REPORT
MARKETS
The margins battle is underway Woke retailers are on the move
By Thomas Baillod
A
fter decades of trying to increase their penetration in the markets, brands now seem to be backing off and starting to cut significantly in their network of authorized retailers, while predicting an improvement in their operating margin. No intermediaries, only direct sales! Audemars Piguet’s announcement in the second half of 2018 was at least very clear. The strategy of FrançoisHenry Bennahmias, CEO of the brand, was unveiled in the context of the announcement of his withdrawal from the SIHH. It highlighted a major trend for watch brands: to integrate their distribution network more and more. Another example: in an interview with the NZZ - Neue Zürcher Zeitung - on 23 March 2019, Jean-Christophe Babin, CEO of Bulgari, announced that he wanted to reduce his points of sales in Germany from 600 to 300. The remaining 300 stores now represent 85% of sales, and the man at the head of this Roman brand, who joined the LVMH group in 2011, is confident: by refocusing its sales on half of its partners, he will allow them to better promote the brand, which should enable Bulgari to recover the 15% of lost business. Most of the major brands are currently doing this calculation and no longer hesitate to state it clearly and openly. But what they don’t necessarily confess is that in most cases they have a joker in their pocket.
6
#JournalSuisseHorlogerie Juin 2019
Online sales, mass retail network cuts, questions about the future of watch fairs... What is this groundswell that sweeps away the foundations of traditional watch distribution?
Margin recovery
Let’s take a look at lifestyle brands to better understanding. With no complexes and a past as short as their life expectancy, these brands take risks and try new experiments. During Baselworld 2018, the entire Daniel Wellington brand staff left the exhibition on Sunday morning. There was only the bartender and DJ left on the stand... for legal reasons of stand opening! From a fair already shortened to six days, the sales teams spent only three days on the booth, from Thursday to Saturday. What did they do during those three days ? They drilled their network resellers and cut off all those who wouldn’t follow, or that the brand didn’t wanted anymore.
Watch distribution, secular business model The centuries-old business model associated with watch distribution is based on a network of intermediaries who successively own and transport the stock of watches to the end consumer. Offering potential customers a permanent stock of watches that patiently awaits their visit in a store is a very expensive business model, and therefore very greedy on the margins. The retailer, the last link in the distribution chain, bears the three main costs: the rental costs of the store (the location), the salaries of the employees (the service) and the watches he owns (the stock). This largely justifies the high margins they have to charge. In Addition to being expensive, this approach also induces a fundamental bias: the business model of watch brands consists above all in selling their watches to intermediaries (the so-called sell-in) and leaves it to intermediaries to sell them to end consumers (the sell-out). Traditional watchmaking is therefore an industry that sells and thinks «wholesale», and delegates the link with the end customer.
customer, is currently shaking up the boards of directors of most brands and resonates like the new Eldorado of watchmaking, at a time when sales are at a loss for many of them. In fact, the rush to the margins of the market has become possible because of the combination of two phenomena. The first, which served as a trigger, is conjectural. The second, irreversible, is structural. In 2009, the economic air gap in the world economy was a wake-up call for the Swiss watch industry. Most of the brands were able to successfully absorb it and six years of record sales followed. But the crisis that began in 2015 had a much deeper impact, as it officially persisted until the end of 2018. Officially only, because unofficially not all brands have emerged unscathed. The global economic
downturn, the advent of connected wristbands (editor’s note: preferred term over smart watches) and a change in consumer purchasing behaviour are the main factors that may explain the reasons for this recession in watch sales. Especially since during these four years between 2015 and 2018, the digital groundswell, the same one that previously transformed marketing in a fundamental way, spread to distribution and changed the very foundations of traditional commerce. (see the text box dedicated to Watch distribution, secular model).
Three fundamentals upset by the Internet
How can digital technology revolutionize this traditional model? The digital modifies three fundamental parameters: notions of time, space and information. It eliminates the first two and
and retailers - the brand can recover around 70% of the public price value of its watches and thanks to this direct sales inflow, boost its profit by up to 400% (see the text box dedicated to the decomposition of margins). The calculation is quickly done, the profit being equal to the margin multiplied by the quantity, a loss of 20% of the volume compensated by 50% of the additional margin gives a profit growing by 30%. This probably allowed the bartender to feast on cocktails on the stand until Tuesday at the end of Baselworld.
