Why we’ve all been paying a lot more for watches… AKA, upmarket strategy: a case study with the enamel dial Seiko SPB091

Even after taking into account inflation, watch prices have been skyrocketing.  What in the world is going on?  Well, this is a big, long post that analyzes watch market trends, and why watch manufacturers are taking bigger and bigger chunks out of our wallets!

“Premiumisation"

Effectively, the middle and the bottom of the watch market are disappearing.  Any established player (non-micro brand) competing in any segment in which a watch retails for less than ~$4,000 is…  how do I put this diplomatically…  f*cked.

These charts, which come from data from a 2021 Morgan Stanley report, elegantly illustrate this:

https://monochrome-watches.com/top-50-swiss-watch-brands-2020-market-share-sales-editorial/

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2020 was an outlier due to the pandemic, so ignore that data point.  What you see leading up to 2020 is relatively stable Swiss export value (total $$$ revenue), but massively declining volumes.  Effectively, from 2011 to 2019, the number of Swiss watches exported went from 29.8M down to 20.6M.  When volume declines, but total $$$ revenues remain the same, that means that the price of each unit sold has skyrocketed - people who are buying watches are buying high end luxury watches, and sales volumes for anything below $4,000 are contracting massively.

This indicates a polarisation of the market towards high-end watches, with a premiumisation and a more difficult market for entry/mid-price mechanical watches (priced below CHF 3,000), where sales have contracted more drastically. This is even clearer for quartz wristwatches, where sales have contracted by 36%. 

Meanwhile, there is huge upside in the luxury segment, from the 2022 Morgan Stanley report:

https://watchesbysjx.com/2022/03/morgan-stanley-watch-industry-report-2022.html

“Premiumisation” strengthened in 2021 with the price segments of over CHF2,000 in export value (equivalent to a retail price of CHF4,000) showing the most growth in both volume and value. These premium price segments represent only 16% of volume, but 82% of value.

Seiko’s upmarket strategy is a perfect illustration of what’s going on in the entire watch market

Seiko have traditionally been the “King of Affordable Watches.”  In a world of cell phones and Apple Watches, that’s like being King Louis XVI during the French Revolution.  So, Seiko ain’t dummies.  They know that the market for mid-tier and affordable watches is dying.  You know how I know they know?  Because here’s their financial performance for the past decade:

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Seiko experienced a -2% revenue CAGR over the past 10 years, going from 296bn Yen (~$2.25b at today’s exchange rate) all the way down to 237bn Yen (~$1.80bn).  Seiko Holdings Corporation has been an absolute dog, experiencing secular declines, with no end in sight, over the past decade.  These are precisely the kinds of businesses that I’m called into in a turn-around capacity, in my professional guise.  So, what would I do if I were charged with turning around Seiko’s business?  That’s easy.  There’s a well-worn private equity playbook that you always apply to dogs like this:

  1. Identify the business lines that are shrinking the fastest, and divest them, and if you can’t divest, then immediately stop all investment into those business lines and simply milk them for cash flow
  2. Take that cash flow and invest it into the most profitable and growing business lines, and focus everything you have on those - R&D, marketing dollars, management talent, etc., etc.
  3. Identify your most profitable customers and give them whatever they want, so long as they keep opening their wallets to you
  4. Identify your unprofitable customers and fire them.  And as a corollary, identify customers who may not be that profitable today, but who are loyal to the brand and make them happy…  but only so long as they are willing to spend more and more money with you now and into the future to make it worth your while

What we actually see happening with Seiko

#1 - Seiko can’t divest their middle and affordable watch business lines, so they stopped investing and are milking ‘em.  Every enthusiast who points out that QC has gone downhill?  Yup!  That’s what happens when you stop investing in a business line!

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#2 - You invest in the star business line, not the dog(s)

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Grand Seiko went from 24th in market share in 2016 to 5th in 2020, without spending a single dime on advertising.  (The chart omits Rolex, otherwise it would have dominated the entirety of the graphic.)  And when your strategy starts delivering, you promote the people who executed effectively…

https://usa.watchpro.com/akio-naito-who-launched-grand-seiko-in-america-lands-role-as-worldwide-president-for-seiko-watch-corporation/

#3 - Grand Seiko is growing and margins are fat.  So, you give GS customers whatever they want.  ("More dials?  Here ya go!  5-day power reserve on spring drive?  Sure!  80-hour power reserve on a hi-beat movement that uses one of two new escapement designs in over 250 years?  Happily!  Power meter on the back of the watch, instead of the dial?  Okie-dokie!”)  And you keep raising prices.  Remember this?

Grand Seiko Spring Drive Snowflake SBGA211 Watch – Grand Seiko Official  Boutique

THE iconic GS watch and it cost $5,800 in 2021, but now it’s $6,200 in 2022.  And that price increase is nothing compared to this…

SLGH005- Grand Seiko Automatic Hi-Beat 80-Hours SLGH005 - Buy Online Grand  Seiko Boutique

The SLGH005 has inherited THE iconic GS watch status from the Snowflake.  And, well, instead of paying $5,800 for THE iconic GS watch, you gotta pony up $9,100 now.

