According To Ariel: Investors & Brand Finance Managers Are Mistaken That The Watch Industry Is Doing Poorly

News of the watch industry’s decline has been greatly exaggerated. I decided to talk about this issue because of what I started to suspect the proliferation of such news was doing to the health of the watch industry that I work within the orbit of. The last decade or so has been an absolute whirlwind for the global luxury timepiece industry. The storm isn’t nearly over. Even if history and statistics probably indicate that the luxury industry will return to growth again in the coming years (when taking into consideration historical cycles), a lot of damage has been done in the luxury watch space. A lack of investor confidence and spending internally at watch brands and the companies that sell them has led to a real contraction in the size of the watch industry and the various suppliers that contribute to the ecosystem. The last ten years of the watch industry have been incredibly eventful, with extreme highs from pandemic-era consumer purchasing frenzies, to quite low as luxury brands consolidated power and finances at headquarters levels, which contributed to huge numbers of layoffs and professionals permanently leaving the industry. The last fifteen years or so, from my perspective has seen a great shifting and flight of talent in the watch industry space. It is a sticky industry, and people tend to like to continue working within the watch industry when possible. That means people prefer to work for another watch company if they leave one role, rather than entirely leave the space and try working in another industry. People might even take on entirely different types of job roles just to stay working within the ambit of fine timepieces. Nevertheless, despite the psychological attraction to the watch industry space, I have seen great people leave, and nearly no fresh blood or exciting talent enter. A close examination of business changes and shifts in “supplier relations” within the watch industry space over the last 20 years will illustrate huge dynamism. By definition, that comes with a lot of conflicts, disagreements, shifts in power, and bottlenecks of cash flow and influence. The Great Talent Flight: How The Watch Industry’s ‘Stickiness’ Started Failing While the luxury watch industry used to like to insulate itself from global affairs, today it must reckon with the fact that geopolitics can have an immediate and direct impact on its fortunes. The last decade has experienced multiple wars, difficulties in travel and the movement of money from various regions, a global pandemic, accompanying supply chain shocks, social struggles with digitalization, and economically weak mainstream consumers. If the luxury watch industry normally thrives in stable economic times, then instability is seen as the enemy. The interesting thing is that in a sense, luxury never dies; it merely sleeps. There are a surprising number of multiple-century-old watchmakers who have weathered many more storms. Upon close inspection, what you will find is that during hard times, they tend to ‘turtle up’ and go into protective, near-hibernation modes. When Swiss watchmakers believe the outlook will be good, they will invest in products and marketing. But because it takes multiple years to recoup your investment on making high-end watches, the companies behind such products get spooked if they believe an economic dip or trouble is on the horizon. Especially after the luxury watch industry has experienced so many of them in the last few decades. Self-Insulating Like a Water-Resistant Watch Case When Geopolitics Cause Fear The logic is pragmatic. Watch brands see themselves as business that need to make money. They aren’t solving world problems, and they can’t rely on durable consumer demand like food and tool companies enjoy. Watch brands only thrive when there are people out there who want to reward themselves by spending a lot of money on a personal luxury like a timepiece. To repeat the mantra, “no one needs a watch, they merely want a watch.” Needs are easy to address. Wants can be valuable, but not if you need to engineer those wants in the first place. The Swiss prefer to leave that work to their colleagues in the pharmaceutical space. People who make watches thus “sniff the air” to determine if they feel people are going to want the expensive wristwatches they are planning to make five, ten, or fifteen years from now. While many small, start-up watch brands are rather agile, the reality is that most major watchmakers cannot simply adjust their product portfolios and strategies on a whim as the market underneath them shifts like moving waters. This is why luxury watch makers freeze up during turbulent economic times when the market outlook isn’t just bad, but wholly unpredictable. The Headline Trap: How Media Sentiment is Suppressing Investor Confidence Now I will get to my observation and the argument I think needs to be addressed. Within the larger context of worried and trebulous managers in the watch space (that I discussed above), an additional force (which looks bad but isn’t actually truly bad) is preventing managers and decision makers from accelerating out of panic mode. In other words, while the watch industry certainly has troubles, it is actually in a pretty good position when it comes to consumer demand and buying behavior. Many of the watch industry’s most pressing issues are problems of their own creation (such as rampant inflated pricing), or based on a misunderstanding (or at least confusion) of the watch market. The problem lies with headlines. I