It is impossible to obtain official figures for this disengagement campaign, but one hypothesis is enough to reveal the very nature of the wildcard: let us suppose that during these three days, the Swedish Filip Tysander, founder and owner of this brand, closed 20% of his network and that this led to a 20% decrease in his sales. Being very active in online sales through its official portal, the Swedish brand was reasonably able to expect, through this direct channel, to recover part of its sales. Let’s be pessimistic by estimating that it’s only half, meaning 10%. It already allows the brand to generate a 50% increase in his profit! How? By eliminating intermediaries - distributors
MARKETS
Jean-Claude Biver in the spring of 2018 warned retailers: «Specialize yourself, otherwise the brands will go live»
Digital breaking wave, the targeted end customer
This new direct-to-consumer sales trend, i.e. not needing anymore intermediaries to sell directly to the end
Audemars Piguet has just passed the CHF billion turnover and is abandoning the SIHH 2020. Its CEO François-Henry Bennahmias, here at the height of the launch of the Code11’59 and facing the Chairman of the Board of Directors Jasmine Audemars, embodies the temptation of brands to entirely integrate their distribution.
#JournalSuisseHorlogerie Juin 2019
7
REPORT
MARKETS
The margins battle is underway Woke retailers are on the move
By Thomas Baillod
A
fter decades of trying to increase their penetration in the markets, brands now seem to be backing off and starting to cut significantly in their network of authorized retailers, while predicting an improvement in their operating margin. No intermediaries, only direct sales! Audemars Piguet’s announcement in the second half of 2018 was at least very clear. The strategy of FrançoisHenry Bennahmias, CEO of the brand, was unveiled in the context of the announcement of his withdrawal from the SIHH. It highlighted a major trend for watch brands: to integrate their distribution network more and more. Another example: in an interview with the NZZ - Neue Zürcher Zeitung - on 23 March 2019, Jean-Christophe Babin, CEO of Bulgari, announced that he wanted to reduce his points of sales in Germany from 600 to 300. The remaining 300 stores now represent 85% of sales, and the man at the head of this Roman brand, who joined the LVMH group in 2011, is confident: by refocusing its sales on half of its partners, he will allow them to better promote the brand, which should enable Bulgari to recover the 15% of lost business. Most of the major brands are currently doing this calculation and no longer hesitate to state it clearly and openly. But what they don’t necessarily confess is that in most cases they have a joker in their pocket.
6
#JournalSuisseHorlogerie Juin 2019
Online sales, mass retail network cuts, questions about the future of watch fairs... What is this groundswell that sweeps away the foundations of traditional watch distribution?
Margin recovery
Let’s take a look at lifestyle brands to better understanding. With no complexes and a past as short as their life expectancy, these brands take risks and try new experiments. During Baselworld 2018, the entire Daniel Wellington brand staff left the exhibition on Sunday morning. There was only the bartender and DJ left on the stand... for legal reasons of stand opening! From a fair already shortened to six days, the sales teams spent only three days on the booth, from Thursday to Saturday. What did they do during those three days ? They drilled their network resellers and cut off all those who wouldn’t follow, or that the brand didn’t wanted anymore.
Watch distribution, secular business model The centuries-old business model associated with watch distribution is based on a network of intermediaries who successively own and transport the stock of watches to the end consumer. Offering potential customers a permanent stock of watches that patiently awaits their visit in a store is a very expensive business model, and therefore very greedy on the margins. The retailer, the last link in the distribution chain, bears the three main costs: the rental costs of the store (the location), the salaries of the employees (the service) and the watches he owns (the stock). This largely justifies the high margins they have to charge. In Addition to being expensive, this approach also induces a fundamental bias: the business model of watch brands consists above all in selling their watches to intermediaries (the so-called sell-in) and leaves it to intermediaries to sell them to end consumers (the sell-out). Traditional watchmaking is therefore an industry that sells and thinks «wholesale», and delegates the link with the end customer.
