Before COVID-19 and trade shows were the big topic of discussion in the watch industry in 2020, “direct-to-consumer” was the conversation du jour, writes Ariel Adams, founder and editor of aBlogtoWatch.
Even as the world is enduring global economic shutdown, luxury watch brands continue to plan the next phase of their sales strategies – which, for many companies, will rely heavily upon internet sales.
Most of the watch brands intent on having Internet sales as a core part of their revenue are razor-focused on making those sales themselves, i.e., selling “direct-to-consumer.” How were sales indirect until this point? Historically, the majority of watch brands have mostly or entirely sold inventory in wholesale volume to third-party retailers or distributors. Those third-party retailers would include their own mark-ups for margin, and the watch brands would make their money once those goods were sold into the wholesale market.
The last decade has forever changed the nature of how luxury wristwatches are distributed across the globe. The Internet has “flattened” pricing to the lowest global price point, and this has allowed wide swathes of discounted inventory to sully the demand for full-priced new wristwatch models.
In the wake of all this, traditional brick-and-mortar retail spaces, countless malls, chain department stores, and family-owned watch/jewelry stores shut down due to lack of demand or, more commonly, a failure to compete with the prices and convenience of the same goods online.
As traditional watch-brand distribution avenues have continued to dry up or perform more poorly than expected, an increasing number of watch brands have said, “Hey, let’s just do it ourselves — let’s sell directly to consumers online.” In a sense, watch brands with this notion have a point. They have observed that, in other industries, the ability for brands to directly reach the eyes of consumers has allowed never-before-possible companies to sprout up and blossom by having relationships with consumers and then selling directly to them. The biggest appeal of such a dream is that watch makers get to charge the same amount of money as if they had third-party retailers but without having to cut in a third party.
The economic appeal of “margin recapture” has become so vivid to many watch brands that few companies seemed to have stopped to ask, “Is such a model right for me?” In fact, few have even asked the question of whom this model is working for. It is true that a number of companies, even luxury brands, are experiencing success with selling directly to consumers, but I can’t think of too many success stories within the luxury watch space.
Some of the exceptions are “digital natives” who started their operations in the direct-to-consumer space and leveraged the ability to relatively cheaply (at the time) reach a large number of consumers with easily testable marketing assets and the availability of very inexpensive inventory. Most traditional watch brands don’t fit this profile. There really are no good examples of traditional watch brands hitting gold by selling their watches, one at a time, to consumers online.
True, a number of major watch brands have e-commerce stores set up, but none of them can honestly report that a big part of their sales come from e-commerce. By my estimate, even the best-performing watch brand e-boutiques account for only 15-20% of overall brand sales – and that is a high estimate. In fact, when I speak to folks at many of the brands that have e-commerce stores, they are somewhat surprised by incoming sales – a quick Google search will still turn up healthy discounts much of the time.
Given that luxury watch brands are notoriously conservative, I find their blind faith in the mere potential of direct-to-consumer sales ironic. As much as they dislike reliance on today’s wholesale model, many brands are entirely dependent on it. Is that really such a bad thing? The question I want to raise in this article is whether or not direct-to-consumer e-commerce is a practical solution for most watch brands is a practical idea. This is based not on the potential profitability of earning more margin, but rather the unlikelihood of watch brands doing what it actually takes to make them profitable.
I’ve spoken to a number of Swiss watch brand managers who seem to feel that an e-commerce store is like an automated sales teller that just pings new sales at random intervals each time a consumer happens upon the digital storefront and is swept away with immediate consumptive affection. Unfortunately, this is untrue. Operating a properly functioning e-commerce website requires two things that are absolutely non-negotiable. The first is a full-time engineering team that’s constantly building new features and tweaking pages. All e-commerce websites are like buildings that are never actually completed. Once you finish one room, you start to think about how to rebuild it tomorrow.
E-commerce also requires an enormous amount of human attention behind the scenes. The idea that a “bot” will sell luxury timepieces is something I’d like to see in order to believe. Certainly, a bot can take orders, but even Rolex salespeople have demonstrated the ways in which a personal touch can make all the difference. No, my friends, I do not think e-commerce money-making machines are realistic — in any case, this isn’t a reality I’ve observed yet.
Watch brands also need to consider that true sales prowess requires some interpersonal work. In the traditional watch sales and distribution model, this work wasn’t done by the watch brands themselves but rather their hired third parties who stood in stores and faced clients. I’m not trying to burst anyone’s bubble here, but people don’t exactly enter the luxury watch-buying process with the actual need to leave the store with something new. Consumers want to be seduced, romanced, and satisfied. This all requires a nuanced and delicate dance of emotions that only a human can deliver.