learn about an interesting (but hardly surprising) correlation a number of years ago: Investor confidence is highly impacted by news headlines and the sentiment of the media. The implication is that people who make decisions about how to spend money are regularly seeking information about the world around them. These financial decision makers often use news and media to get their information and establish a basis for their mood and confidence. When the headlines and stories they read repeatedly signal economic decay, they avoid such an area or investment. Alternatively, when investors read a lot of positive or optimistic media (in general or about a specific area they are focused on) it tends to vastly increase their confidence and desire to prospectively put money into a particular area. Data Without Context: The Used Watch Bubble and the Illusion of a Market Slump If you apply this to the watch industry, then you will immediately understand why investor confidence is so low. I am not saying that 100% of the articles about the watch business are pessimistic about the economics, but most of them are. The problem is that such articles conflate their meaning and usually do not talk about the larger health of the watch industry itself. In fact, nearly all of the many “bad” particles about the trajectory of the watch industry refer to already inflated prices of particular pre-owned watches. There was a big bubble for a while where even used watches were being priced at more than retail. Sometimes a lot over retail. This was due to a conflagration of factors as wide as the pandemic to cryptocurrency investors looking for alternative “real” things to easily buy online. The pre-owned watch bubble was always destined to burst, and when it did, no one should have been surprised. But this bubble came with something else that was new for the watch space: lots of sales and valuation data. Compared to the sale of new watches (which sees companies offering truly little public performance or revenue data), platforms that deal in used and gray market watches are happy to share their numbers with anyone who cares. In fact, an entire cottage industry (born of cryptocurrency and equities data crunching platform styles) of used watch analytics, trackers, and consultants has emerged. There are countless tools designed to track in real time the value of your watches, and marketplaces where you can trade watches (that you never take hold of, and which are stored in warehouses) with associated blockchain tokens attached to them and never actually wear the product. Anticipating the wristwatches would become another fast and fun tradable (and unregulated) asset, a lot of people put a lot of effort into tracking and commenting on “the numbers” of the vast online watch trading space. This small industry of traders who wanted to treat wristwatches like a financial asset versus a fashion accessory produced most of the data that led to most of the financial articles about watches over the last several years. This also meant that once the “priced over retail cost watch market” started to shrink back down, the people who were tracking this data made it seem like the entire watch industry was doing poorly. That is where the great misconception is. As much as some people want to turn the wristwatch industry into the collectible trading card industry, it just doesn’t operate that way. Instead, consumers often expect a slight discount when buying a brand-new wristwatch. It is not normal or healthy for them to be happy spending precisely retail, let alone above retail. That the price of pre-owned watches is coming down to near or below retail price is how the used watch market should be. My point is that the watch industry is exiting a bubble and not doing poorly because the price of pre-owned watches is down. I have to make such explicit statements these days because most of the people making financial decisions about the luxury watch industry simply do not understand these nuances. At least not yet. They are not connected to the market, they do not understand the systems (or agendas) behind the data brokers, they do not understand the limited scope of the findings they read about in professional-looking reports, and they do not understand where actual performance in the watch industry is. I want to repeat that. The luxury watch industry does not typically report positive numbers. If a luxury brand reports on an area of growth, all it will do is attract more competition in that space. The established luxury watch industry will prefer to hide sales success that is reported on it. Thus, there will rarely be headlines about how any one brand in the watch industry is doing amazingly well (unless they aren’t, and are slyly hoping for investment after the publicity). Let me share seven concrete examples of articles with entirely misleading headlines that purport to talk about the health of the luxury watch industry. If you were a casual observer, the most rational takeaway message from reading the headlines and much of the content of these articles is that money is moving out of the watch industry, and not towards it. Instead, all these articles actually mean is that fewer people are speculatively purchasing wristwatches as an investment. In my opinion, these reports and graphs have no reference to people’s interest in purchasing watches to wear and as a self-reward. While consumers are limited by their disposable incomes, the overall purchasing behavior of quality watches to wear, collect, or otherwise enjoy is remarkably strong. Here are seven articles that highlight the problem of misleading