customer, is currently shaking up the boards of directors of most brands and resonates like the new Eldorado of watchmaking, at a time when sales are at a loss for many of them. In fact, the rush to the margins of the market has become possible because of the combination of two phenomena. The first, which served as a trigger, is conjectural. The second, irreversible, is structural. In 2009, the economic air gap in the world economy was a wake-up call for the Swiss watch industry. Most of the brands were able to successfully absorb it and six years of record sales followed. But the crisis that began in 2015 had a much deeper impact, as it officially persisted until the end of 2018. Officially only, because unofficially not all brands have emerged unscathed. The global economic
downturn, the advent of connected wristbands (editor’s note: preferred term over smart watches) and a change in consumer purchasing behaviour are the main factors that may explain the reasons for this recession in watch sales. Especially since during these four years between 2015 and 2018, the digital groundswell, the same one that previously transformed marketing in a fundamental way, spread to distribution and changed the very foundations of traditional commerce. (see the text box dedicated to Watch distribution, secular model).
Three fundamentals upset by the Internet
How can digital technology revolutionize this traditional model? The digital modifies three fundamental parameters: notions of time, space and information. It eliminates the first two and
and retailers - the brand can recover around 70% of the public price value of its watches and thanks to this direct sales inflow, boost its profit by up to 400% (see the text box dedicated to the decomposition of margins). The calculation is quickly done, the profit being equal to the margin multiplied by the quantity, a loss of 20% of the volume compensated by 50% of the additional margin gives a profit growing by 30%. This probably allowed the bartender to feast on cocktails on the stand until Tuesday at the end of Baselworld.
It is impossible to obtain official figures for this disengagement campaign, but one hypothesis is enough to reveal the very nature of the wildcard: let us suppose that during these three days, the Swedish Filip Tysander, founder and owner of this brand, closed 20% of his network and that this led to a 20% decrease in his sales. Being very active in online sales through its official portal, the Swedish brand was reasonably able to expect, through this direct channel, to recover part of its sales. Let’s be pessimistic by estimating that it’s only half, meaning 10%. It already allows the brand to generate a 50% increase in his profit! How? By eliminating intermediaries - distributors
MARKETS
Jean-Claude Biver in the spring of 2018 warned retailers: «Specialize yourself, otherwise the brands will go live»
Digital breaking wave, the targeted end customer
This new direct-to-consumer sales trend, i.e. not needing anymore intermediaries to sell directly to the end
Audemars Piguet has just passed the CHF billion turnover and is abandoning the SIHH 2020. Its CEO François-Henry Bennahmias, here at the height of the launch of the Code11’59 and facing the Chairman of the Board of Directors Jasmine Audemars, embodies the temptation of brands to entirely integrate their distribution.
#JournalSuisseHorlogerie Juin 2019
7
MARKETS
MARKETS
Décomposition des marges. Exemple d’une montre à CHF 1’000.1100
Member of the JIMH board of the Journées Internationales du Marketing Horloger, market expert Thomas Baillod founded the Watch-Trade Academy entirely dedicated to teaching watch sales. Online courses, conferences, consulting, this son of a famous figure in Swiss journalism, is in tune with the digital advances that may help the retail network, for which he is building a global database.
makes the third plentiful and free, whereas information was previously scarce and expensive. However, if we analyse a consumer’s purchasing act, we find precisely these three parameters, since the customer goes to a store (space) at a given moment (time) to receive information on a product (service). The first and the last parameters are the most expensive, they are the ones that generate the most margin together with the stock.
entire collection that the retailer will never be able to compete with. And, most importantly, direct sales provide brands with the key information they have so far sorely missed: sell-out knowledge. This information enables the brand to know its sales in real time in the markets and thus to optimize its commercial operations, its marketing campaigns and its production. The Holy Grail.
By combining digital with online stock availability, brands can eliminate the main cost factors, while providing customers with a choice over their
If this concept offers so many advantages, why didn’t the brands adopt it sooner? First, because there was until very recently no alternative to selling
8
#JournalSuisseHorlogerie Juin 2019
Who’ll move first?