How can a human deliver that experience in a digital context? Phone calls or online chats with a real human can be just as effective as an in-person conversation, when done correctly. A consumer who is willing to get on the phone in the first place is, more or less, waiting to be sold. Smart luxury e-commerce brands have humans behind the scenes ready to capture leads the website catches – the website itself doesn’t often do all that much itself.
Many watch brands already have this service set up, but none of them will tell you their phones are ringing off the hook. Why? Not because consumers can’t view these services, but because most of them don’t care or don’t respond well to the polite sell of “contact a brand concierge.” Who even uses a hotel concierge anymore? To get answers, people ask the Internet, not the brands themselves. Before watch brands blindly assemble what they believe to be the ingredients of e-commerce for themselves, they need to answer the question of what a consumer stands to benefit from by contacting a human being to communicate.
I’m not saying that watch brands cannot answer these questions, but rather I am saying that, given years of opportunity, most of them have not. In the past, when this has been done correctly, it has most been through third-party retailers and other sales professionals. My theory is that the skills that make an organization good at sales aren’t always equally skilled at making the best products. And conversely, watchmakers who make excellent products aren’t usually good at sales. This is why, since time immemorial, luxury watches have been sold through third parties who specialize in romancing the fruits of another. Why would this paradigm of proven wisdom be any different online than it is in the real world?
Accordingly, watch brands that dedicate to direct-to-consumer sales strategies are, more often than not, biting off more than they can chew. They might look from the side at the world of a quality third-party authorized dealers and remark, “I bet we could do that,” but very few of them actually have, in practice. Even the mighty Rolex sees the overwhelming wisdom in keeping an army of third parties around the world to sell its goods and share in the profits. If selling direct-to-consumer made sense for luxury watches, if it was an avenue for consistently better profits, Rolex would have done it years ago.
Instead, what the larger watch industry learned quite some time ago is that paying others handsomely to do the dirty work of relieving consumers of their disposable income was a small price to pay for being the beneficiary of such a service.
I further argue than any margin “recaptured” by luxury watch brands going direct-to-consumer will immediately be offset by increased costs. Not only the costs I mentioned above of having a large and diverse human sales and web engineering staff, but also the cost of constantly keeping the brand on the minds of consumers. Remember, before a watch brand fights the battle of turning an e-commerce website visitor into an interested customer, it might fight the battle of getting that consumer to the website in the first place. This is yet another area in which the vast majority of watch brands have failed to invest properly.
Getting consumers to your website isn’t easy, as most watch brands will profess. It not only requires reaching consumers with a compelling message, but it also requires crafting a compelling message to begin with. This task, alone, has utterly stumped watch brands that, in my estimation, are entirely intimidated by the volume of time and money that proper online marketing requires. At the end of the day, I am willing to bet good money on the fact that most watch brands with a strong interest in e-commerce sales performance will profit much less with a direct-to-consumer sales model as opposed to working with a more traditional third-party sales partner.
Let me briefly discuss this latter point: If watch brands do not employ a direct-to-consumer sales model when it comes to e-commerce, what should they do? This is a fair question because, today, having a number of authorized dealers competing with one another for e-commerce sales (including against the brand itself) has not been a formula for success. As such, I ask watch brands to reject the “omni-channel” approach that suggests all distribution channels be employed at the same time. This is an incorrect assumption for the Internet age.
Digital ring-fencing of territories
What is probably wiser is for watch brands who wish to work with third-party retailers online to first redefine the notion of “exclusive territories.” The old regional distinctions agreed upon by authorized dealers no longer makes sense in the context of the Internet, but that doesn’t mean retailers can’t choose a lane and stick to it. One retailer might have the right to sell a brand’s watches online to an English-speaking audience, and a different retailer might have similar rights to sell to an Arabic-speaking audience. Or perhaps the real borders are customs and tax borders, so one retailer or distribution partner might have exclusivity over e-commerce sales in an entire country or region. Having too many retailers in the same region in the age of the Internet doesn’t make as much sense, as it simply causes overcrowding — and for consumers, this causes choice paralysis. The worst thing that has happened in the luxury watch online sales space is the overwhelming variety of places consumers have to purchase ostensibly the same product. I’ve done studies for brands that show upwards of 25 offers (or more) for the exact same “exclusive luxury” product online at different prices, from different stores. That’s right, a consumer types the name of a brand and product into a Google search bar, and he or she is immediately shown a dizzying array of confusing purchase options.
