Are Luxury Watches Worth Their Prices?

[tag]

Here and there I read some saying that luxury watches are overpriced.

And I've been wondering sometimes... whether luxury watches are a rip-off or not.

So I want to share some thoughts on this topic.

Is the market competitive enough? 8 groups are controlling 90% of the world market.

First of all, what are luxury firms' profits? Richemont's operational profit represents in 2005 about 14% of its sales (Richemont includes brands such as Baume & Mercier, Cartier, IWC, Jaeger-LeCoultre, A. Lange & Söhne, Piaget, Vacheron Constantin, Panerai, Montblanc). Swatch, which is not only producing luxury watches, also has a near-14% margin. I read somewhere that Rolex's margin was about 25% but could not confirm this information since it's a private company.

A 10-15% margin is healthy but not exaggerated. So can we agree with these brands' spokesmen, that a genuine watch's prices are justified? Watchmakers invest in advertising, sponsoring, engineering & research; they use pricy materials and have tight quality controls. Sometimes manual work is involved. Sometimes production series are limited. In the end the product and its brand deliver the dream, design, social status and technical prouesse that could justify its price.

But the retail price hides huge margins taken by retailers. 20 to 25% goes to the wholesaler, 50% to the retailer ; that leaves only 25-30% to the watchmaker. So when you buy a $3000 PO, its factory price may be around $800... $800 for the design, marketing, materials & work force does not seem exaggerated but $1500 that goes to the retailer definitely is...

So why can't we find PO on the internet for, say, $1500? On the internet you'll get only 15 to 20% off. Because watchmakers control final prices. And they can keep prices up because of the demand. Demand is so strong that Omega for exemple raised its prices by an average of 7% for the past 5 years : a $3000 watch would have cost $2150 in 2001. That's more than cost of quality... In some case, they'll even sell better if they set a higher price. That's pure speculation : rich customers want exclusivity; price and limited editions provide it...

I find often that $400 watches look crappy but only a handful of luxury watches look gorgeous to me. I would rather buy gens than reps but don't have the budget to. So what? If I'm buying replica will it weaken the watchmakers I admire? Anyway I won't buy more genuine than I already do... On the other side could brands lessen their prices without weakening their image?

tag.

Edited June 2, 2006 by tag

[Indyclmbr]

Interesting thoughts and information on profits. I would think the makers could increase profits by revisiting their distribution or sales model. Of course, I think that model is what adds to their exclusivity, which is a high selling point for their targeted buyers.

I often find watches in the $400 price range that look good to me, but ultimately I snub them because they are quartz or because they have mineral glass. Swiss Army has some great looking watches, but for the price, I feel like a rep is a better purchase, QC notwithstanding.

Climb on.

[infinitime]

It would be interesting to see how much of the manufacturer's costs actually go to production, compared to costs going to marketing. Given that many source their parts from sub-contractors in Asia, there is every reason to believe that the cost of production has actually gone down in the last 10 years... I have no problems paying a manufacturer if the bulk of their costs actually went into production, but i would have an issue with companies like Tag Heuer and Omega spending millions for celebrity endorsements from Tiger Woods, Cindy Crawford, and Pierce Bosnan.

[tag]

It would be interesting to see how much of the manufacturer's costs actually go to production, compared to costs going to marketing. Given that many source their parts from sub-contractors in Asia, there is every reason to believe that the cost of production has actually gone down in the last 10 years... I have no problems paying a manufacturer if the bulk of their costs actually went into production, but i would have an issue with companies like Tag Heuer and Omega spending millions for celebrity endorsements from Tiger Woods, Cindy Crawford, and Pierce Bosnan.

Well actually I don't mind they spending millions with celebrities... That's part of the dream...

What I do mind is the 50% of the retailer who who less about the product than me !!!!!

[Pugwash]

Well actually I don't mind they spending millions with celebrities... That's part of the dream...

What I do mind is the 50% of the retailer who who less about the product than me !!!!!

