November saw the first two major new store openings for The Watches of Switzerland Group in the United States with flagship showrooms for New York and Las Vegas. Despite strong growth in 2018, America is still an under-developed market where WoS Group CEO Brian Duffy thinks his proven formula of large, luxurious destination stores underpinned with kingmaker brands like Rolex and Patek Philippe will grab a large slice of a growing pie. The UK operation is also being reconfigured with an inexorable drive upmarket, as WatchPro’s Rob Corder discovered in January’s Big Interview with Mr Duffy.
WatchPro: Tell me how 2018 has been going for you in both the UK and United States.
Brian Duffy: We reported our first half financial results through to October, which was very satisfactory in terms of year-on-growth and in particular like-for-like growth for luxury watches, which was in the double digits in both the UK and US.
We are very happy with where we are in the UK and the strategy that we have been following with investing in stores and investing in technology, digital marketing and customer reach-out through our CRM system.
In the US the market has definitely turned positive since the end of 2017, so we have benefited from that. In addition we have implemented all our systems such as our SAP systems, POS systems and data analysis. We have also established great relationships with all of the major brands, which are really helping us in America.
WatchPro: If you look at the Swiss watch export data, they show that growth has almost vanished in the UK in 2018 — albeit in comparison to the record year of 2017 — but the opposite is true in the United States where 2017 was soft and 2018 has been booming. Do you feel you are outperforming the market in both countries?
Brian Duffy: Looking at Swiss watch exports can often be misleading over the short term because it only shows product coming into the market. That does not always reflect what sell-out trends are. In terms of the UK market that has been true throughout this year. You will find that stock levels throughout the market are definitely lower than they have ever been historically because sell-out has been stronger than the sell in that you see in the Swiss export data.
It is a similar situation in the US. We are seeing stock levels at very low levels because sell-out has been so buoyant. The world-wide demand for Swiss watches, in particular the powerhouse brand of Rolex, has been consistently strong in both markets and on a global basis.
We have been gaining share in an improving market over the last couple of years. And we will keep doing what we do, which if focusing on the customer experience, while continuing with our marketing and outreach, and see where that gets us.
WatchPro: Have you found that the UK has returned more towards a domestic market this year?
Brian Duffy: One of the great features of the UK market is that it is nationally strong. We love our watches, we are very knowledgeable. We enjoy watches; both men and women. So, yes, the tourist business is influenced by factors like exchange rates, politics and other matters, but domestic business can always be strong. We in no way concentrate on one or the other. The whole approach of our stores, particularly our big flagship stores, is that they are for everybody. If we target anybody at all, it would be a younger more contemporary customer who really appreciates an environment where they can browse, be helped if they want help, and enjoy the watches.
WatchPro: Your most recent store opening in Manhattan looks like it is aimed at a younger audience with its industrial loft style. Other than the look and feel of the store, is there anything else you did from a business perspective that you piloted there?
Brian Duffy: The common theme in all of our flagship stores, whether that is 155 Regent Street (London), Las Vegas and the most recent opening in SoHo, Manhattan, is that we really want to give space for our big brand partners to express themselves, so the stores need to be physically big. Every element of the store has to catch customers’ attention. We want them to look into every corner of each store, so everywhere they look needs to be exciting. We want the environment to be inviting and browseable. We also want to provide hospitality because, when people are spending a lot of money, we want them to have refreshments and entertainment. These are the common elements we want to deliver consistently in every Watches of Switzerland flagship along with, of course, the best selection of luxury watches.
Beyond these consistent elements, we also want to reflect the environment of where each store is located. The SoHo showroom is unique. The area is a legitimate luxury destination with the likes of Louis Vuitton, Dior, Chanel, Yves St Laurent, and they all work with the fabric of the buildings that are in the area. They are all ex-industrial buildings that are very spacious with high ceilings and work really well for luxury. We did not want to change the look and feel of the building, so the challenge was turning an industrial background into a wonderful world for Swiss watches. I have to say, with the guidance of our architects, we have done it fantastically well. Many of the original features are either still there, or we have recreated them, including a tin ceiling, beautiful wooden floors, cast iron columns, natural brick is all there. Downstairs we have the old ceiling that even has singes on it from various fires. It really works well.
Given that the store is in SoHo, and this is the first time there has been a multibrand watch showroom in the area, we have put more of an emphasis on the social hang out side, so there is a lounge area and cocktail bar. We have unusual watches including limited editions created especially for us by some of the brands and we have added space for vintage watches in collaboration with Analogue Shift, which has created a lot of interest.
