Imagine being a CD manufacturer when iTunes and Spotify emerged. It has not been much more comfortable for retailers of volume fashion and lifestyle watches as Amazon decimated the market with its combination of a massive range of product and deeply discounted prices. One company that adapted to survive is Watches2U thanks to a dramatic change in direction by its founder Danny Toffel. WatchPro’s Rob Corder met him to find out how.
Back in 2013, the market for watches priced at under £500 was worth half a billion pounds to retailers in the UK. In 2018, that had fallen by a quarter to £374,000 and was another 10% down in the first half of 2019, according to retail analyst GfK.
The market for fashion and lifestyle watches from the likes of Citizen, Casio, Seiko, Fossil Group, Timex, Sekonda and Accurist has changed beyond recognition in the past five years; buffeted by a combination smartwatches from technology companies like Apple and Samsung exploding and a price war triggered by the dramatic rise of ecommerce giants like Amazon.
Watch Shop, which was bought by Aurum Holdings (now The Watches of Switzerland Group) was a huge player, with sales as recently as 2016 of £45 million. Because it is now part of the larger group, it is no longer possible to pin down the precise turnover of Watch Shop today, but there is a strong clue in a statement issued by The Watches of Switzerland Group ahead of its stock market listing earlier this year. “Watch Shop, which sells classic and fashion watches online only, and The Watch Lab, which provides a UK network of watch repair branches, were businesses that were not considered core to the ongoing strategy of the Group. These businesses were carved out of the Group in December 2018. The combined revenue of these businesses was £25.4m and operating losses were £18.2m (including £16.9m of impairment) for the year prior to their sale,” WoS Group’s financial report described.
Much smaller than Watch Shop during the boom times was Watches2U. The company’s founder Danny Toffel told WatchPro in 2016 that he was progressing towards sales of £20 million, although the claim could not be verified because the company was not big enough to publish full accounts at Companies House.
Now Mr Toffel hopes he will exceed sales of £10 million in 2019 thanks to a dramatic change of tactics last year towards buying only discounted watches direct from brands.
“We will smash through £10 million turnover this year, hopefully around £12-13 million. We won’t get to £20 million in 2020, which was our target, but it will be close,” Mr Toffel reveals.
“We changed our business model late last year to cater to market demand. The future of this business is providing a vast array of choice for our customers at prices they will not find anywhere else,” he adds.
That mission statement led Mr Toffel directly to “off-price” watches, which brands now sell at clearance prices to the likes of Watches2U when they have not sold at full RRPs through other authorised dealer channels. Because they are discontinued, or a season or two out of date, the choice is much larger because it might be fed with watches from many years in the past.
If you ever shop in TK Maxx, you will know how the off-price market works in categories ranging from clothing to cosmetics. What you might not have known is that it is not necessarily TK Maxx discounting these lines, it is the brands themselves. This gives authorised dealers a better chance of selling current collections at full prices because only older product will make its way to the discounters.
“A lot of our selection now is different. For example we are now an official off-price partner with Fossil group and we no longer work with core seasonal products but follow shortly behind so we will no longer have the core ranges you would see in the high street,” Mr Toffel explains.
It is tempting to think of the off-price market as the seedy underbelly of the industry, but it has rules and regulations like the full-priced sector and is an increasingly important way of helping to maintain prices for authorised dealers of current collections.
Amazon and Ebay are often stigmatised as destructive unregulated channels, but they simply work to a different set of rules. The enormous reach of these global platforms is critical to Watches2U, and familiar territory to Mr Toffel. “The business started on Ebay and we understand that channel and Amazon well. We work through Amazon and Ebay with most of our brands. Some do not allow you to work through certain channels, and we respect that,” he says.
Rotary will not list watches from its most recent four collections going back two years directly with Amazon (although Rotary retail partners may choose to do so as third party merchants on the platform), the company’s chief executive Peter McKenna told WatchPro. This means the latest watches have a better chance of being sold at full price by other retail partners because the individual SKUs are not sold on Amazon.
Watch brands want to see their current collections on sale at high traffic brick and mortar stores where there is more full price activity.
