CORDER’S COLUMN: Is the Rolex boom a bubble?

As Robin Swithinbank persuasively argues in this week’s column, the irresistible economic consequences of limited supply and soaring demand are damaging some of the luxury watch industry’s biggest players, particularly Rolex, but also Patek Philippe and Audemars Piguet.

Sticking with the language of economists, this begs the question of whether extreme prices for Rolex’s most popular models — an ever-widening list that includes the Daytona, Submariner, Oyster Perpetual and GMT Master II — constitutes a bubble, with the associated risk of a crash?

An article on Investopedia describes four types of bubbles: stock market, asset, credit and commodity.

Rolex watches fall into the asset category, defined as industries or sections of the economy outside of the equities market. Real estate is a classic example. Run-ups in currencies, either traditional ones like the US dollar or euro or cryptocurrencies like Bitcoin could also fall into this bubble category.

The article goes on to describe the anatomy of a bubble over time.

Stage one is displacement, where money starts to shift  from one type of asset into another. A decade of low interest rates mean money in the bank is getting no return, so it has shifted into other assets: property, stocks and hard luxury goods such as art, antiques and classic cars.

According to the 2021 Knight Frank Luxury Investment Index, fine wine prices have risen by 127% in the past decade; cars are up 193% and watches 89%.

Revenge spending

The pandemic accelerated this trend because money that might have been spent on expensive holidays, meals out and other treats was available to spend elsewhere. And why not spoil yourself with a luxury watch?

This trend was even given a new definition: revenge spending.

Stage two of a bubble is the boom, where prices that were rising slowly at first get noticed by a wider population and they pile in, fearing everybody else is profiting while they sit on the sidelines.

Where an asset is plentiful or divisible, like commodities, stocks or crypto currencies, millions of people can participate as we saw with Bitcoin and may be about to see with non-fungible tokens (NFTs).

Fractional ownership

Hard luxury goods like watches are not plentiful or divisible (although fractional ownership may address the latter). They are scarce, and this makes attaching the bubble label problematic.

Unless something dramatically changes, it is likely Rolex will make around 10 million watches in the next decade.

Set that figure against the fact that 5.2 million people became millionaires across the world in covid-ravaged 2020, according to a study by Credit Suisse.

That takes the global total of millionaires to 56.1 million.

One of Rolex’s great tricks is to be the watch of choice for any newly minted millionaire, so 5.2 million people were potentially chasing the one million watches the business makes in a normal year, and that production was estimated to have been trimmed by around 25-30% by the pandemic.

So the boom in prices for Rolex may not be driven by speculators, so much as by genuine customers who want to reward themselves for their success.

This is why I do not think the next three stages of a bubble: euphoria, profit taking and panic, apply to Rolex.

Euphoria is defined as a phase where caution is thrown to the wind as asset prices skyrocket.

The sheer difficulty of scoring a unicorn watch, even at inflated prices on the secondary market, makes it hard to see how this could happen. Fractional ownership might take us there, with Daytonas broken down into tradable tokens, but it looks a long way off.

Profit taking could soften prices, but watches don’t really fit the model here either. Flippers will certainly respond if they see prices crest and begin to dip, but there are millions of real customers ready and eager to buy if supply rises.

It is almost impossible to see the market reaching the panic stage, which might explain why prices are continuing to rise. Without the prospect of profit taking or panic, buying a Rolex looks like a one-sided bet.

Can anything be done?

This may be controversial, but I believe that the vast majority of luxury watches are sold to genuine customers, and that measures to stop authorised dealers selling to flippers have been largely effective, particularly in this country.

But genuine customers are perfectly well-informed about the resale value of the watches they buy, and it would be irrational to ignore the fact that models from some brands are trading for double their retail price and others are selling for 25% off.

Demand for any watch with a secondary market value above its retail price will not weaken any time soon.

I do not think Apple Watch will decimate the Swiss watch industry in the way that quartz did. If anything, mechanical watchmaking is more appreciated in comparison to mass-produced gadgetry.

Apple earns more from watches than the entire Swiss watch industry, but the Swiss have survived and thrived. Demand is rising at more and more brands. Cartier, Omega and Breitling, for example, are all getting stronger.

If demand cannot be cooled as a way to bring sanity to prices on the secondary market, there are only two levers to pull to close the gap between primary and secondary market prices. You can increase prices at authorised dealers or increase supply of the hottest watches.

Prices have been rising at authorised dealers. A stainless steel Submariner was priced at around £800 in the early 1980s when the average wage was £6,000. The same model today is £7,300 and our average wage is £29,600.

So, in 1980, you could buy a Sub for about six weeks’ wages. Now it would take almost twice that time. Broadly speaking, if you take out inflation and wage growth over the past 40 years, retail prices for Rolex watches have doubled while the secondary market has flipped from a discount sector to a profit centre.

Recommended retail prices can and will rise again, but Rolex has no form when it comes to sudden hikes. In recent years, prices rises have been more dictated by currency fluctuations that cause imbalances between different regions.

For example, after the UK voted for Brexit and the pound tanked, Rolex (and all other luxury brands) chose to increase prices in this country to stop us having a huge advantage over the euro zone.

Interestingly, while prices on particular models have only crept up over several years, the average price for all watches sold in the UK has rocketed.

In the year to July 2021, the average selling price per watch was up by 63% over the prior 12 months, according to GfK. Why this has happened is a column for another day.

Increasing supply

Which leaves the issue of supply.

Patek Philippe president Thierry Stern has insisted he will not sacrifice production of precious metal high end complications in favour of steel Nautilus or Aquanaut watches, nor does he intend to increase production above the current 60,000 to 70,000 units per year.

So no help to cool speculative prices that saw a steel Nautilus in olive green sell for almost $500,000 earlier this year — a watch with a retail price of $35,000.

A full speed Rolex will reportedly make around one million watches per year, a figure the company never confirms, but could it make two million or three million?

Not a chance in the short- to mid-term future.

You only have to read accounts by experts that have visited the Swiss manufacturing facilities to appreciate sheer scale of the task to make the first million watches.

You cannot read this piece by Ben Clymer, founder of Hodinkee, and then think Rolex is sitting on some secret unused capacity or could simply turn up the speed on a production line to make more watches. It is not going to happen.

The conclusion, troublingly, is that the current prices are likely to be with us for some time to come.

It is not a bubble, but a structural result of relentless demand for a scarce commodity.