I was concerned about it looking a little contrived, but it does not at all. It is our most beautiful store.
WatchPro: Creating impact and drama in places like Las Vegas, Manhattan, Knightsbridge and the West End of London is one thing, but how do you take that concept into every store, whether that is Mayors in Florida, Mappin & Webb or Goldsmiths in the UK?
Brian Duffy: The fundamentals do not change. The store has to be welcoming, not intimidating and inviting intrigue so that people look around. That said, we have to adapt to the environment and the brand proposition for each location. Good examples are 155 [Regent Street, London], where domestic and international customers do feel welcome. It is modern, slick, uses a lot of modern materials and encourages people to browse all the great brands. If you go across the road to Mappin & Webb, it feels softer, more feminine, a bit more traditional, but it still feels welcoming.
WatchPro: You have said there is no news or statement regarding the rumoured IPO in 2019, but The Watches of Switzerland Group is owned by private equity firm Apollo Global Management, which will certainly want to exit its investment at some point. Any future shareholders or owners will not just want to see top line growth that is likely to come from all of the openings and upgrades you are doing, but also growth in margins leading to substantial profits. Has there been any shift in tactics from building top line value to improving bottom line profitability?
Brian Duffy: Honestly no. Apollo have been wonderful in supporting us from the start. They have been totally on board with our strategy for investing in high quality growth and will continue to do so. It is a proven formula where profitability comes from growth and our focus has been on top line growth and seeing that flow through. Our shared conviction throughout has been that you have to do it right and believe that the consumer will shop for luxury when you give them a fantastic environment and line up of brands. If you don’t give them these things, they will not buy. There is not really a choice between dialling up and dialling down investment in luxury.
EDITORS NOTE: Since this interview, The Watches of Switzerland Group’s accounts for the financial year ended April 29, 2018, have been published and show operating profit jumped by over 35%. From the UK, alone, operating profit rose by 24% to £34 million.
WatchPro: Is the growth story in America as much about the quality of your teams, systems and marketing as it is about new stores?
Brian Duffy: The store environment is the biggest thing, but you really have to be engaged digitally as well. We are building up a CRM database, we have engaged with watch collecting groups. We have launched websites for Watches of Switzerland and Mayors in the United States, which provide information right now, but will be doing e-commerce from February. We are just working through the details of the payment mechanisms ready for that February launch.
Our digital presence will be another differentiator. Digital is hugely influential. Most people who come in store today are very well informed and know what they are looking for. Our customer experience that we provide; one of partnering and engaging with customers and enjoying watches together will drive satisfaction.
WatchPro: You collect vast amount of customer purchasing and preferences data from your systems. Can you share any insight into the consumer trends that you learn from this data?
Brian Duffy: The big brands that are driving the market, and which have demand exceeding supply, have been Rolex, Patek Philippe and Audemars Piguet. I am sure that will continue.
Across the market, the trends we are seeing clearly are coloured dials for men. Blue dials continue to get bigger overall. Men’s dial sizes have settled down in the 40mm to 42mm range, although there is some action at smaller dials like 39mm. When it comes to styles of watches, pilots’ and divers’ watches — sports watches in general — are very popular. Men’s is a steady market with relatively modest changes taking place in consumer tastes from season to season. Where we see the biggest changes are in the women’s market. We see a huge shift from quartz to mechanical watches. There is increased interest in non-round pieces like rectangles, which we have always thought was not getting enough attention until recently with launches such as de Santos from Cartier and Jaeger-LeCoultre’s continuing development of Reverso.
The average price point for women’s watches is rising. They are buying more watches with bracelets than leather straps. Within that, there is a trend towards sportier watches for women.
One of the biggest trends that we are trying to put more data behind is that women are buying more men’s watches. The industry has to look at not having a gender classification on watches. This is not really relevant in today’s market, in my opinion. I can well imagine this is being considered by the wider watch industry.
It is a unisex world these days in every respect. I think it is an issue of respect that we don’t tell people what type of watch they should wear from a gender standpoint. The industry should look at that.
WatchPro: Is the average age of customers changing?
Brian Duffy: When you analyse the data, the age has not really changed. It still kicks in at around the 35-55 year-old customer. The encouraging thing is that today’s millennial customers appreciate fine watches as much as any previous generation. Our approach is definitely skewed towards a younger customer and we will be where these consumers want to shop and research, whether that is in one of our flagships or online. Airport and travel retail is another perfect example of retail adapting to lifestyle rather than the other way around.
