time-business


Business climate, competition and the digital future

Scenarios

October 2017


Business climate, competition and the digital future

The Hour Glass is present in the markets of Singapore, Malaysia, Thailand, Hong Kong, Japan and Australia. In 2016, in most of these markets, the watch industry experienced significant headwinds and contraction.

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or 2016, The Hour Glass saw a 2% decline in sales, and was fortunate to have sized its inventories to match demand conditions. For the watch industry overall, we see that there is still a general inventory overhang for several brands in the industry, which will take considerable time to be absorbed into the market. I remain hopeful that this can be done within the next 18 to 24 months.

Business climate, competition and the digital future

“To survive, bricksand- mortar retailers must differentiate and specialise. The future is not solely predicated on how watches are sold, but on who will sell them.”

We continued to invest significantly with our core long-term partners: Patek Philippe, Rolex, Audemars Piguet and Hublot. These companies not only demonstrated tremendous resilience during this period, they each continued to consolidate their strengthening positions in the market.

Though 2017 can be still characterised as a challenging environment for the industry, the outlook for the world has become somewhat lighter and with that, we anticipate more positive consumer sentiment to return. As an aside, it is vital that at every moment – and more so at times like this – the industry focus its efforts on enticing newer and younger enthusiasts and buyers into the watch collecting universe. It is only through them that our future can be secured.

Business climate, competition and the digital future

Competition and the Digital Future

The global retail landscape is littered with casualties of the changing profile of consumers and consumer behaviour. Baby boomers are all but retiring and Millennials born in the year 2000 will, by 2020, account for 40% of the luxury market, exerting their influence on global shopping habits with their minute-to-minute updates on social media of what’s hot and what’s not. Shoppers are hunting online for the lowest prices, and shopping malls and traditional retailers are struggling to attract customers through their doors. Even what were once considered mainstay fashion brands, controlling both their own standalone boutiques and webstores, are facing the threat of online retailers undercutting them on pricing (excess inventory strikes again!).

Other trending observations we have made are that in 2016, in mature retail markets such as the US, consumers spent 31% of their discretionary income on goods and 69% on services and experiences. Three decades ago, 45% of their spend went towards goods. To compound matters, by 2026, it is estimated that 25% of all luxury goods consumption will be online, leaving physical retailing of all goods products with only 20% of the overall discretionary spend of this consumer. With an increasing number of independent dealers starting up new businesses by way of establishing a social media account, the battle traditional retailers will have is to either define and demonstrate their relevance to luxury shoppers, or face their fate of retail redundancy.

The watch industry is notoriously slow to adapt to change, and their recent embrace of the digitalisation of the world is approximately fifteen years behind the rest of the luxury goods sector. But now that the inevitable is firmly at the forefront of everyone’s strategic agendas, manufacturers and retailers are wasting little time in playing catch-up.

Richemont is an example of a watch company whose leadership is embracing this digital transition with aplomb. Rolex too has internalised an entire digital division staffed with the best technology minds, and has begun to develop solutions to combat online grey marketeers and drive a superior omni-channel experience with their retailers.

The implications are obvious and twofold. First, digital will be a key pillar of the industry. In the past year, several established brands owned by Richemont, LVMH and Swatch Group have sold limited edition capsule collections direct to consumers online, reportedly with tremendous success. These early wins will embolden them to further develop more such projects. What this tells us is that the conquest of the digital landscape is only just beginning, because as recently as last year, the battle for sales still existed exclusively in the physical domain.

Key luxury groups are now recognising that online retailing is an additional channel of distribution, and acts as a complement to their bricks-and-mortar operations.

The second implication is that to survive, bricks-and-mortar retailers must differentiate and specialise. The future is not solely predicated on how watches are sold, but on who will sell them. The demise of multi-brand specialist watch retailers has been bandied about for nearly a decade now. But, if anything, the current crisis enhances the strength of retailers with scale, reach and tech savvy, who have teams with deep specialist knowledge of the fine watch domain.

While brands have been consolidating their distribution networks, the culling has been primarily on what the industry defines as “B” and “C” retailers. Networked retailers will be required to play a more important role in this transmutation of the watch ecosystem. The rise of e-commerce is advantageous to multi-brand retailers because, by virtue of our business model, we offer choice. And choice is clearly one of the key tenets of online retailing. The world leaders in luxury fashion are not the brand’s own webstores but rather e-tailers such as Sephora and Yoox Net-a-Porter.

Success in the realm of online multi-brand retail is far easier imagined than accomplished. Our reading of the manoeuvring in the online luxury space is that developing a full-price, multi-category, multi-brand platform is a challenge that even the most cash-rich luxury goods conglomerates have admitted difficulty in navigating. Two years ago, Richemont divested themselves of online luxury fashion juggernaut Net-a-Porter, merging it with its direct rival Yoox and at the same time declaring that their rationale was because with CHF 5 billion in cash, they (Richemont) did not have the resources to become a winner in this space!