He's not getting rich off that.

Besides, it's closer to 40%; the same your book shop, grocers and shoe shop make.

[jens]

I think the answer to the question 'are they overpriced' can be both yes and no. Looking from a technical point of view, the answer is in my opinion a clear 'yes'. From a marketing point of view - 'no'. Technically most luxury products are heavily overpriced, however they manage their brand, image, marketing and distibution extremly well (in practice perfect). As long as they manage to create and balance the demand for their products they are not overpriced - it's simply the added value of their brand name. You never pay for the product alone - you pay for the image and the organization behind it.

[shimside11]

It seems that alot of the price paid is for the intangible. Much of these companies stock in trade is the name and what it has come to represent. If you look at what it takes to "manufacture" the image, which includes keeping prices high, then what looks like super inflated prices is more understandable.

While getting into the whole watch thing, I had to abandon some strongly held beliefs which included the idea that prices reflected the worth of the goods ( including all the econ 101 stuff like value added, economies of scale, etc.).

I've come to the conclusion that half of the price issue is keeping out the great unwashed. Even if the item isn't really great, it's percieved worth is greater if it's priced out of reach of 95% of the people. "Sure, it might be crap, but YOU can't afford it, can you" either really pisses people off or makes them go out of their minds aspiring for it because of what it represents.

Years ago, I read in Fourtune magazine that a guy bought a rundown fleabag hotel in New York, did very minor repairs, stocked the place with old rotting European furniture and art, then jacked up the room rates by 1000% and marketed it as "old world elegance". What was a losing property beame one of the hottest destinations virtually overnight.

Bottom line...it will cost you about 50,000usd to join the Patek or VC country club...or you can get the rep. I just love this place.

[lagae]

I often find watches in the $400 price range that look good to me, but ultimately I snub them because they are quartz or because they have mineral glass. Swiss Army has some great looking watches, but for the price, I feel like a rep is a better purchase, QC notwithstanding.

I too agree that many of the replicas we purchase are better watches than what you'd buy in a mall for similar prices, but I wouldn't worry so much about the watch having a mineral crystal. It's interesting that many of the authentic watches I like that have MSRPs between $600 and $1K or so have mineral glass while our $200 replicas often come with sapphire, but I also realize that it costs very little to replace a crystal. If you like the Swiss Army or any other watch, don't worry about it having a mineral glass crystal. If/when the crystal gets damaged you can always upgrade to a sapphire cyrstal.

[mhinagoya]

It's really a matter of perspective.

Brand name watches are luxury items and as such, are priced at what the market will bear. If they were priced significantly lower, the manufacturer couldn't meet the demand. If the manufacturer then upped production to meet the demand, the label would lose the mystique.

In short, yes, they are worth what they cost simply because people are willing to pay it.

Another example is the Harley Davidson motorcycle. A couple of years ago, someone slipped a document out of HD that showed the production cost of a 1200 Sportster was about $800, yet they sell for $12,000. Motorcycles, like high-end watches, are luxury items and again, are priced at what the market will bear. Boats are the same way.

When we talk about luxury items, value is whatever the public believes it to be. The value of a luxury item has absolutely nothing to do with the cost of manufacture.

Bill.

[lagae]

He's not getting rich off that.

Besides, it's closer to 40%; the same your book shop, grocers and shoe shop make.

That bugs me the most - for all sorts of items. What value does that last retailer really add to a $4K watch (or $20 book or $100 pair of shoes or $4 pineapple?) The shoe store does add some value, you often would want to try on a pair of shoes before buying them, and a grocer does make it convenient for you to purchase most of your food items in one location. Book stores offer some value if you want some reading material, but often if you want a specific book they don't have it. It's just as easy for me to stay at home and order it online (for less) than to drive to a bookstore, only to be told they could order it for me.