I often talk to my team about the philosophy of Wayne Gretsky, one of the greatest ice hockey players of all time. When he was asked bout the secrets of his success, he said that the skill is to always be where the puck is going, not where it has been. That is our approach. We will be where the consumer is moving towards. We anticipate it and get ahead of it.
WatchPro: is there any evidence that consumers who start wearing a smartwatch or fitness tracker move to more traditional timepieces over time?
Brian Duffy: Not that I would know. We had research done that found that only 1% of people who owned both a luxury watch and a smartwatch considered one to be a replacement for the other. That is corroborated by my own experience, which is that a smartwatch is for something different to a luxury watch, it is not a replacement.
WatchPro: There is no evidence that the luxury Swiss watchmakers are suffering at the hands of smartwatches?
Brian Duffy: No, I think that at lower price points it is something new, a new reason to buy, so at that level, which interests us progressively less, there is a trend in that category.
WatchPro: What do you think of this year’s Rolex drought? And I could include AP and Patek as well.
Brian Duffy: A lot of good opportunity comes from that. If the consumer can’t get exactly what they want, they still want to buy into the brand. We have been proactive. For example, we have availability of women’s watches so we made sure that we advertised that during the Christmas season. That is the right thing for us and others to do. It is a healthy situation for the industry for there to be such a high level of demand. Is it at the point where it is challenging the overall economics? I don’t think so.
We have stopped all interest-free credit on Rolex. Interest-free is a common industry-wide practice but given the supply issues, the demand for the brand, it is something that we do not feel is right for the brand and our business so we have taken the step to eliminate interest-free credit. We withdrew it from November.
WatchPro: Is that a way of managing demand when supply is so tight?
Brian Duffy: Rolex is a luxury brand and there really should not be financial incentives for buying a Rolex. It is a way of moving towards fully recognising that. We will see what happens, but we tested the idea before implementing it and found that it did not affect business at all. Most customers just switched to paying in cash and a smaller proportion took the option of interest-bearing credit. This means the consumer is bearing the cost of the credit, not having it subsidised by us.
It has not affected business, it is just the right way of doing business for a brand like Rolex. We have taken this step alone, but we would encourage other retailers to consider moving in the same direction. Of course it is not something that we can or should coordinate with others.
[Editor’s note: neither Bucherer nor Fraser Hart, the second and third biggest Rolex partners in the UK, offer interest-free credit for Rolex purchases.]
WatchPro: Interest-free credit is effectively offering a discount to customers, something that Rolex does not allow its authorised dealers to do. Is that your view?
Brian Duffy: It is a financial incentive that comes into the same category as other discounts and Rolex does not need a financial incentive for the consumer to buy it.
WatchPro: It seems odd that you are drawing attention to this because you are effectively saying that it is more expensive to buy a Rolex from you compared to everybody else.
Brian Duffy: Yes, that will be the case if others do not follow suit, but we are publicising it in the hope that others do see it as an opportunity. It is a tough market out there, Rolex apart, for everybody. Businesses need to be profitable so that they can maintain the level of investment they need, and this is a step in that direction.
WatchPro: In a nutshell, selling Rolex is now more profitable for you than it was when a customer paid using interest-free credit.
Brian Duffy: Yes.
WatchPro: Do you think we will see such acute shortages of Rolex in 2019?
Brian Duffy: We hope not. We are never given great visibility into the plans of the brands, but my sense is that in time the situation will become a bit more manageable.
WatchPro: Might it also resolve itself over time as Rolex continues to manufacture the hottest models like the GMT Master II, launched in 2018, for several years into the future? Once another hot watch is launched this year, does the herd move on?
Brian Duffy: If you take something like the Hulk, demand is still through the roof for it. For the industry as a whole, it is really a positive situation to have demand so strong.
WatchPro: Do you not fear these shortages are driving people towards the secondary market?
Brian Duffy: Maybe there is more of an interest in that market. If you cannot find the watch you want new, there is a temptation to look around and find it elsewhere second hand. Watchfinder is very good at what it does. It is genuinely pre-owned, not confused by anything else. We do also think the second hand market is under-played at the moment.
We are in the pre-owned business in the UK and it is doing very well for us, growing very fast online. It is not fundamentally what we do, which is representing our brand partners in luxury environments, but we do provide the service to our clients so that they can trade-in and trade-up their watches if they would like. Generally, the second hand market provides liquidity along with preservation of value, so it is important.