If you’ve spent any time on the internet over the last 12 months it’s a sure bet you’ve come across the term “blockchain”. It’s been hyped as the solution to just about every challenge that exists with the storage and transfer of digital data. It promises increased security, increased transparency and a better user experience for all. Buyers, sellers and everyone in-between. But what exactly is blockchain? And how could the luxury watch industry benefit from it?
What Is Blockchain?
In (relatively) simple terms, blockchain is a decentralized, distributed ledger for recording transactions between two parties efficiently and in a verifiable way. It was invented in 2008 by an anonymous individual (or group of individuals) using the pseudonym Satoshi Nakamoto. Nakamoto wanted to create an unhackable public ledger for the cryptocurrency Bitcoin. A place where both sides of a transaction could be recorded with complete transparency. Every time new information (a block) is added, it is timestamped and encrypted. Each new block is linked to the previous one to form a chain. This ensures the integrity of the previous block is confirmed, all the way back to the original genesis block. Because the information is stored across multiple computers, as opposed to one single place, it cannot be altered or removed. It can however be accessed by anyone within the network.
In the last few years, large companies have begun to explore the potential benefits of blockchain technology outside of cryptocurrencies. Among them is LVMH, the world’s largest luxury conglomerate, which recently announced it will start using blockchain to track products through its supply chain. The primary goal of the platform, dubbed “Aura”, is to create a robust and reliable way to prove the authenticity of these products. From raw materials all the way up to finished goods, everything will be recorded, validated and tracked.
Fighting Fakes By Increasing Transparency
It’s no secret that the luxury industry has been plagued for years by counterfeits. And with the rise of online resale sites, the problem is only getting worse. Various estimates put the value of annual sales of fakes well into the billions. Watches are particularly prone to this issue, as are handbags.
A major contributor to the problem is the lack of transparency within these highly competitive industries. When a product is sold outside of an authorized retail network – an increasingly popular trend driven by the rise of e-commerce and secondhand retailers – there is no easy way for the consumer to independently verify its authenticity.
A decentralized database maintained by a reputable source (i.e. a brand or a collective of brands) and accessible to the public would go a long way to addressing this issue. That is exactly what LVMH envisions its Aura platform will provide. Eventually, all the group’s brands will be on there (presumably including Swiss watch brands Hublot, TAG Heuer and Zenith). It will also be opened up to competitors to use.
Likewise, there is a growing demand from consumers for increased transparency around how products are made, including where the raw materials come from. The diamond industry has been quick to respond. De Beers, the world’s biggest diamond producer by the value of its gems, worked with five other diamond manufacturers to develop the blockchain platform Tracr, which launched in 2018.
Diamonds can be tracked on the platform from the mine all the way to the shop floor to guarantee their authenticity and verify they do not originate from conflict zones where gems may be used to finance violence. The open-source technology was made available to the rest of the industry at the end of last year.
Arianee, a Paris-based non-profit, is planning to launch a database similar to LVMH’s later this year, which will be collectively managed by participating brands. Among its advisors are representatives from Richemont and Kering. This might indicate that an increasing number of luxury watch brands will soon begin to use blockchain as part of their supply chain management. What that will look like in practice, however, is anyone’s guess.
How Blockchain Might Work For Luxury Watches
One thing that clearly differentiates luxury watches from most other luxury categories is the breadth of raw materials used in their construction. Even relatively simple, time-only mechanical watch movements can be comprised of hundreds of individual parts. While brands of course need to track each item for inventory and quality control purposes, it’s hard to imagine they would make this information available on a public database.
For one thing, customers might not like knowing how many components are sourced from outside the company. And indeed, from outside of Switzerland. After all, the requirements for the “Swiss Made” label state that 60% of the production costs of a watch taken as a whole must be Swiss-based. That leaves 40% that could potentially come from elsewhere. Of course, this does present an opportunity for truly vertically-integrated manufacturers to show that their claims are more than just marketing hyperbole. But even this seems doubtful. Arguably what will be appealing to customers is access to information about their individual watch. For example, who was responsible for final assembly, how the watch performed in quality control tests, when it shipped to the retailer, serial numbers, and so on.
That’s what Vacheron Constantin is betting on, at least. At the time of writing, the storied Maison had just announced a new certification process supported by blockchain technology. As the oldest watch manufacturer in continuous production, VC’s archives date back to the creation of its first timepieces. This means it can certify any timepiece ever produced.
Now, the manufacturer is taking that certification process to the next level with a digital certificate stored on the blockchain. From May 2019 onwards, all models in the Vintage Le Collectionneurs series are being delivered with a physical certificate of authenticity as a well a digital one.
This enhanced digital certificate will enable to new owner to access more detailed information about their watch. It will also allow them to register and track any service and repair work undertaken on the watch. And of course, this digital proof of ownership is easily transferable to the new owner if the watch is sold.
Based on the Vacheron Constantin example it’s easy to see the potential benefits to the buyer and seller alike. Retailers working with brands could use blockchain to track each individual watch received into inventory all the way through to after-sale servicing. An immutable digital record could be created at the time of sale giving the customer access to all relevant paperwork and providing unalterable evidence of the authenticity of the watch.
If and when the customer chose to sell the watch, or trade it in to upgrade to something new, it would be possible to bring up its entire history at the click of a button. This would help with negotiating deal terms while also making it easier to validate the authenticity of the watch. Both parties would be able to make better informed decisions, leading to greater transparency around pricing on the secondary market.
This would also theoretically make it possible to track watches on the grey market back to their source. The grey market has been a contentious issue for a long time in the luxury watch industry. It’s something of an open secret that high volumes of genuine models are sold each year through unauthorized channels. What’s less clear is how they end up there in the first place. Whether the industry wants this level of transparency, however, is a different question.
Who Should Have Access?
The underlying premise of blockchain is that it is anonymous but public. That means the information contained in the chain can be accessed and validated by anyone on the network. But how realistic is this in the highly competitive luxury watch industry? On the one hand, a public database where anyone can look up any watch at any point to verify its authenticity (but not its ownership) could go a long way to fighting the spread of fakes.
At the same time though, there are a number of potential pitfalls. For example, if it’s possible for anyone to trace which models were sent to which retailers, it might cause some consternation. Particularly, if it becomes apparent that one or a handful of retailers seem to be getting outsized allocations of sought-after models. Likewise, the increased visibility distributors would have over the inventory of their retail partners could lead to more efficient stock replenishment. However, it could also lead to more pressure to take on additional stock based on current sell-through rates and so on.
Of course, this type of transparency could make it significantly easier for customers to track down and buy the watch they want, when they want. As opposed to going on a lengthy waiting list at their local retailer. But this presents its own set of problems.
Deciding what information should and should not be stored on the blockchain and who should have access to it is no doubt going to be a complex and lengthy process. For smaller businesses, the perceived benefits probably don’t justify the costs. For big brands and large retail groups, however, which process hundreds if not thousands of transactions every month, this solution may prove to be very attractive indeed.
So, is the luxury watch industry ready for blockchain? Only time will tell.
About the author:
Tom Mulraney is a 10-year veteran of the watch industry. He is the publisher and editor of The Watch Lounge, a digital magazine with a unique take on the world of luxury watches. www.thewatchlounge.com