ARIEL VIEW: The case for long-term ‘exclusive’ agreements between watch brands and retailers

As 2024 edges forward, most watch industry eyes are on the US because, as the world’s largest market for timepieces, performance there can be indicative of future global demand and consumer trends.

As a well-developed consumer market with robust retail penetration and often sophisticated buyers, the US also has a reputation for being a more challenging market to get traction in, as compared with developing markets.

Brands are often faced with two daunting potential challenges when they want to enter the US  or expand their business footprint in the country. One challenge is to go it alone and develop one’s own network of retail stores and marketing. If that is successful, there will be a large profit margin to enjoy each time a wristwatch is sold. On the downside, brands not only need to stock and staff their own stores, but they also have to market heavily and rely on sales one at a time to end consumers.

The more traditional approach (and perhaps wiser for most brands) is to rely on retail partners — stores and distributors that share in profits but also in overhead and marketing expenses. The challenge there is not only which retailers to work with but how to ensure that the watches, once they are in the retailer’s display cases or catalog, actually sell.

The funny thing is that even though I just indicated two possible directions, brands have at least three or four different ways of approaching this seemingly dichotomous decision.

One of the reasons I love today’s watch industry is that many of its current business models are merely experiments because there are few truly sustainable ways of creating demand and selling watches in today’s rapidly evolving marketplace.

Maximum margin capture

Some old models continue to work well, but few market players are skilled in tweaking traditional luxury values with modern customer expectations. Then, we have all the brands trying novel business models such as entirely vertically integrating their production and sales operations hoping for “maximum margin capture” (i.e., minimal sharing in the ecosystem).

So, getting back to how brands approach the “go direct or go wholesale route,” some brands choose “all of the above.” This approach may not long be for this world, but it is great to see all the experimentation and brands hoping to strike it rich with minimal cooperation from others.

What will happen when this virulent evolution dance calms down a bit? I suspect we will see a lot of watch brands returning to working with third-party retailers. Why? Mainly because it blends the best possible combination of sharing spending risk with distributing responsibility for the complex task of both making and selling luxury timepieces.

It is the rare brand that can truly go it alone. And even those that are arguably set up best to do so (e.g., Rolex) specifically choose not because it defies the risk-intolerant personality of Swiss companies and financial managers.

So, if the US is going to remain the most important market for watches for the foreseeable future, and if working with third-party retailers is probably the best solution for getting timepieces to market, then what hurdles must the watch industry still overcome?

The 800-pound gorilla in the room is the ugly topic I regularly discuss in articles and podcasts on aBlogtoWatch, and elsewhere, is the chasm that exists between the expectations of independent watch retailers and watch brands hoping to sell their products on the open market. The cause of this chasm is the fear a watch retailer has that a brand it invested in (both financially and emotionally) will spontaneously sever ties with them without cause.

You see, the agreement between watchmakers and the stores that carry them tends to be very much in favor of the brands. It is often stipulated that brands can break the agreement at any time, for little or no reason.

The fundamental purpose behind this is so that brands can move to another store or door that they feel could work better for them. In reality, though, most of the time when brands sever retailer agreements, it isn’t to put their products in another third-party retailer but rather to sell watches out of their own store down the street.

This is not a rare occurrence. In fact, most US (and, frankly, global) watch retailers I speak with have experienced at least one brand severing ties with them in the last several years. The retailers are never happy about this, and it never appears to be related to a violation of contractual terms, engaging in “bad behaviour,” or not providing a good experience to the brand.

“Retailers that perform too well can be as likely to lose an account as those that do poorly”

Ariel Adams

Here is where the situation becomes ironic: If a retailer does particularly well with a brand it carries, then the brand itself often gets jealous. A third-party retailer who is “too” successful selling a watch might signal to a brand that its products are just so hot in a market that it is “dumb” not to go direct and set up a company store there selling direct to consumers.

Retailers that perform too well can be as likely to lose an account as those that do poorly. More so, retailers that perform well and lose the account also stand to lose much more in the short term because of their investment in selling that brand to people within their market.

Suffice it to say that significant distrust can occur between third-party watch retailers and timepiece makers today.

Frankly, while there are indeed instances of brands being cheated or lied to by unscrupulous distribution partners, in most instances today, the watch brands look like the bad guys when retailer relationships are terminated. Why? Mainly because the reasons for the termination often relate to wanting to sell directly and not wanting to share sales revenues.

More so, watch brands that go direct often vacillate between that and a wholesale preference with little notice. What this means is that brands might be committed to working with retailers for a few years, only to later decide they want to go direct in a particular market.

