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America’s ever evolving mid-market

DON’T FORGET THE MIDDLE CLASS

March 2017


America's ever evolving mid-market

To see the impact of cutting-edge change in the watch world, check out America’s big, bruising middle market.

I

n the 2016 U.S. presidential election, an ocean of ink was spent on chronicling the uncertainties and anxieties of America’s middle class. Despite all that, there is one area that just-plain-folks really can’t complain about. That’s watches. When it comes to buying a watch, Joe and Jane Six-Pack have never had it so good. Middle-class Americans today can buy more watch brands, boasting more technologies and styles, at more watch retail outlets than ever before.

The American midmarket is undergoing some dramatic changes resulting from new economic, technological, and demographic forces. For consumers, that’s good. For watch companies, maybe not so much.

That’s not to say that the U.S. watch market is booming. It isn’t. (Swiss watch exports to the U.S. dropped 9.1% in value last year.) What it means is that the American mid-market, like the global watch market, is undergoing some dramatic changes resulting from new economic, technological, and demographic forces. For consumers, that’s good. For watch companies, maybe not so much. The middle segment of the U.S. watch market, which runs roughly from $200 to $1,200, may be the best place to see those forces at work. Somewhere in that range is what the American middle-class – defined as a three-person household with an annual income ranging from $42,000 to $125,000 – tends to spend on a new watch. It’s home to the traditional Big Three mid-priced brands, Citizen, Seiko, and Bulova. It also includes a strong fashion-watch segment as well as quartz analogue watches from a significant contingent of Swiss brands like Movado and Raymond Weil. Here’s a look at three forces that are shaping that important market segment today.

1 | Smartwatches

The arrival of the Apple Watch in 2015 was a mid-priced bombshell that showed the potential power of the connected watch. After just nine months in the watch market, Apple became the world’s first or second largest watch company (it depends on your estimate of Rolex’s sales) with sales of an estimated 13 million watches worth $6 billion. Last year, though, in its first full year and despite the launch of Apple Watch Series 2, priced from $369 to $1,339, Apple’s watch sales dropped 15%, according to estimates by Strategy Analytics, a Boston research firm. (Apple does not release sales data for the watch.) Smartwatch sales for Samsung, the world’s #2 smartwatch producer, fell 11%. Overall, global smartwatch sales rose a measly 1% to 21.1 million units.

U.S. watch executives offer good news/bad news assessments of the impact of smartwatches. The good news is that they are expanding the market, putting watches on the wrists of people who would not otherwise wear them. The bad news is that they have taken sales away from traditional mid-market brands.

Just where the smartwatch market is headed is anybody’s guess. Apple and Fitbit remain gung-ho about it. But the loss of momentum at Apple and Samsung and the failure of smartwatch- pioneer Pebble (the watch was discontinued and the company sold to Fitbit in December) and Motorola (it halted production of its Moto360 smartwatch) has soured analysts on the category. They have slashed 2017 smartwatch forecasts, as smart technology moves on to new applications such as home appliances (smart speakers, smart bathroom showers, etc.).

In an ironic twist, one smartwatch expert last summer looked to traditional watch brands to boost the stalled smartwatch market. “One of the biggest omissions in the smartwatch market is the absence of traditional watchmaker brands among the leading vendors,” wrote Ramon T. Llamas, research manager for International Data Corp. in Massachusetts, an authority on consumer technology markets. “Only a small handful of traditional watchmaker brands have entered the smartwatch market…. Participation from traditional watchmaker brands is imperative to deliver some of the most important qualities sought after by end-users, namely design, fit and functionality. Combine these with the brand recognition and distribution these brands already have, and it’s reasonable to expect the smartwatch market to grow from here.”

Indeed, the number of traditional watch brands offering smartwatches is growing. They include Fossil, Timex, Swatch, Casio, TAG Heuer, Movado, Frédérique Constant, Alpina, Bulgari, Tissot, Mondaine and more. Whether they will help the smartwatch market, or it will help them, remains to be seen. The game is still afoot. Silicon Valley analysts may consider sales of 21 million watches small peas, but in the watch world, that’s a big deal: it’s nearly as many watches as the entire Swiss industry exported last year (25.4 million).

