The November 2017 Strategic Case Study is based in the luxury watch industry. Strategically, the luxury sector in general presents unique and fascinating challenges, requiring a delicate balance between conservatism and vision. In VIVA’s full industry analysis, we explore this complex interplay in greater depth, shedding light on the Case Study through real world data and examples. Here, we introduce you to some key points from that fuller analysis…
We begin by looking at some raw, quantitative data to get a sense of where the industry stands, and where it’s likely to be going in the next few years. The first chart below traces luxury watch sales globally from around 2005 until the present. There are two notable changes year on year. The first, unsurprisingly, is the slump we see around 2008 – 2009, following the global financial crisis. However, the slump didn’t last long and there was quite a rapid turnaround from around 2010 onwards. This had a lot to do with the fact that in that period, China’s economy was growing rapidly, and a new rich elite was fast emerging. This helped insulate luxury watch companies somewhat from the adverse effects of the financial crisis, as they shifted their sales focus increasingly away from the west and towards China. However, the second notable development in this first graph is in more recent years. You can see that the growth rate of sales year on year is beginning to taper off. There appear to be a number of factors at play, but certainly the Chinese clampdown on bribery and corruption seems to have had something to do with dampening demand for luxury items. Moreover, China’s economic boom in general has been showing signs of a slowdown. This presents an interesting challenge for luxury watch companies in terms of short-term strategy—whether they should continue to bank on China, or whether the West’s recovery is likely to pick up pace in the coming years.
A second notable quantitative trend in the luxury goods sector pertains to the online market. The second graph below shows the overall share of the luxury goods market going to the online segment. As you can see, since 2003 it has risen steadily from 1% to 8%, and that trend looks likely to continue based on year on year growth for the last 5 to 6 years. What this means for luxury watch manufacturers is that online retail is something that they will have to keep an eye on, and consider in what capacity they should establish an online presence. The pre-seen seems to indicate that luxury manufacturers tend to avoid direct sales to customers, relying instead on authorised retailers to do the selling for them through traditional brick-and-mortar luxury watch/jewellery stores. Whether this traditional model will have to be revisited is an important strategic question. We explore this in more detail in the full analysis…
Real world companies
Unsurprisingly, most of the major names in this industry are either based in or associated with Switzerland. But perhaps less well-known is the fact that most of the most recognisable brands in this industry actually belong to major luxury conglomerates. There are four such conglomerates that dominate the luxury watch industry: two Swiss, and two French. LVMH (Luis Vuitton – Moet Hennessy) and Kering are two major French-based conglomerates, both of which combine luxury watch manufacture with other luxury wearables such as jewellery and clothing items. From Switzerland we have Richemont and the Swatch Group. Iconic watch brands such as Omega, Longines and Tissot all belong to the Swatch Group, with Cartier and Piaget belonging to Richemont. However, the most recognisable watch brand in the world is an independent private company. That brand is of course Rolex, the Swiss-based stalwart with a long tradition of luxury and mechanical sophistication.
One interesting strategic question which we explore in more detail in the full analysis is whether the conglomerate structure, or the independent private company is better suited to this industry from a strategic point-of-view – whether there aren’t certain inherent advantages to being one or the other. A number of considerations bear on this question. One of course is that of diversification. Certainly, many of the major conglomerates in this industry combine luxury watchmaking with the manufacture and sale of other luxury products. When we look at the revenues of the likes of LVMH and Richemont, as compared to Rolex, we can perhaps see the benefits of a diverse product portfolio, offering a kind of security that is not available to the hyper-specialised independent watchmaker. On the other hand, diversification can potentially compromise brand identity, and so a company like Rolex (or even Steelcast) would have to think very carefully before considering any such expansion. Conversely, some industry experts argue that there may be competitive advantages associated with being an independent, private luxury watchmaker from the perspective of shareholder behaviours. We discuss this in more detail in the full analysis.
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