Steve Brydon, general manager for Movado UK, told WatchPro last month that the industry cannot create desire for full priced watches without the presentation and salesmanship that physical stores deliver. “Our long term objective is directed by the knowledge that we need healthy retailers. They support us and we will support them. If your brand is not visible in the key accounts, it is very difficult to break into the market,” says Mr Brydon, who represents Hugo Boss, Tommy Hilfiger, Lacoste, Movado and others in the UK.
Watches2U battled to make its own brick and mortar stores profitable because without physical shops, certain brands would not sell it their new season collections. It was a battle that could not be won while watches were sold at such deep discounts online. In the end, resigned to the fact that if he could not beat the discounters, he would need to join them, Mr Toffel closed his stores.
“We had three shops, then two, then one. Since March, we have had no shops. We are totally out of retail. The shop was losing a fortune and retail is struggling. Certain brands, including a few Swatch brands, want bricks and mortar but we got to the stage where it just was not worth it. The margins were so thin and the costs so high that it was impossible to make a profit,” Mr Toffel concedes.
A shift in attitudes from the suppliers meant he could pivot entirely into ecommerce and particularly sales as a third party trader on Ebay and Amazon. “Once our main suppliers agreed that we could operate only online and did not need bricks and mortar to keep their account we were OK to close the door on that last shop. Anybody that demanded we have physical stores, we had to part company with. We lost a few brands when we closed the last shop, but our main suppliers have stuck with us,” Mr Toffel adds.
The final closure was personal. Named after Mr Toffel’s two daughters, ChrisElli in Brighton was an emporium of fashion accessories. “It had beautiful jewellery, sunglasses and prestige watch brands including Tissot and Raymond Weil and Swatch. It was a really nice shop but a complete disaster. I gave it five to six years and we kept saying we could not close it because we would lose the brands, but in the end we had to make the decision to let it go so now everything is online,” he explains with a shrug.
Terms of engagement change when a business goes entirely online. Bad reviews for substandard products, poor delivery or an unacceptable returns policy can kill a ecommerce business. Mr Toffel sweats over the small stuff, which has helped Watches2U achieve a 99.3% positive rating on Ebay where it has over 2200 watches for sale right now. On Amazon it has a 94% positive rating and has more than 4000 watches on offer.
Stock may cost less to buy through the off-price process, and does not gather dust in expensive high street shop cabinets, but it does have to sell fast because margins are so thin at this end of the market.
“Online right now in our world is all about getting the right watches that are in demand and getting exclusivity so that margins hold up. When you find them and hit that sweet spot, the watches really work. We even have a few brands that make special watches exclusively for us,” Mr Toffel reveals. “If you don’t get the buying right, you can get caught with watches that are absolute dogs and you have to lose money to get rid of them. I always try to buy watches well enough so that, even if I have to knock prices down to clear them, I will not lose money. I don’t mind breaking even, but I do not want to lose.”
Even Hugo Boss, which remains the most popular fashion watch for men in the UK, has off-price stock, which Watches2U eagerly snaps up. “We have been working with Hugo Boss since March, which is the first time we have worked with Movado Group brands apart from a few small orders in the past. We are getting more brands to buy into our vision as they can see the model works and that we want to build long term relationships,” Mr Toffel urges.
Those relationships might not be with Mr Toffel forever as he hopes to sell Watches2U. “In two or three years’ time I want to sell the business so I have to ensure it is trading at its maximum potential. This is a nice company, even in tough times like we are in now. Margins are tight, overheads are high, there is a recession going on and we do not know what Brexit is going to do to us,” he admits.
“The fashion watch market is still really tough. If I had not changed my business model last year by moving away from core collections, I do not know if I would still be in business today,” he adds.
If he finds a buyer, Mr Toffel will have more time for his current passions: his family, keeping fit and playing poker tournaments. When WatchPro met him, he was just back from his annual pilgrimage to Las Vegas where he enters high profile tournaments that attract stars of the game.
If I made enough money I might semi-retire and spend three days per week in Las Vegas. But I would get bored very quickly. I do not play as much anymore. I have cashed good money in major tournaments like a World Series Main Event [thousands of people enter tournaments and only after the majority drop out do the remainders make any cash]. I have probably broken even over the years. I used to play every night, but with the kids and my new focus on staying fit, I do not have as much time for it. I would rather spend time with the kids and play tennis,” Mr Toffel, now approaching his 50th birthday, says.