And something like the $4K watch? As many people have already said, the sales people know much less about the watch than you do. Why should they make $1,600 on that $4K watch? What did they do to possibly justify adding that much to the cost of the watch? I'd just as soon purchase the same watch over the internet for $3K and let the manufacturer pocket the extra $600.

I don't mind paying for something, if I'm actually getting something of value for my money, but I find that many retail outlets add little to nothing of value, and if anything add inconveniences to a purchase. I would much rather purchase directly from a manufacturer if they're set up to deal with end customers, or at least purchase from the a wholesaler who purchases directly from the manufacturers and makes a fair profit for collecting orders and mailing out the correct items.

[Pugwash]

And something like the $4K watch? As many people have already said, the sales people know much less about the watch than you do. Why should they make $1,600 on that $4K watch? What did they do to possibly justify adding that much to the cost of the watch? I'd just as soon purchase the same watch over the internet for $3K and let the manufacturer pocket the extra $600.

Here we go. Would you buy a new Sub off eBay without a safety net?

When you buy anything from a shop, you're paying for that shop to be there. You're paying for those shopkeepers to stand around ready for that unknown time you'll walk through the door. You're paying for that store's Authorised Dealer sticker that they pay and train for so they have the watch in stock that you want. You're paying ground rent, taxes, rates, sick days, social security, insurance and security (for a jewelers, imagine) to ensure they can afford to stay in business to hold enough stock for you to um and ah over a wide range of watches. Imagine walking into a shop and having to pay a month in advance to pre-order something you saw a picture of in a catalogue, because that's the easy way to get the overheads down.

If selling luxury watches is such a cash-cow, why are you not doing it? No-one's getting stupidly rich owning a jewellers.

[shimside11]

The higher-end brands do a pretty good job of keeping the prices where they want them, including the profit margins for their dealers. If Rolex hears about one of their dealers offering discounts, the AD is in danger of getting the dealership pulled.

The thing that kills me is some of the lower brands like Invicta will inflate the retail so high that it's a wonder they keep any retail dealers at all. I saw a Speedway (Daytona clone) at my AD for 300.00. He was prepared to give me 15% off. I ended up getting it from an authorized dealer online for 130.00. Same thing for an Accutron Gemini chrono, 1200.00 at the dealer, 580.00 online. To Pugwash's point, there really is alot of overhead for a bricks and mortar shop, and the manufacturers that ignore it in their wholesale pricing do so at their peril.

The more exclusive companies really protect the image very well by keeping a close watch on what price you can get ahold of their product. Omega is trying to dig themselves out of neglecting that for several years (along with over-extending and diluting the product line).

Must...protect the...brand identity...arrrgh...

[Lollipop]

The higher-end brands do a pretty good job of keeping the prices where they want them, including the profit margins for their dealers.

Try Ulysse Nardin, their ADs often has to offer big discounts as their watches are not very popular.

If Rolex hears about one of their dealers offering discounts, the AD is in danger of getting the dealership pulled.

Many Rolex ADs do offer discounts of up to 20%, especially in places like Hong Kong and perhaps Dubai where competition is more fierce.

Of all the brands Louis Vuitton is the best at keeping the prices high as they don't have any authorised dealers apart from eluxury.com, they only sell their watches in their own boutiques therefore they're much more valuable at the 2nd hand market.

Edit: eluxury.com is actually owned by LVMH, the parent of Louis Vuitton so they're not actually an AD.

[supermanx]

I would buy a gen sub or po for 1200-1500. But as it stands now, I dont see that value that Rolex brings being worth 4500 more then the subs the dealers here provide. The movement on the current eta subs is not bad, and with a servicing its will perform date and time functions on par with the gen and should last as long. Also rolex "requires" servicing every 5-7 years currently costing ~$400.00 usd. Which will just about buy you a new movement/servicing and new crown/tube or a new rep + servicing.

[Indyclmbr]

Interesting discussion. Thanks for the info lagae. Funny. I think about mods for reps all the time. Never occurred to me to mod a genuine watch--even if it's just a Swiss Army watch. Not sure why.