#4 - How do you fire unprofitable customers?  Easy.  Raise prices and they’ll fire themselves.  For everyone who’s complained about Seiko raising prices but at the same time offering no additional value, and how you’re no longer a Seiko aficionado because you feel jilted?  Well, you’re 100% right.  You were jilted!  “I ain’t paying $X more than I was before!   Not when they can’t get their QC act together!"

You ever wonder why Seiko doesn’t just fix their QC issues?  I mean, for goodness sake!  It ain’t rocket science!  (And, as somebody who trained in physics, even rocket science isn’t “rocket science.”)  Well, because when you milk a dog business line for free cash flow, you put someone like this in charge of that dog business line, because all your real talent gets reassigned to the high priority stuff...

Milton Waddams GIFs - Get the best GIF on GIPHY

And, well, you don’t care all that much if those customers get fed up and leave.  Why?  Because they were unprofitable for you to begin with!  

Now, by raising prices, you also identify the folks who are actually going to be loyal to you, and who will move upmarket with you over time.  If you raise your prices, and certain customers keep buying, that’s how you know they’re loyal!  And while they may start off with the Seiko 5, next they’ll get a Baby Alpinist, and then after that…  they may discover seikoluxe.com…  and after that…  Grand Seiko.

The enamel dial SPB091

Now, finally, we get to the SPB091.  I just got my hands on it.  I love it so much...

Will You Marry Me GIFs | Tenor

So, all of this is @Ichibunz fault.  I was living life happily, in my little hermit shack, when he mentioned www.seikoluxe.com.  I didn’t even know the website existed!  And then, he began posting all his recent acquisitions of porcelain and enamel dial Seiko’s.  In fact, he’s gone so far as to say that he’s thinking about getting a “reasonable” Credor now!  

Here’s been my reaction each and every time I see him getting yet another beautiful dial Seiko BEFORE I do…

Gordon Ramsay Fuck Off GIF - Gordon Ramsay Fuck Off - Discover & Share GIFs

The Green-Eyed Monster is a terrible thing.  Every night, it's whispering in my ear, as I’m dropping off to sleep, “You can’t let @Ichibunz get away with that.  You gotta get yourself one of them beauties - one that he doesn’t have!”

So, here it is…

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The dial is astounding!  $1,450 MSRP.  

Now, if I can use @Ichibunz as the perfect example of Seiko’s strategy in action…

  • In spite of the spate of price increases, and all the online commentary about QC issues, @Ichibunz’s Seiko collection has grown to 12
  • And, @Ichibunz has another 4 on the way
  • But, he didn’t just stick with Seiko.  He went to www.seikoluxe.com, and now has 12 watches from Seiko Luxe, with reservations on another 3
  • And, well, recently, he also got this!
Grand Seiko Spring Drive Soko Shadow SBGA429 Watch – Grand Seiko Official  Boutique

Has Seiko’s strategy paid off?

When you begin to execute a turn-around strategy, you hope that this happens…

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Well, it's too early to tell - again, ignore 2020 as an outlier year - but at the very least, revenue seems to be stabilizing.  It's remained relatively flat when comparing 2019 and 2021 results, rather than declining, like we saw in the previous charts.

In the meantime, go get yourself an SPB091.  It’s amazing.  And get it before @Ichibunz gets one, so you can lord it over him.  Just like I am lording it over him with this post!

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This could be heartbreaking news for a lot of people on here, the Seiko they have known and loved for many years has told them to F#'k off and not to bother them again, well not unless they're ready to dig a lot deeper into their wallets.

Excellently presented HWC69 and what we've seen going on over the last few years does make a lot more sense now. 

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😂 oh lawdy lord!  hahaha!! Great post great information!!  Psst …check out this Shippo enamel…also I call it Brand Loyalty 😁

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Great analysis! It makes me wonder about the more recent models from Orient using sapphire instead of mineral glass. I wonder if this means that Orient doing some positioning in the market with what Seiko is doing and continues to invest in their entry-level lines instead of focusing exclusively on their Orient Star line and moving up market like Seiko and some other brands.

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I think that we all intuited this strategy with the release of the new Seiko 5's:  more expensive without any added value or quality.

Thanks for the presentation.  When something similar happened forty years ago Seiko exploited the gap (most Swiss brands moved upmarket, ceding the field).  Who will try this time? It would be weird if we started getting $400 Timex.  Oh wait....

What is overlooked is that Seiko will still be a player down market as the principal supplier of movements.  Unlike the recent past, they will no longer be competing with themselves.

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morganthedruid

This could be heartbreaking news for a lot of people on here, the Seiko they have known and loved for many years has told them to F#'k off and not to bother them again, well not unless they're ready to dig a lot deeper into their wallets.

Excellently presented HWC69 and what we've seen going on over the last few years does make a lot more sense now. 

Totally.  You know, I don't believe for a second in being loyal to a company or an organization or anything of the sort.  Corporations are profit-maximizing entities.  And while they may put out press releases claiming X, Y, and Z, they're all just press releases!  I mean, I know, because over the years my teams have put out lots of press releases on behalf of the CEO of A, B, or C company, and 99.9% of what was in the press release was pure lies.

