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CORDER’S COLUMN: Audemars Piguet’s direct to consumer and Rolex’s wholesale model both work

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Rob Corder.

I have long been an admirer of Rolex’s refusal to sell directly to consumers through its own boutiques or online.

Its consistent loyalty to retail partners has been repaid in spades, catapulting the brand to sales of $5 billion in 2019, more than double the next biggest watchmaker, Omega.

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Audemars Piguet’s CEO François-Henry Bennahmias may be convinced that its direct to consumer model is the only sustainable choice, but there is plenty of evidence to the contrary.

Morgan Stanley’s respected annual report on the Swiss watch industry is an interesting read on this topic.

In 2019 (we will brush over 2020 because the pandemic distorted the market) Rolex revenue was estimated at CHF 5.2 billion, and the implied retail value of sales was CHF 11.9 billion.

In comparison, Audemars Piguet turnover was estimated at CHF 1.2 billion from an implied retail value of CHF 1.7 billion.

My Bennahmias makes the point that AP is retaining a far higher percentage of retail sales value, which is unarguable, and this leads him to conclude that, “Retailers are going to have to be extremely good at what they do because, if not, the brands will take over.”

Today, 70% of AP sales are direct to consumer, compared to 20% a decade ago, so he is certainly taking his own advice.

AP and Rolex are two very different animals, not least in size. AP makes around 40,000 watches per year while Rolex produces roughly one million units in a normal year.

Comparing AP to Patek Philippe — both privately owned — is more like apples to apples because Patek makes around 60,000 watches per year and generated turnover of CHF 1.45 billion in 2019 with implied retail sales value of CHF 3.1 billion.

For every swiss franc spent at retail, Rolex makes 0.44 cents; Patek Philippe makes 0.47 cents and AP makes 0.7 cents.

Ergo, AP is right and the wholesale brands are wrong. Right?

All three companies are private, so we do now know their profit margins. What we do know is that Audemars Piguet owns many of its own points of sale including eight AP Houses around the world, while Rolex and Patek Philippe own virtually none.

Retail is incredibly expensive, as Mr Bennahmias points out, particularly if that retail is in the most expensive cities in the world, which is where he is focusing his attention.

For Patek Philippe and Rolex, it is multibrand retailers that bear the cost of owning and running stores and even converting areas of these stores into the sort of boutiques that AP favours.

AP is slightly disingenuous about how it describes its ratio of direct to consumer sales because it is also working with multibrand retailers — including Watches of Switzerland Group — to open boutiques, particularly in the United States.

The business model is different to regular wholesale because these boutiques are typically joint ventures with the partner and AP sharing the costs, risks and rewards (the rewards include AP co-owning the customer data).

My point is not that one model is better than the other, but that both have a long term future, which is what Mr Benhammias appears to be questioning.

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