Will the Apple Watch kill the luxury watch industry?

According to Neil Cybart at Above Avalon (the world’s top ranked Apple analyst), it took just over five years for the installed base of the Apple Watch to surpass 100 million people. As shown in the chart below, its growth trajectory continues to accelerate. What does this mean for the ‘traditional’ Swiss watch industry, and how should they react? A 14-year-old who wears an Apple watch today, will have worn nothing else until they’re old enough to afford a Rolex – The question is, when this day comes, will they want one?

There is a long list of has-been corporations which many will be familiar with; Think about Kodak, Nokia, or BlackBerry who are now almost irrelevant in markets which they once led. Clearly, no brand or product category is safe from obsolescence. One thing I witness myself in the watch industry today, is how consumer loyalty is vastly overestimated. The only constant, is change; Everything changes, and typically it happens faster than brands expect, or are able to deal with.

The Quartz Crisis

The quartz crisis was the upheaval in the watch industry caused by the advent of quartz watches in the 1970s and early 1980s. Even though the swiss were making their own advancements with quartz technology, they were hesitant to fully embrace quartz watches. At the time, Swiss mechanical watches dominated world markets. In addition, excellence in watchmaking was a large component of Swiss national identity. From their position of market strength, and with a national watch industry organized broadly and deeply to foster mechanical watches, many in Switzerland thought that moving into electronic watches was unnecessary.

Others outside Switzerland, however, saw the advantage and further developed the technology. By 1978, quartz watches overtook mechanical watches in popularity, plunging the Swiss watch industry into crisis while at the same time strengthening both the Japanese and American watch industries. This period of time was marked by a lack of innovation in Switzerland at the same time that the watch-making industries of other nations were taking full advantage of emerging technologies, specifically quartz watch technology, hence the term “quartz crisis”. Between 1970 and 1983, the number of Swiss watchmakers dropped from 1,600 to 600!

Basically, were it not for the mergers which led to what was later renamed the Swatch group, many Swiss watch brands we see today would probably never have survived. Thanks Nicolas Hayek! As for the other brands such as Patek PhilippeVacheron ConstantinAudemars Piguet, and Rolex… they continued to play at the higher end of the market as luxury goods – they fuelled the desire for people to spend extreme amounts of money on luxury watches.

Since then, every other big player is operating out of the same playbook; They tweak complications, offer various case sizes and materials, create collectible limited editions, develop in-house movements to differentiate from other brands, and over time they simply increase prices. Is there any real innovation taking place? Probably not much.

I raise this topic of the quartz crisis because I often hear about this being used as an example of how the swiss overcame one such crisis, demonstrating resilience… along with the implication that they will weather the new tech revolution as well. Perhaps they will, but not by doing nothing differently.

The Apple watch

It took Apple about 6 year to become the biggest watchmaker in the world. According to Cybart, at the end of 2020, approximately 10% of iPhone users were wearing an Apple Watch. That said, the adoption rate of Apple Watches in the U.S. at the end of 2020, was approximately 35% of iPhone users. For illustration, if 35% of iPhone users around the world were to wear an Apple Watch, the Apple Watch installed base would exceed 350 million people. That’s 2.5x larger than the current installed base. Equally, if the Apple Watch were to become more user-friendly for non-iPhone users, this would also be a game changer. According to Cybart, a 10% adoption figure among all smartphone users around the world would also amount to 350 million people wearing an Apple Watch.

He also talks about how the Apple Watch can increase its potential even further: To identify the user, since it is always in contact with the skin; as a digital health advisor that constantly observes vital signs; and quite conveniently, as a support for Apple’s rumoured AR glasses, where the watch would handle the processing and computing, while the results are shown on the glasses.

So how did they do it? They focused on the customers! Apple built a platform which allowed them to continuously engage with their customers. Whether it is basic stuff like various watch straps, or buying back used watches when it’s time for an upgrade. If you bought the Hermes Apple watch, and a few straps every year with an upgrade, this would amount to the price of a Rolex Daytona in a few years, and during this time, you will have interacted with Apple countless times possibly spending money on apps and accessories too, perhaps even other hardware.