And, I don't say this pejoratively.  I wouldn't have it any other way - management teams within companies have a fiduciary duty to shareholders to maximize long-term value.

It alway makes me think of this Carfection video about Porsche and Alex Goy is directly addressing the Porsche fanboy community:

https://www.youtube.com/watch?v=Fe4HGYrRD90&t=3s

"Seiko owes you nothing!"  And we owe Seiko nothing.

I believe in being loyal to people and human beings, not companies or brands!

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Ichibunz

😂 oh lawdy lord!  hahaha!! Great post great information!!  Psst …check out this Shippo enamel…also I call it Brand Loyalty 😁

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Fuckoff GIFs | Tenor
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Yes, the lower and mid-market for watches is on life support. I have to give Seiko and a few others credit for providing an "entry level drug" with something that is probably not a loss leader, but not very profitable either.

I don't think watch makers have much of a choice as the traditional watch as a way to tell time has become an anachronism.

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Great analysis. It’s really a shame since Seiko is such a good brand with great offerings for all price segments. But I guess it’s inevitable since pretty much all big watch brands are constantly increasing their prices, and people would still be buying Seikos since many Seiko watches are still relatively affordable than Swiss counterparts.

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HotWatchChick69
Fuckoff GIFs | Tenor

muhahahaha…says a guy who has these on reserved…

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🤤🤤🤤🤤🤤🤤

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What goes up must come down.  We've seen adjustments before and we will see it again, its coming.

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Candide3693

Great analysis! It makes me wonder about the more recent models from Orient using sapphire instead of mineral glass. I wonder if this means that Orient doing some positioning in the market with what Seiko is doing and continues to invest in their entry-level lines instead of focusing exclusively on their Orient Star line and moving up market like Seiko and some other brands.

Yeah, Orient is really interesting.  I have no idea how integrated that business is with the overall Seiko portfolio.  I've read articles about how Seiko had been contemplating an upmarket move for some time now - even back to the early-2000s.  If there were a product portfolio manager, it would make sense to try to upmarket the Seiko brand, and then maybe position Orient as their entry-level brand?

It's tough.  At some point, you end up with so many internally competing brands and so many different agendas, you get chaos - like what happened over time with General Motors.  

I don't envy Seiko management.  They've got a really, really tough road ahead of them.

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Candide3693

Great analysis! It makes me wonder about the more recent models from Orient using sapphire instead of mineral glass. I wonder if this means that Orient doing some positioning in the market with what Seiko is doing and continues to invest in their entry-level lines instead of focusing exclusively on their Orient Star line and moving up market like Seiko and some other brands.

Exactly this. Orient stands to benefit from this. Too bad their marketing in North America is lacking. 

Would love @PeterKotsa 's thoughts as he has a very honest comparison of the SBDC101 (SPB143) vs previous generation SBDC051 on his YouTube channel.

The 051 retailed for $300-400 less than the 101 but is arguably a better watch except for the new movement.

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Aurelian

I think that we all intuited this strategy with the release of the new Seiko 5's:  more expensive without any added value or quality.

Thanks for the presentation.  When something similar happened forty years ago Seiko exploited the gap (most Swiss brands moved upmarket, ceding the field).  Who will try this time? It would be weird if we started getting $400 Timex.  Oh wait....

What is overlooked is that Seiko will still be a player down market as the principal supplier of movements.  Unlike the recent past, they will no longer be competing with themselves.

That is a BRILLIANT point!

  • If someone is going to pay a premium, they're going to pay the premium for 1) brand cache, 2) design, 3) finishing, or 4) superior movement
  • At the low end of the market, there's little to no margin to be made, as there isn't room for any of those things
  • Therefore, just supply all the emerging micro brands and modders with NH35 movements, and you're still participating in that market, should it grow

Spot on, man!

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hbein2022

Yes, the lower and mid-market for watches is on life support. I have to give Seiko and a few others credit for providing an "entry level drug" with something that is probably not a loss leader, but not very profitable either.

I don't think watch makers have much of a choice as the traditional watch as a way to tell time has become an anachronism.

You know, I really do hope that micro brands successfully fill the niche.  I mean, if you look at Seiko's and Swatch Group's financial statements and market share...  it's a truly depressing story, and evidence that you can't be successful as an established player in the mid and lower tiers.

However, micro brands are offering compelling stories and compelling designs and hipster cache at really affordable prices.  So, hopefully, they continue to do so.  None of these micro brands will ever boast enviable ROE or ROIC, and they'll simply provide their founders with subsistence wages, but there should be lots of entry and exit from micro brands that will give us cool new stuff at the entry level.

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GreenNeptune

Great analysis. It’s really a shame since Seiko is such a good brand with great offerings for all price segments. But I guess it’s inevitable since pretty much all big watch brands are constantly increasing their prices, and people would still be buying Seikos since many Seiko watches are still relatively affordable than Swiss counterparts.

What I would love to see is some sort of analysis on units sold of micro brands.  Impossible to collect that data, but if you could, it would be interesting to see how much $$$ revenue is generated by affordable micro brands and compare that to the loss of $$$ revenue from established players in the mid and lower end.