It is also too early to speculate on LVMH’s attempt at building their multi-category, multi-brand e-commerce platform 24 Sevres and its eventual commercial success.

With the watch industry, we recognise that there are tremendous opportunities to be exploited, and the argument for engaging online is evidently stronger than that of remaining on the sidelines. But we see three key challenges for any authorised watch retailer intent on developing a global e-commerce platform for new, primary market watches.

Firstly, there is the notion of global pricing parity. Watches are not priced the same all over the world. Retail prices vary with historical market conditions, import duties, consumption taxes and foreign exchange rates. And the possible arbitrage between markets could be up to 25%. Several brands such as Rolex, Cartier and Omega are addressing this issue by geo-fencing prices based on IP addresses. A recent case of Omega releasing exclusively for sale, online, a special 2,012-piece limited edition watch was met with such overwhelming demand that Omega’s servers went offline several times in the span of a few hours. All the watches were sold to clients with the geo-fenced retail price of their home country, and the difference was as much as 20%. However, due to the limitation of the offer, clients accepted, and many were not even aware of the difference. We cannot discount the novelty effect of such launches but, should they occur more frequently, the results are unlikely to be as robust.

Secondly, there is the issue of cross-border selling. Brands continue to assign the privilege of online retail to themselves whilst restricting their traditional specialist retail partners to the geographies that they operate within. However, with the rise of omni-channel commerce and a prospective desire to lever off pure play internet re-sellers, this model may soon be put to the test. Specialist watch e-tailers with large common markets that embrace online buying such as the United States, Europe and China may eventually give rise to the next corps of specialist retailers of the digital world. Such a development, however, will take time to manifest.

Finally, logistics. The single biggest logistical challenge for all watch brand owners and resellers is their ability to have a returns policy when selling online. Unlike other fashion and leather goods, the cost of refurbishment of a returned watch can be in the range of 2% to 10% of the retail value of the new watch, depending on its price. Additionally, when volumes increase, it is within reason to anticipate that a separate after- sales division needs to be created to accommodate the servicing of returned watches.

Assuming the preconditions stated above have been met, the first positive news about the internet is that it doesn’t always pay to be first. The second is that, owing to the apparent lateness of the watch industry to embrace the online realm, the real winners of the game have yet to be determined. In this quest to discover the digital El Dorado, there will be room for several players to securely entrench themselves, and even more ways to eventually disrupt and dislodge them.

Future

Two years ago, we recognised that The Hour Glass was facing an inflection point in its phase of business and organisational development, that for us to respond to the digitisation that was taking place in the watch retail industry, to be future-ready, we had to unshackle ourselves from our incumbent mindsets and broaden our views of where the world and the watch industry were headed. In the past 18 months, we saw to that. We reorganised our senior management ranks and flattened our organisational structure, reallocated resources to bolstering our technology, customer experience management and engagement marketing teams, committed to a series of course-altering technological capital investment programmes and, most important of all, engaged in a process of augmenting our organisational culture to meet the new demands of our business and clients.

Part of this journey is our emphasis on developing an omni- channel model that humanises the shopping experience every step of the way, from our online engagement with clients to their offline interactions with our corps of watch specialists. When we think about the consumer, we must consider that the new consumer is one that survives in an ever-present connected social environment. The merging or blurring of online and offline does not exist, as they are no longer mutually exclusive realms. A shopper, whilst engaged in a physical retail store and dialoguing with one of our watch specialists, will be concurrently online chatting with a friend, a group of friends or engaging in product and pricing research on their mobile device. Appreciating all these developments, our team invested considerable grey matter in architecting our technology roadmap, and is due to go live with our inaugural customer experience management platform – a solution that will form the backbone of our group’s omni-channel strategy.

Smartwatches

Evidently, there is a market for wearable tech, and smartwatches form one segment of this category. They are very useful, and I personally wear a Garmin watch when I exercise as it provides instantaneously highly accurate data that a conventional analogue watch would not be able to do whilst on the move. So I believe that functionally, there is a bright future for such devices. And I do not believe I stand alone in this view. I am certain traditional watch clients are interested in smartwatches. But not for the same reasons they would be interested in a mechanical timekeeper. Smart watches are really just the new tool watches for collectors.

ABOUT

Name: The Hour Glass
Boutiques: Singapore, Malaysia, Thailand, Hong Kong, Japan, Australia
Launch date: 1979
Category: High-range
Brands represented: Patek Philippe, Rolex, Audemars Piguet, Hublot, Richard Mille, Breguet, A. Lange & Söhne, Cartier, Chopard, IWC, Jaeger-LeCoultre, MB&F, Urwerk, Kari Voutilainen, Roger Smith, Omega, TAG Heuer, Breitling, Nomos, Sinn
Website: www.thehourglass.com