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

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

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.

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.

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!

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.

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.

muhahahaha…says a guy who has these on reserved…

🤤🤤🤤🤤🤤🤤

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

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.

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.

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!

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.

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.  

Please...  get your facts straight.  These are the 2 on reserve...

That's a great point!  You're absolutely right about that - prices have, in many cases, simply kept in line with inflation.  I hadn't properly appreciated that fact.  Thank you for that incredible insight!

It's funny, but in light of that, I guess in many ways, Seiko is a victim of its own success.  By making incredibly good watches, at such low prices, Seiko has trained its own customer base to always get the best for the lowest possible price.  And just by raising prices in line with inflation, they create a huge backlash from the enthusiast community!

Okay, now that I think about it, let me make an argument about expectations...  Do we judge Seiko based on Framing A or Framing B?

Framing A:  So long as something costs today what it used to cost, when inflation-adjusted, it's all good!  And I'm especially happy if it's higher in quality too!

Framing B:  In most manufactured goods, we see steeply falling prices, even as the quality of the goods increases.  The ideal way to measure the "cost" of an item is "time cost," as in "how long does the median worker have to work in order to earn enough to buy the thing?"  As you can see from the examples below, manufactured goods prices have fallen in most cases something like 70% - 90% over the years, for items that boast immeasurably higher quality!  So, if something costs the same as it used to, when inflation-adjusted, I'm pissed!

https://www.aei.org/carpe-diem/christmas-shopping-1958-vs-2012/

I think what you've pointed out is that, under Framing A, Seiko should be lauded for the fact that they've improved quality somewhat, while keeping price equivalent, when inflation-adjusted.  But, as a society, we've all come to expect Framing B.  And under Framing B, one could make the argument that Seiko has failed miserably, and that that's why so many enthusiasts are so pissed!

A few others have said it, but it bears repeating... these types of posts are what sets WC apart from other forums. No pissing match of trying to be the smartest person in the room, no trolling, no bickering. Just a great discussion all around a great article written for us by HWC69. Thank you HWC69 and cheers to everyone in this community. I continue to learn more and more all the time here 🍻

Fascinating discussion especially being a finance guy - I appreciate the dollars spent that make sense.

I have to admit that I have been seduced by the Seiko Presage line with nine of these gorgeous dials now in the collection together with my Seiko divers, chronos and mods.

However, until this past weekend, I've not owned a GS. I have seen all of your beautiful wrist shots of the various GS references, but in person and on wrist they have not driven me to make the purchase. I've been to GS boutiques to see if maybe there was something I missed. Nope.

Then I saw this exclusive from Watches of Switzerland - British Racing Green and Gold with that gorgeous brown alligator with green stitching - how could I say no?

Hopefully this will arrive sometime this week and you will see a WRUW shot.

I've now joined the club with the Toge.

I was about to reply that all your examples are problematic for reasons X, Y, and Z, but instead I'll just enjoy the post. 

Also. I'd rock that 1958 Kenmore toaster in my kitchen. 

this is a fabulous post and discussion - thank you @HotWatchChick69! I want to highlight something @Everett said - they did just come out with a GMT movement in an (subjectively) attractive package for probably less than $500. Is there another major manufacturer doing that at that price point? I can’t think of one. That seems like a big R&D investment, so perhaps they are still interested in the lower tier market. 
 

Seiko is also putting out new “Street” version tunas and things that are different. They still have hardlex, but something new and interesting. that Suggests to me that they are still investing in the lower lines and not letting them wither away. 

that said - it seems that they have convinced me to hop on the Seiko train and ride it right upmarket with them, so perhaps I’m biased And I’ll sit down and go back to refreshing my AD’s webpage to see if they have the new SPB317 slim Willard in stock yet (actual photo of me doing so below)

Yeah, you're right.  And @Everett is right too.  I shouldn't have been so hard on them - please forgive me a touch of "yellow journalism," just to try to hit home the overall point.  Nuanced, my write up was not.

...

But, dammit!  I can't help myself!  

• When you look at manufactured durable goods, inflation-adjusted costs have fallen significantly, while quality has also skyrocketed

https://www.usatoday.com/story/tech/2018/06/22/cost-of-a-computer-the-year-you-were-born/36156373/

Once wildly expensive and inaccessible but to the very rich, computers today are one of the most ubiquitous technologies worldwide. Though many personal computers in the early 1970s were much cheaper, the most basic model of an HP 3000 sold for $95,000 in 1972, the equivalent of slightly over half a million in today’s dollars.

Today, a brand-new computer costs just a few hundred dollars and has capabilities that in 1972 were in the realm of science fiction.

• Like, the reason the world keeps getting better and better and better (contra what we all hear on 11 o'clock Eyewitness News...  "Child welfare experts report that even 2 minutes of screen time could potentially cause your child's eyeballs to fall out of their heads! Stay-tuned!") is because costs for all things continue to fall monotonically, while our earnings continue to rise - thus the time-cost for goods and services falls dramatically

https://www.aier.org/article/let-there-be-light/

• There are 3 major, glaring exceptions to that rule:  1) Things that suffer from Baumol's Cost Disease, and 2) Things that are protected by artificial barriers to entry (patents, regulations, etc.), and 3) positional goods

In the case of luxury watches, luxury watches are ultimately nothing more than positional goods.

https://www.investopedia.com/terms/p/positional-goods.asp

What Are Positional Goods?
Positional goods are goods and services that people value because of their limited supply, and because they convey a high relative standing within society. Positional goods may include brand-name luxury handbags, a custom Feadship motor yacht, or front-row tickets to the Super Bowl.