It gets even better for Apple, if you think about it. As personal health becomes even more topical, the ability to track your heart rate, oxygen levels, and other vitals using your Apple Watch creates a reason to never to take the Apple watch off. Not to mention, you can make calls with it, use it as a credit card, and even open and start some cars with it now – it is difficult to get rid of it once you’re used to it. Sure, some folks might wear two watches, but I suspect they are in the minority. Worse, still, is the first-time buyer is much more likely to be buying an Apple watch than a luxury Swiss watch.

The thing is, we have to question whether Apple Watches and mechanical timepieces actually serve the same purpose at all. Most collectors will agree that a mechanical watch is rarely worn solely in order to tell the time… hold that thought for now, but if you take one thing away from this section, it is to consider how much, and how often, Apple interacts with their customers.

Swiss watch brands

Morgan Stanley / LuxeConsult estimates of the top 50 brands’ turnover and retail/wholesale values in 2020

The year 2020 was among the worst years since the 1940’s in terms of sales volumes for the industry; I will use some facts and figures, as well as statements quoted verbatim from the Morgan Stanley report on Swiss Watches (March 2021) – thanks to @chiu.bio for sharing it with me.

Rolex was the top performer with sales declining ‘only’ 19% versus the 33% industry average” – but the key point is that they also declined. What also happened was a trend towards ‘premiumisation’ – i.e. higher prices; “Watches with a wholesale value over CHF 3000 (minimum CHF 5500 at retail), accounted for 70% (from 69% in 2019 and 34% in 2000) of all Swiss watch exports in value, an all-time high (while the segment only represents 10% of exports in volume)“. As the chart above shows, the Swiss only exported about 14m watches in 2020, compared with Apple’s 102m.

Arguably, selling fewer, but increasingly more expensive watches won’t work forever. An overhaul to their approach will likely be essential; This includes digital and retail innovations to improve customer engagement as well as new business models to reach new potential collectors and enthusiasts.

The ‘traditional’ retail experience for these luxury watches is often disappointing and non-transparent (absurd waitlists and bundling activity). More importantly, there is very little differentiation. Most of the big brands’ stories talk about their history and fine craftsmanship as key differentiators… but since all brands are saying this, it doesn’t do much for the consumer to differentiate, other than having to decide which brand’s story they like the most. In other words, the choice is down to emotions and randomness, or luck.

What could they be doing differently? I think non-independent brands like Vacheron Constantin could take a page out of the independent watchmakers’ playbook. If the goal is to secure repeat purchases and retain clients’ loyalty for years to come, potentially inheriting the business of these clients’ offspring too, then relationships matter more than anything else. Even in finance, the value of a business is the present value of future cash flows. What I don’t see at all, is even an iota of consideration being given to potential long-term clients of the brand. There is an unhealthy obsession with short-term sales metrics and feeding into the hype waves that come and go.

By way of example, I would suggest Vacheron offers a factory visit for collectors in each city, have a rolling schedule which covers the whole world over the course of a year or two. It doesn’t have to be free – people could, for example, pay for their own flights, and Vacheron could cover the rest – or even pay for nothing… at least they have an option to connect with enthusiasts who aren’t just coming for a free trip, but are coming to educate themselves and connect with the brand. F. P. Journe (the brand, not the man) hosts regular dinners with collectors in various cities, and regularly sends representatives all around the world to meet with potential clients and connect with them. That’s just one example, but I’m sure you get the idea.

I could write a whole post about what brands could do differently, but I will spare you and conclude by saying the current model is total nonsense. As the charts above show, they won’t last long if they carry on this way. (By ‘they’ I don’t mean all Swiss watchmakers, I mean the big brands who aren’t fostering long term relationships). The concept of ‘customer first’ is one which needs to be revisited, and simply expecting repeat business 5-10 years down the line from a single customer probably won’t yield good results; the brands need to increase engagement and build stronger relationships. Ironically, this will also give them the data they require to avoid the flooding of watches onto the grey market; something they claim to despise.