The natural reaction from any consumer is that a lot of caution and ample education are required before proceeding to make a purchase. If a sale was to be made by that consumer on that particular day, the overwhelming volume of offers for the same product at different prices in different formats likely caused high sales-preventing stress to the consumer. This is exactly why watch brands with third-party authorized dealers online need to diligently monitor the activities of those retailers but also to have the discipline not to create more relationships with distribution partners than the market can bear.
More than a few watch brands will be able to stomach the new expenses and skills needed to adopt a full direct-to-consumer model when it comes to online sales. Those brands will not readily be able to mix that with third-party authorized dealer sales online at the same time. Let me repeat that, in my professional opinion, if a watch brand wants to dedicate itself to a direct-to-consumer sales strategy online, it is an all-or-nothing decision that is incompatible with also having other third-party authorized dealer sales competing with it online.
That doesn’t prevent watch brands from having third-party authorized dealers in a traditional brick-and- mortar store environment. This is really the only way I can see a hybrid model working — where a brand mixes direct-to-consumer sales and selling product wholesale to authorized dealers. Concurrent with this, brands should also remedy a gaping hole in the logic of the current sales environment, to wit: It is easier to get a new watch discount online than in a store. This should be the other way around. All published prices for a watch online should be consistent. Brands and their partners should diligently fight to keep discounted prices from being published online. The published price for a watch online should never be more than about 5% from the retail price.
Private conversations, in person or on the phone, should be the domain of discounts, never in public. This, for me, was the most damaging irony of luxury watch sales for the last decade – that a retailer in person was barred from giving the same discount that any consumer could immediately find online. Discounts can be effective sale tools, but they must remain discreet if they are not to seriously erode valuable brand equity.
In sum, I want to stress that the romantic allure of keeping a sales margin for the benefit of a brand is fraught with expenses and stresses that most watch brands will not be able to stomach. Direct-to-consumer sales requires the adoption of news skills and ongoing marketing and human resource costs that most luxury watch brands today are not willing or able to absorb. Sharing a profit margin with an existing or yet-to-be created third-party retailer (especially online) is probably a wise choice for many watch brands.
Digital Authorized Dealers
Those digital authorized dealers will be tasked with expensive and time consuming duties, such as creating product demand within their markets, constantly investing in traffic to their website stores, tweaking their e-commerce platforms for peak performance, and employing, training, and motivating a sales staff who will likely be required to close a large percentage of sales. There are notable brands moving in this direction (though with some limitations that need to be addressed). Patek Philippe was the latest serious watch brand to announce that its authorized dealers were now able to sell Patek Philippe watches online.
While this news sounded impressive, the reality is that most of these authorized dealers already had e-commerce stores up and running, with listings for at least some of the brands they also carry in their store(s). Patek Philippe was just the latest to give them the “right” to list and sell those products online. This was already happening on the phone, so the ability to actually complete the transaction on the website was a token, at best. However, is this enough?
Probably not. At least for now, a number of traditional retailers with e-commerce stores aren’t doing much to market themselves, though this is slowly changing. My theory is that many of them are still faced with a highly competitive online market with a lot of discounts still out there impeding their sales efforts. Watch brands today cannot simply allow their existing authorized dealers to sell online in addition to their in-person activity. This might seem like it is a solution, but without a more curated and hands-on approach to segmenting and maintaining “digital markets,” current authorized dealers will encounter enough barriers to prevent them from fully investing in developing their presence in those markets.
The future for the traditional watch industry, when it comes to sales and distribution, is one of variety and diversity. There will be no one-size-fits-all solution for all brands – even if their price points are shared by others. Each brand will have to determine what sales and marketing approach makes the most sense for them. For some brands, that will be an entirely vertically integrated direct-to-consumer approach, and for other brands it will be a strict wholesale approach in which markets are tightly regulated to ensure fairness and opportunity for the dealers who invest in their inventory. Some brands will develop new models, but few brands will find success by haphazardly mixing everything together or harnessing the fallacious belief that they can make more money per sale and not have to work very hard at it.
The age of the strong multi-brand online watch store is upon us, but it has hardly matured yet. In my view, the market will eventually be dominated by such stores, but it will take a few more years before major players seriously invest in the platforms and the marketing required for best practices to emerge. Watch brands still thrive in times of predictability. Those will still need to wait. Now is the time for willing experimentation. What luxury watch brands have to gain is an online sales marketplace they can finally rely on to sustain and grow their profits.
About the author: Ariel Adams is founder and editor of aBlogtoWatch.