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.
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#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
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