So what?

Now you might be wondering why I am discussing the Apple watch alongside luxury Swiss watches, as many will say this is not really a sensible comparison, as the target market for these products might seem worlds apart. The key point I would make for now is the one made in my introduction: Today’s 14-year-old who wears an Apple watch, will have worn nothing else until they’re old enough to afford a Rolex – So when this day comes, will they even want one? (Of course I say Rolex, but I include all other luxury watches in my intent)

A friend of mine who goes by the alias @IDGuy recently posted this video which is what led me to writing this post in the first place. He covers many interesting ideas, the first of which is planned obsolescence. While this isn’t a new concept, it arguably forms the foundation for perhaps the most important distinction between luxury mechanical watches and modern tech alternatives such as the Apple Watch: the watches we all love, are built to last far beyond our own lifetimes, and these ‘smart’ alternatives are not.

The main area of appeal, is the intimacy that develops between mechanical watches and their owners. Going beyond the faux-intimacy with a brand, which admittedly might be more real than faux with independent watchmakers for now, there is a certain irreplaceable connection which true watch collectors develop with their own timepieces. Apart from the fact that we power the watches via our own movement or input, these watches accompany the owner through meaningful life events and experiences, and come to symbolise memories and accomplishments. This is, in part, due to the value, and partly despite the value. What do I mean by this? It is rarely the case that people will go out and buy an Apple Watch to celebrate an anniversary or to use as a wedding watch for example, because it simply isn’t valuable or meaningful enough. The second part, ‘despite’ the value, is referring to how a memory being connected with a watch will be treasured regardless of how valuable the watch is – you might have been wearing a Hamilton Field watch when you first met your spouse; the memory is no less meaningful because you weren’t wearing a more valuable watch. Again, I doubt that people will ever ‘connect’ memories with smart watches – they are merely objects that serve a purpose… in the same way that you don’t remember what phone you had when you got married, you won’t remember an Apple Watch either.

This intimacy carries on from generation to generation. My 5 year old is already aware of how much I enjoy watches, and he takes a keen interest in them. One day when I pass away, I’d like to believe he will treasure them not only because I instil a love for watches in him (hopefully!) but also because they were close to me, he will enjoy them as though he is wearing a part of me too. Again, I don’t think this is possible with the tech alternatives. So as much as watches might seem rather anachronistic to the younger generation of future watch collectors, this might be the very reason they endure beyond our lifetimes, and remain appealing for years to come; They allow the future generations to remain connected to the past, to romanticise it and cherish it, long after we are gone.

Look forward to your thoughts.

-F

4 Comments Add yours

  1. Although it took a while to get to this point, I completely agree with your suggestion that luxury watchmakers are missing out by not building true relationships with their customers. And that this is insane considering that their entire business model is built on faith and belief of these customers. I love your suggestion about factory tours, visiting customers where they are, and recognizing that the myth of craftsmanship is not owned by any one watchmaker.

    Liked by 1 person

    1. kingflum says:

      Stephen! Always a pleasure to hear from you sir. I’m hoping that someone relevant to the brands reads this, although I ain’t holding my breath 😄

      Like

  2. T says:

    I am a strong believer in utility triumphs artistry. When the generation grew up with Apple watches reaches the age in which they can afford luxury watches, I am not so sure they will want it. By then smart watches will probably offers some amazing functions that people can’t do without.

    McKinsey consulting once recommended AT&T not to go in the cellphone business back in the 80s because they think it’s a small market, very few people need to have the ability to call or receive calls at anytime. The consultants only looked at what the phones could do back then and dismiss it. Same could happen with smart watches.

    As for leaving mechanical watches to children, yes I like the idea too, but at the same time I am not so naive that when I passed away, the first thing they might do is to sell the watches.

    I think there will always people who likes mechanical watches, just as there are people who are still into films, vinyl records, and etc., but I think the market will collapse leaving only a niche market and a few top brands standing. I believe human race moves forward, I just don’t see many people 50 years from now still using a mechanical device on their wrist.

    Liked by 1 person

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