outlook it seems there is light at the end of this particular tunnel as Fabienne Lupo, chairwoman and managing director of the Foundation de la Haute Horlogerie says “trends are looking quite good”.
The numbers published by the Federation of the Swiss Watch Industry, reports 11 months to the end of November last year the export value is up 7.1% on the previous period at a massive 19.54bn Swiss francs that translates to (£15.5bn; $19.9bn).
More numbers worth taking into consideration are Hong Kong up 21%, US up 8%, China up 14%, the increase in US exports comes on the tail of a previous 3 years of consecutive declines. The 5 largest markets are Hong Kong, USA, China, Japan, UK, and the products in the 3000+ (CHF) – are up 11%, but sub 500(CHF) has taken a 15% hit.
The watch industry coming of age.
The positive numbers give cold comfort, as Morgan Stanley suggests the positive numbers obscure some major challenges ahead. There still exists a glut of overstock leaving the possibility of large buy-backs to keep cut-price products off the market. Some big players such as Richmont group owning A. Lange & Söhne, Baume & Mercier, Cartier.IWC.Jaeger-LeCoultre. Montblanc. Officine Panerai. Piaget., certainly find the discount market an affront to their brand value. This leaves the real possibility of a substantial financial loss as part of the realignment, so it’s probably safe to say, things may get worse before they get better.
It’s easy to simplify why the industry has been so slow to react, but it’s taken painful changes to management, and a realization of the inevitability of investing in an online presence, adopting or at least accepting the direct to customer DTC distribution model. As Ariel Adams of ablogtowatch.com says, “The industry has been through a long period of consolidation”, “Companies have purchased brands as investments. But a lot of brands have not been allowed to develop”.
It can’t be ignored that the old school had more than communication problems and a requirement for an attitude adjustment, but the relentless onslaught of the digital age also feature heavily in the crisis. With two distinct markets in the guise of entry level to high end the Swiss Watch Industry has seen a fair proportion of mechanical and quartz market lost to the digital space, as Morgan Stanley pointed out. In an attempt to level the playing field some manufacturers such as Fossil and Omega are joining the revolution to create SmartWatch and Hybrid pieces within the entry-level market.
As Morgan Stanley point out, the high-end brands such as Longines, Breguet, Blancpain are unlikely to be affected, while the sub 500(CHF) market will take the brunt of the competition. While this may appear to be an additional burden it could be considered a market place that introduces a new generation to luxury watches, as Ms. Lupo of Morgan Stanley points out, “Smartwatches are complementary to mechanical watches”.
This assertion is seconded by Ariel Adams of ablogtowatch.com saying “Young people are paying attention to watches, and that gives the industry a potential new generation of consumers”.
To read the full report publish by Morgan Stanley, follow this link.
So, if you’re looking for the perfect Watch at the perfect price, from a trusted source, you know it can be a stressful experience, with the right help and advice, you too can find your dream timepiece. As I’m considered an expert in my field and I write for other publications like Wrist Review I know you’ll benefit from my experience and avoid the pitfalls.
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