What the Watches of Switzerland warning says about Rolex demand

Want a Rolex? Ha! A person doesn’t just buy a Rolex. There’s a process.

You’ll need to register your interest with an Official Rolex Retailer, whose window displays have a “for exhibition only” sign next to all the flashy wristwear. A salesperson will take your details while making discouraging noises about the scarcity of your preferred model, sometimes hinting that the waitlist might get shorter if you were to buy some trinkets and tchotchkes from the jewellery display.

Many months and jewellery purchases later you might hear back from the Official Rolex Retailer who’ll congratulate you on being selected to purchase a completely different model, after which you can post a “got the call!” wrist shot on Reddit while being careful not to break the clasp seal, so you can immediately list your new purchase for sale on Chrono24.

Yes, it’s madness. And maybe, it’s ending. Per MainFT:

Shares in luxury watch retailer Watches of Switzerland plunged by 25 per cent on Thursday after the company became the latest luxury group to warn on profits. Watches of Switzerland said it had “experienced a volatile trading performance in the run-up to and beyond Christmas”.

Chief executive Brian Duffy said that consumers had focused their festive spending on areas such as fashion, beauty, hospitality and travel. Revenue for its financial year is now expected to be between £1.53bn and £1.55bn, down from previous guidance of £1.65bn to £1.7bn.

In its statement, WoS blamed all its problems on the UK, where underlying demand is said to be weak and more reliant on promotions than expected. The waiting lists remain in place but unbranded jewellery and midmarket watches aren’t selling well, with no recovery expected in the second half, it said.

A midmarket slowdown might make WoS’s problems sound like another simple story of luxury-consumer caution. That’s until you factor in that Rolex provides 55 to 60 per cent of WoS’s sales.

On its post-warning conference call, WoS management added the important detail that while Rolex supplies were as expected, the models received weren’t as flashy as hoped. Too many deliveries from Switzerland have been steel rather than rose gold so average selling prices have taken a hit.

When Rolex last year bought Bucherer, WoS’s main rival on the high street, there were worries it would starve independent third-party retailers of prime supply.

Gradually, investors came to believe that the jewellers most vulnerable would be local smalltime operators with the sharpest sales practices. The parallel was with Nike and Adidas, which have used direct sales channels to kill mom-and-pop-owned sports retailers rather than bulk buyers. Rolex appears to be planning to grow production well above the estimated current rate of a million-plus watches a year so has to keep key partners including WoS onside, the logic went.

Today’s warning adds considerable doubt to that conclusion, says Peel Hunt analyst Jonathan Prichard:

It’s impossible not to wonder if the relationship with Rolex is in decline already: both WoS and Rolex were all out to say otherwise post the Bucherer deal, but this quarter’s allocation does beg the question. Either way, the change in product mix was extremely damaging and will likely continue to be so.

Rolex’s importance to WoS can’t be understated. The promise of a new or certified second-hand Submariner is what gets people into the shops, where they can be downsold a Breitling or a Montblanc Meisterstück pen. It seems, at least in the UK, the gambit isn’t working, which might speak of a wider downturn.

According to WatchCharts data, secondary market prices for fancy watches have fallen for seven straight quarters, having peaked in May 2022 (alongside crypto, which is probably not coincidental). Fourth-quarter prices were down 2.8 per cent quarter on quarter after a 5 per cent drop in Q3. Declines are across the board though the big brands — Rolex, Patek Philippe and Audemars Piguet account for about two-thirds of the market by transaction value — are bearing the brunt.

Pressure’s unlikely to abate for a couple of quarters yet. Dealers who bought watches near the peak are holding out rather than taking the loss, so there’s a lot of supply on the sidelines and steadily rising levels of distress. This shows up in WatchCharts’ median age of inventory data:

And because trading platforms make everything transparent, weakening second-hand prices affect demand for new watches.

Rolex updates its list prices for third-party retailers every January and sometimes again in September. There are hundreds of Rolex models made in unknown quantities and each country gets a different price list, with the privately owned watchmaker famously reluctant to provide even headline data, so working out whether prices are rising or falling isn’t easy.

Morgan Stanley takes a stab at it by averaging the best sellers by country and finds that for the first year since 2015, list price inflation has stalled. That includes in the US, where Rolex’s share of the lux market is approximately a 40 per cent share and growing:

Rolex’s apparent caution on 2024 might be because its lead versus rivals has narrowed in a wider market that’s decelerating.

It might also be because buying a Rolex with no previous owners is no longer the guaranteed win it once was: the second-hand Rolex premium in the US is down to about 20 per cent on average, from ~90 per cent in March 2022, WatchCharts data show.

According to Morgan Stanley, premiums are disappearing as watch flippers are exiting the market. That gives its analysts confidence there’s a trough in sight:

Transaction volumes for the Big 3 in recent years were significantly driven, we believe, by professionals who speculated on this increasingly liquid asset class (with the development of trading platforms). As with other asset classes, a tighter monetary environment (among other things) has translated to a normalization of prices (as some market participants had to off-load inventory). Overall, we believe that underlying demand remains solid – albeit weakening sequentially – and we take comfort in the fact that 1) despite the market downturn since 2Q22 which saw brands’ secondary market prices approach a three-year low, Patek Philippe and Audemars Piguet have exhibited prices around +30% higher than what they were three years ago; 2) value retention, while shrinking further sequentially, remains relatively high in absolute: the big three’s secondhand prices collectively commanding a strong +24.7% premium vs retail prices still in 4Q.; and 3) as for the primary market, based on our channel checks, while demand has sequentially moderated further (translating into shorter waiting times for brands for a number of Rolex models), overall the moderation is gradual.

Another possibility is that the secretive and uncommunicative market leader will choke off wholesale availability of its highest markup products while secondary premiums on cheaper stuff evaporate, so the hype bubble depressurises in realtime and third-party jewellers are left holding the bag.

It’ll take a while to figure out which outcome is more likely, though WoS investors aren’t hanging around to find out: the shares are at a four year low this morning, down 32 per cent.

Further reading:
— Is that the sound of a luxe watch bubble popping? (FTAV)