And, given the Instagram Effect and the Pandemic limiting people to buying goods instead of services to signal wealth, it makes sense that luxury watch prices would have skyrocketed.  

But, you can't do that with affordable watches!  Luxury watches are positional goods.  Affordable watches are all about perceived value, whereby the buyer is intensely focused on utile delivered per dollar spent.

So, I do hope that Seiko is providing greater and greater value for watches in the affordable segment.  But, given where the market is going overall, not sure it's the world's best idea to do so!

As for you have fallen victim to their upmarket strategy...  Dude!  You ain't the only one!  Here's me!!!

I feel like I'm a full-on clown car when it comes to having succumbed to Seiko's strategy!!!

1. I'm rec'ing simply for the fact that you have me laughing and googling econ phrases. 
2. We have talked a number of times on the show about the silliness involved in objectifying watches beyond a timex ironman or g shock. For $100 you can get a virtually indestructible, solar powered, radio synced, highly legible and immanently light G Shock. The objective discussion should stop there. Mechanical watches, at any price, are positional goods. The (silly) justifications are just different as you travel the price spectrum. 

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

Hello #prospex. I'm a slave to the machine. 😭😭😭

Nice analysis! You've put into words what most of us have been feeling.

I feel the price increases for Grand Seiko can be justified slightly because of the increased warranty to 5 years.

Can't say the same for Seiko...

Yes, of course they are positional goods. Beyond a Timex or Casio you are either pleasing yourself, or you are signaling. 

Great analysis HotWatchChick69. Do you think Chinese companies, AliExpress, will begin to fill the bargain-basement segment now? 

Thank you, sir!  

I don't have any idea if they'll be able to manage it or not.  Right now, Chinese brands are really really niche players.  Can they jump in and provide watches to the masses, that the masses will actually covet and appreciate?  I have no idea.  What I will say is this, though:

• There is a widespread misconception that companies use overseas labor in order to generate "labor cost arbitrage."  Everyone thinks, "Oh, Apple uses Chinese workers, because they only have to pay Chinese workers $1/hour!"  
• Turns out...  that just ain't how the world works!  (Apple actually uses Chinese labor, because they needed access to a MASSIVE labor pool that could be trained up overnight!  You ain't gonna find that in the U.S. or Europe!)

• The way I always explain it is, "Pretend the world is based on cookies.  If you are able to make 100 cookies a day, because you're super productive, you'll take ~65 cookies home.  If you are only able to make 10 cookies a day, you'll take ~6.5 cookies home."  In other words, "labor cost arbitrage" is an illusion, because if you're paying someone 6.5 cookies per day, it's because they produce 10 cookies per day.   If you're paying someone 65 cookies per day, it's because they produce 100 cookies per day
• The reason that people have differential labor productivity across countries is due to a number of factors, but here's an incredible thought experiment that is backed up by empirical data.  If you observe @HotWatchChick69 working in China on Monday, he can only make 10 cookies per day.  Tuesday, he flies to the U.S., and starts work in the U.S., and well, miraculously, he'll be making 100 cookies per day.  What this shows is that human beings are the same the world over...  it's just that some systems are able to better leverage labor productively than others

Given all this context, right now Aliexpress and other Chinese watch companies are selling watches cheaply.  But, that's because they're cheap watches - meaning they have very low quality.  You're getting what you paid for.  And nobody wants to get what they paid for!  Everyone wants to get more than what they paid for.

• What consumers want is a higher quality to price ratio in their products and services, with quality being brand cache, fit, finish, reliability, cool new technology, etc., etc.
• The Chinese watch producers simply cannot do that given their current manufacturing techniques - they can only provide poor quality at low prices, or medium quality at medium prices or high quality at high prices - they will forever be stuck with a quality to price ratio, of, let's say 1
• How do they get to > 1?
• Well, we can look at historical examples.  Remember when "made in Japan" was a by-word for low quality and low price?  How did the Japanese get to a quality-to-price ratio of > 1?  They pioneered lean manufacturing.  And with lean manufacturing techniques, next thing you know, Toyota and Honda decimated the U.S. auto manufacturing industry, followed by Sony in the electronics space, followed by...  etc., etc., etc.  
• Remember when Hyundai and Yugo launched their horrible little cars in America?  How did Yugo go on to be the term we always use when we want to make fun of horribly manufactured death traps?  Meanwhile, Hyundai now makes these...  which boast specs comparable to the best German and Japanese luxury vehicles, but at lower price?

So, unless, and until the Chinese learn how to do lean manufacturing, they'll remain at a quality-to-price ratio of 1.  I really do hope they adopt lean.  If they do, that'll mean lots of new watches for us, that give us more than what we paid for.

Much of the higher end of the watch market is subsidized with cheap credit, interest free payments over 4 years means most people in the developed world can afford higher end of the market if something grabs them.

That cheap credit is going to end soon, just as low inflation has ended.

It will be interesting to see how many of these watch brands struggle through.

Of course I download watch crunch to take a little break from work, and then see CAGR this and volumes that. Lmao, the takeaway is that I am the problem. Great analysis, thanks for putting it together man