2 | E-commerce

Last November, in a meeting with financial analysts, Richemont Group Chairman Johann Rupert sounded the alarm about how e-commerce was changing the luxury industry. “I am talking about a massive change in the way business is being done by going digital, a massive change in e-commerce.” Addressing the worsening slump in luxury goods sales, he said, “The sales will come back, but how will they come back? Will they come back in the same way, where people walk into retail stores? I doubt it.” Richemont had just hired an executive from Google, he said: “We’re appointing new people from e-commerce to be ahead of that curve.”

Compared to other Swiss luxury-watch firms, Richemont may be ahead of the e-commerce curve. But compared to watch companies competing below $1,200 in the American mid-market, including Swiss ones like TAG Heuer and Movado, most Swiss luxury brands are far behind.

The U.S. market is ground zero for e-commerce. The rise of e-tailing giants like amazon.com is drastically disrupting America’s complex brick-and-mortar distribution system. The watch industry relied on an array of retailers: independent jewellers, regional and national jewellery chains, brand boutiques, department stores, mass merchandisers, outlet stores, etc. Now, though, brick-and-mortar casualties are mounting. Malls are dying; once mighty Macy’s will close 100 stores this year; and 1,269 jewellery stores closed last year, according to the Jewelers Board of Trade. Consequently, mid-range watch firms had little choice but to embrace e-commerce years ago. Virtually all of them sell their watches on their own websites and apps. Many have a network of authorised e-commerce dealers. Citizen, for example, lists 88 “authorised internet retailers” on its U.S. website.

Moreover, e-commerce may be the solution to what many U.S. watch executives consider a serious emerging threat to watch sales: Millennials and the generation behind them, Gen-Z. These youngsters are famously immune to the lure of the wristwatch. They don’t value traditional brands or traditional modes of shopping. So how to reach them? Electronically, via social media. There they discover products and brands that appeal to them. Including watch brands, like California-based MVMT, founded by two American millennials. Priced between $95 and $160, MVMT is a mass-market, not a mid-range brand. But let’s see where they are in five years when the founders turn 30.

3 | Grey market

The rise of e-commerce has exacerbated another distinctive feature of the U.S. watch market: the thriving grey-market sector. Swollen inventories in Asia due to the slowdown in China and the collapse of the Hong Kong market has led to an avalanche of grey-market merchandise in the U.S. Maurice Goldberger, owner of Chiron Inc., in Montreal, is one of the watch industry’s biggest and best-known watch closeout specialists. “2016 got off to a flying start and the market is expected to grow over the next few years,” he told Switzerland’s swissinfo.com last year. “Our growth is particularly strong in North America.

No surprise there. The size of the American market (Switzerland’s second largest market) and its deeply engrained discount culture have long made it a destination for closeout watches. Last year, though, the influx of grey goods rose to alarming levels. “It’s the worst I have ever seen,” one veteran jeweller told me. Boom times for transhippers are a bane for authorised retailers. With unauthorised e-tailers like amazon.com, eBay, jomashop.com, and others offering tons of new watches at deep discounts, it makes it harder for authorised retailers to move their own bloated stock.

Or to move new goods. At SIHH in January, Baume & Mercier unveiled a new men’s quartz analogue Classima priced at CHF 890 on a leather strap and CHF 1,090 on bracelet. The watches are “priced to sell”, particularly in the United States, B&M’s top market. On amazon.com, however, you can buy a men’s quartz analogue Classima 8485 from the existing collection for $640. Indeed, a search of amazon.com shows quartz and mechanical watches from a surprising number of Swiss brands selling at bargain basement prices aimed directly at the mid-market buyer.

Can America’s mid-market absorb all the new models flowing into it? Over time, yes. But not this year. With watch pipelines still full, for American watch consumers, it’s still a buyers’ market.