How margins are subdivided, distribution keys
1000
45 80
900
45
800
in a physical point of sale. Several luxury brands tried to open their own stores from the 2000s, but they quickly realized that they were leaving their core business and that Retail required a particular know-how. This changed with the advent of the Internet. From users, Internet users gradually became consumers. And even if online sales have taken time to democratize, the average shopping basket has never stopped increasing gradually. When finally Internet users were ready to acquire watches online, the brake came first from the brands. Selling is a matter of territory and they
This theoretical example is based on the sale to international distributors of a basic Swiss made watch, three-hand automatic model. The production cost for such a model is around CHF 175. Since the brand takes a reasonable margin of 50%, it adds CHF 175 to it, which can be decomposed between its gross profit (CHF 140.-) and a marketing budget (CHF 35.--) equivalent to 10% of the resale price to intermediaries, (note that in general, the distributors will replicate the CHF 35.-- in marketing expenses, bringing the marketing budget to a total of CHF 70.--). The CHF 350 obtained is called ex-factory value and represents the brand’s turnover. The intermediaries in our example represent 65% of the final price, or CHF 650. This brings the watch to an in-store selling price (excluding tax) of CHF 1000.00. In the event that this brand decides to sell directly, it can theoretically multiply its profit by 5 (+ 400% increase), while increasing its marketing budget by 14% (from CHF 70.00 to 80.00). If, on the other hand, its priority is to maximize the customer experience, it can dedicate half of the watch’s price to marketing, while doubling its sales.
700
500
650
(50% du prix de la montre)
600
700
500
(+400%)
400 300 200 100
35
280
140
(+100%)
175
175
175
0
Modèle traditionnel Coûts production
Maximisation du profit Profit marque
Marketing
Maximisation expérience client Intérmédiaires
Envoi
Bulgari CEO Jean-Chrisophe Babin intends to reduce the number of retailers in order to obtain a better representation from those who remain.
#JournalSuisseHorlogerie Juin 2019
9
MARKETS
MARKETS
Décomposition des marges. Exemple d’une montre à CHF 1’000.1100
Member of the JIMH board of the Journées Internationales du Marketing Horloger, market expert Thomas Baillod founded the Watch-Trade Academy entirely dedicated to teaching watch sales. Online courses, conferences, consulting, this son of a famous figure in Swiss journalism, is in tune with the digital advances that may help the retail network, for which he is building a global database.
makes the third plentiful and free, whereas information was previously scarce and expensive. However, if we analyse a consumer’s purchasing act, we find precisely these three parameters, since the customer goes to a store (space) at a given moment (time) to receive information on a product (service). The first and the last parameters are the most expensive, they are the ones that generate the most margin together with the stock.
entire collection that the retailer will never be able to compete with. And, most importantly, direct sales provide brands with the key information they have so far sorely missed: sell-out knowledge. This information enables the brand to know its sales in real time in the markets and thus to optimize its commercial operations, its marketing campaigns and its production. The Holy Grail.
By combining digital with online stock availability, brands can eliminate the main cost factors, while providing customers with a choice over their
If this concept offers so many advantages, why didn’t the brands adopt it sooner? First, because there was until very recently no alternative to selling
8
#JournalSuisseHorlogerie Juin 2019
Who’ll move first?
How margins are subdivided, distribution keys
1000
45 80
900
45
800
in a physical point of sale. Several luxury brands tried to open their own stores from the 2000s, but they quickly realized that they were leaving their core business and that Retail required a particular know-how. This changed with the advent of the Internet. From users, Internet users gradually became consumers. And even if online sales have taken time to democratize, the average shopping basket has never stopped increasing gradually. When finally Internet users were ready to acquire watches online, the brake came first from the brands. Selling is a matter of territory and they
This theoretical example is based on the sale to international distributors of a basic Swiss made watch, three-hand automatic model. The production cost for such a model is around CHF 175. Since the brand takes a reasonable margin of 50%, it adds CHF 175 to it, which can be decomposed between its gross profit (CHF 140.-) and a marketing budget (CHF 35.--) equivalent to 10% of the resale price to intermediaries, (note that in general, the distributors will replicate the CHF 35.-- in marketing expenses, bringing the marketing budget to a total of CHF 70.--). The CHF 350 obtained is called ex-factory value and represents the brand’s turnover. The intermediaries in our example represent 65% of the final price, or CHF 650. This brings the watch to an in-store selling price (excluding tax) of CHF 1000.00. In the event that this brand decides to sell directly, it can theoretically multiply its profit by 5 (+ 400% increase), while increasing its marketing budget by 14% (from CHF 70.00 to 80.00). If, on the other hand, its priority is to maximize the customer experience, it can dedicate half of the watch’s price to marketing, while doubling its sales.
