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!
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:
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:
“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:
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:
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!
#2 - You invest in the star business line, not the dog(s)
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…
#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?
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…
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...
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...
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…
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…
The dial is astounding! $1,450 MSRP.
Now, if I can use @Ichibunz as the perfect example of Seiko’s strategy in action…
Has Seiko’s strategy paid off?
When you begin to execute a turn-around strategy, you hope that this happens…
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!