watch industry headlines that I have been talking about: - Rolex, Patek Used Watch Prices Fell to Three-Year Low in 2024 - Pre-Owned Rolex and Patek Philippe Prices Fell to a 3-Year Low in 2024 - The post-pandemic era has sent the high-end watch market into a slump that analysts say could last a decade - Rolex, Patek Philippe, and Other Used Watches Are Outpacing the Stock Market - Rolex Prices at Four-Year Low on Secondhand Market - Luxury Watches: A Timeless Investment in Portfolio Diversification - Secondhand luxury watch prices slump to near two-year low after a pandemic run The American Anchor and the Latent Demand of a Wristwatch Curious Social-Media Generation You’d have to have been a particularly resilient investment-minded professional to ignore the popularity of headlines like those I shared above. Math-minded people have no data available to them to suggest that the watch industry is going to do better, and the scant numbers they can find tend to point to “unpleasant” directions. Will that change? No. In fact, if you look at the history of successful business people in the luxury watch industry, most of them have stories like “they told me I was going to go bankrupt and was crazy to do it.” Most of the watch industry’s heroes have stories about spending money not because of the market but because of their gut instinct and genuine desire to build something new. The luxury watch industry has never been predicated on strong numbers from the market. As I said above, investors have mainly looked for periods of stability. They might not know if a business idea is going to succeed or not, but at least they have enough confidence that the market won’t crash in the next few years. The creative and emotional types who come up with all the good ideas in the timepiece space don’t think that way. Struggle and uncertainty are often their inspiration and motivation. Good ideas always exist in the watch space if there are backers to make it happen. The last few years of depressing watch industry headlines have not done much to instill a healthy volume of investor confidence. What might change that? For one thing, America is by far the top-performing market for the watch industry around the world, which is actually a healthy sign. It means that no unstable bubble economies are propping up the watch industry and that the world’s most mature modern consumer market is organically leading demand. Products that work in the United States tend to work in other countries. For the time being, Americans continue to set global expectations and often trends. If your brand can make it in America, it can probably make it anywhere. That has not proven true for watch brands that spent much of the last few decades specializing in other markets other than the United States, and who have attempted to succeed in America only later on. The United States is not only a good market for luxury watches, but it is also a potential growth market because so many regions still don’t have much access to wristwatch products or culture. I’ve also talked about how the luxury watch industry is doing very well where it counts — with young people. The problem is, many of them can’t yet afford watches. Over the last decade or so, the watch industry got incredibly lucky that culture was all online, just as wealthy people found it increasingly enticing to share their toys on social media. That includes their wristwatches and often a discussion of the prices of those watches. Timepieces are a traditional status item, but when combined with the ability for celebrities (and those who want to be them) to share images of their lifestyle and accessories online all the time, watches became a regular subject for teens to scroll through on their feeds. The luxury watch industry is sitting on a large volume of latent demand that it will not get to enjoy for a few more years or even decades, as the consumers it now has relationships with save up enough money for their first purchases. Not all of them will become watch enthusiasts, but plenty more watch enthusiasts are going to be created that would not otherwise have existed if it were not for the popularity of watches on social media. Used watches are meant to cost less than a brand-new watch. Depreciation is both common and expected by the vast majority of consumers. While there are rare exceptions to the rule in all categories, the reality is that no product category that is produced in quantity has a market where used goods routinely cost more than new goods. That is simply not how healthy markets operate. While you can debate the quality of the above-referenced external news articles, you must agree that none of them fully discussed this concept in context, nor did they explain the broader implications of what their findings mean for the industry they are appearing to comment on. To understand these types of reports in context requires a very full understanding of the watch market, its history, and its current behavior and activity. I exist in a very privileged position when it comes to sensing market forces from various perspectives, regions, professions, and opinions. I can easily say that there are a very small number of other people in the space who have a similar birds-eye view. The outcome is that most people making major financial decisions about the watch industry and how much money is available for it to spend are too frequently being influenced by potentially misleading reports and fearsome-sounding headlines. The actual watch industry’s performance, future opportunities, and underlying strengths are far more positive and optimistic.