700
500
650
(50% du prix de la montre)
600
700
500
(+400%)
400 300 200 100
35
280
140
(+100%)
175
175
175
0
Modèle traditionnel Coûts production
Maximisation du profit Profit marque
Marketing
Maximisation expérience client Intérmédiaires
Envoi
Bulgari CEO Jean-Chrisophe Babin intends to reduce the number of retailers in order to obtain a better representation from those who remain.
#JournalSuisseHorlogerie Juin 2019
9
MARKETS
Av i s e r c h e de
rech
Intermediaries, the counterattack is on the move! Pioneers of online watch sales, intermediaries - retailers in the lead - now find themselves trapped in the Pandora’s box they have opened. The well-established watch brands that first fought this trend are now rushing into the loop. They are directly addressed to end customers. Retailers have not yet had their last word. The digital revolution also brings them new solutions. Two hopeful trails: •
Augmented reality: the user experience is the key to a successful sale and, thanks to his or her mobile phone, the customer can live an enhanced experience in store with displays that come to life, watches that tell you a story or that you virtually pass on his or her wrist to take them with you to share it with his or her partner.
•
Commissioned service: more and more retailers are providing a service to customers for which they are not paid, as they come to inquire and try the watch in store but will only buy it later, often online. New systems are being implemented such as Meotion, in order to be able to qualify the interaction with the customer in store and earn a commission even if they later buy it online.
did not particularly appreciate the fact that retailers were encroaching on the territory of other colleagues in the surrounding area. Even worse when you go up to the level of distributors, who by contract are prohibited from exporting to another country. Yet, ironically, it is often the brands that have indirectly led intermediaries to defy online sales bans. They simply pushed them to do so when they systematically provided them with stocks that were clearly above their sales capacity.
And what about the customer experience
It is difficult in this context for watch brands to apply themselves what they refused to their partners and sell officially online. Especially since the first brand to step out of line would have been immediately sanctioned by the reseller network. It was taking a tremendous risk. But with the crisis that began in 2015, the watchmaking industry as a whole has experienced a kind of generalized saving. There has been a break in resistance at all levels. The competition for the end consumer could begin and the margin battle was launched.
In this context, what will happen to multi-brand retailers? Jean-Claude Biver already urged them in spring 2018: “Specialise, or lose to watchmakers selling direct”. The games are over and the race for specialization will force many retailers to convert. But they certainly haven’t said their last word. Digital will perhaps be their best partner when technology allows the connection of the retail network, the traceability of the service and increased sales in stores (see the text box named “Intermediaries, the response is on the move”).
10
#JournalSuisseHorlogerie Juin 2019
NS
IO REALISAT
BER
ZU S E L R A H DE C
Cherchons à retrouver q u é r ir et/ou à ac hefs c x u e d s e c il li e r s a jo e r v u d ’œ
What about service, in-store customer experience and physical contact with the watch? As shown in the graph, a brand that sells directly could decide to allocate half the price of a watch to the customer experience. By extrapolating this margin to a luxury watch sold for CHF 40,000, a direct sale would allow the brand to spend CHF 20,000 to provide its customer with an unforgettable experience. Which retailer is able to compete with such an investment?
The future may be this barcode that will offer the person who hands it over, the retailer for example or simply the influencer, a traceability that will allow the brand to earn an intermediary fee that has been impossible until now. Identified by Thomas Baillod, the system exists. It was developed by Emeric Delalandre, a young Breton geek immigrated to Paris, a lover of fine watchmaking, already courted by big Food or automotive industries... (JSH N°2, 143rd year, will dedicate a portrait to him in November 2019).
Talentueux joaillier, Charles Zuber (1932-2012), gardien d’une tradition genevoise réputée, inventait et fabriquait des bijoux et des merveilles horlogères pour les plus grands noms, Audemars Piguet, Piaget, Michel Parmigiani, Harry Winston...
Toute indication est la bienvenue Association ‘Charles Zuber & Tradition Joaillière (Genève)‘, Emmanuel Alder Président, presidence@charles-zuber-association.ch +41 79 328 0279 ou +41 79 652 83 53