Much of the time, the plan to go direct fails because the cost of doing business vastly exceeds the amount of money they stand to gain by cutting out a local retail partner. At this point, brands often “come crawling back” to the very same retailers they terminated relationships with just a few years earlier.

It is thus not surprising that few brands are welcomed back with open arms. None of this is what I would consider to be a sustainable situation and it probably blocks a lot of sales performance and market growth that could happen in the US.

What, then, is a feasible solution to the common rift that exists between watch brands and retailers?

The idea I am going to present isn’t mine; it has been implemented in the watch industry in the past, and it is also applied in a number of other industries. Let’s call it the “retail exclusivity lease” style of agreement.

The Ariel Accord

My recommendation is that watch brands offer a lease-like, period-of-years guarantee to watch retailers that agree to stock their watches over that time. The basic tenets of the agreement would be very simple.

The watch brand agrees to a period of time (let’s say three to 10 years on average) when a retailer has absolute exclusivity to earn a profit from watches sold in its region (the physical and/or digital territory should be defined in detail in the agreement). This applies to watches sold by the retailer to customers, as well as if the brand itself happens to sell direct to a customer within that pre-defined territory.

The goal is to make sure the retailer feels it can benefit from its ongoing marketing and inventory investment during the exclusivity period (which, of course, can be extended if it remains beneficial to both parties).

A key point here is that the brand cannot simply sever ties with a retailer because it thinks the retailer is making too much money. Brands must respect the American expectation that if an investment pays off well, one can make outsized returns. This is part of how we play.

What do retailers of brands gain in exchange for this long and generous period of regional or digital-territorial exclusivity?

What retailers should offer is a promise of ongoing inventory investment and promises of promotional marketing investment. While such an agreement would allow retailers to buy more than their agreed minimums, the retailer would commit to a certain annual spend on inventory during the agreement period.

This guarantee of wholesale income would be a big reason the brand would have the incentive to offer such generous exclusivity terms. And retailers would be obligated to spend (in good faith) on promotional advertising within their region. This is to ensure that retailers play their role in creating demand for the watches, both in their territory and globally.

What companies like Richard Mille understood early on is that global regions only suffered when they viciously competed with each other. By each region contributing to the global demand for Richard Mille by offering a similar level of exclusivity and prestige (i.e., not trying to undercut each other), the brand as a whole did better because global marketing efforts were cumulative. 

When multiple watch retailers carrying the same brand all promote that brand in their respective regions, their efforts often end up pooling together to lift performance in all markets, respectively.

The way this marketing-spend promise is different from those in many current contracts is that the marketing spend would be mandatory. Today, a lot of theoretically available marketing dollars that are meant to help the regional popularity of a brand for the benefit of a retailer go unspent.

The reason is at least two-fold. First, spending of the “available” funds ends up being discretionary and based on there being “good opportunities” for using that money. That means the money isn’t guaranteed for spending, and, oftentimes, the people spending it have to justify the expense, which is nearly impossible for most marketing investments.

The second reason is that there is often no drive to spend it. Accountants love it when there is unspent money, and retailers have at least traditionally not been seasoned marketing folks. It is often easier not to spend allocated marketing dollars than make “risky” decisions for where to spend.

These and other factors contribute to the practical outcome that today’s brand/retail agreements do little to ensure effective marketing is being formed or distributed in relevant regions or territories. I advocate for more forced spending with less emphasis on crystal ball-style foresight, and added emphasis on creativity and chance-taking (because there aren’t as many punishments for doing so).

It is my hope that if retailers agree that a lease-style agreement ensuring them exclusivity in exchange for investment is a wise idea, they will demand it from brands that want to work with them more often.

This really needs to be a retailer-led initiative because watch brands will naturally want to work with an agreement that offers them the maximum amount of flexibility and leeway. The question is whether retailers will have the power.

I think enough of them will. I also think that the promise to invest in a minimum volume of watch inventory over a several-year period is of considerable value to brands. Even if these minimums do not promise bonus-busting profits, they can, collectively, ensure smooth and ongoing business operations even through dips in the market.

Whether or not watch brands and retailers apply this particular retail exclusivity lease agreement-style approaches, something about the nature of the relationship between the entities needs to change if barriers to US market growth for the timepiece industry are to come down.

The United States still has a lot of room to grow in terms of market presence and demographic interest development. Most people agree that even the best brands are too thinly staffed (and budgeted) to take on parts or all of the US on their own. Working with local retail and distribution partners is really the answer, but to avoid mistakes of the past, the luxury timepiece industry needs to adapt to the realities of the future.