Climb on.

[shimside11]

I would buy a gen sub or po for 1200-1500. But as it stands now, I dont see that value that Rolex brings being worth 4500 more then the subs the dealers here provide. The movement on the current eta subs is not bad, and with a servicing its will perform date and time functions on par with the gen and should last as long. Also rolex "requires" servicing every 5-7 years currently costing ~$400.00 usd. Which will just about buy you a new movement/servicing and new crown/tube or a new rep + servicing.

Very good point. Most of that extra 4500 is for the name. It's nice to have the option of paying quite a bit less for the name if you can get it.

[Pugwash]

Very good point. Most of that extra 4500 is for the name. It's nice to have the option of paying quite a bit less for the name if you can get it.

Supply and demand and, of course, what the market will bear. You're not 'paying for the brand', you're outbidding other people.

[Award]

Whether they are overprized or not depends on what you seek. If you are looking for a watch which shows the time, and that's all. Then your best watch would probably cost around $10 in your local store.

But when it comes down to design, and the quality of showing off a "power" object such as an expensive watch. Then yes, the prices are just as they should be

[eddhead]

Supply and demand and, of course, what the market will bear. You're not 'paying for the brand', you're outbidding other people.

Adam Smith acutally documented 5 conditions that must exist before Capitalism (and Supply and zDemand dynamics) can work in a free market. The main tenets of these condtions are that the buyer and seller have free access to the markets, that distrubution is unencoumbered, fand that full and equal information be available to all buyers, sellers, and producers. These conditions drive price equlibrium and are the the basis of "supply and demand" economics. Supply and demand economics do not work where a supplier controls pricing by systemically coercing retailers or by artificially controling supply (as would be potentiallybe the case in monoplistic or oligopolistic industrys). Based on what I have read hear, their is a claim that certain brands penalize retailers who discount thier prices to below list. Such punative measures constitute price fixing and corrupt the supply/demand price equilibrium. The "bid" dynamics do not work, because the sellers are not able to set competitive prices. If they were, prices would again rise, or more watches might be produced. The second situaton would lead to a diluting of the brand, but that is the way captialism is supposed to work.

[Pugwash]

If they were, prices would again rise, or more watches might be produced. The second situaton would lead to a diluting of the brand, but that is the way captialism is supposed to work.

Capitalism is supposed to work?

Seriously, if demand were waning, Rolex would have to lower their prices or suffer. Demand isn't dropping at all, so they have no reason to lower prices. Oh, apart from there's a case against them in the US that may force them to open up a bit, but that's another story for another day.

[eddhead]

Capitalism is supposed to work?

Seriously, if demand were waning, Rolex would have to lower their prices or suffer. Demand isn't dropping at all, so they have no reason to lower prices. Oh, apart from there's a case against them in the US that may force them to open up a bit, but that's another story for another day.

True on both counts.

Nevertheless, Rolex, who is undoubtedly concerned with protecting their luxury brand may not be incentivized to lower prices which may lead to additional sales but with lower unit margins. Moreover, they are not dealing with the general public, thier retail re-sellers are. Many retailers probably would reduce prices if it meant capturing additional share, (they tend to be less concerned with margin and not at all concerned with brand protection) if not for the pressure exerted upon them to maintain the list prices In that regard, Rolex may have different objectives than the retailers who sell their products to the general public.

You are correct though, it is difficult to guage the long term effects of potentially removing price restrictions which is exactly the point. By setting a price through the use of non-market based tools, the whole supply and demand dynamic gets whacked.

Edited June 19, 2006 by eddhead

[eddhead]

[

Edited June 19, 2006 by eddhead

[shimside11]

Anyone who would dispute Rolex's right to sell a product for what the market will bear does not understand the fundamentals of capitalism. Rolex does not have a monopoly on watches. (Do they know that you can get a watch that actually tells accurate time for 5.00usd at Walmart, with the same functions as a datejust?) Anything approaching price manipulation in luxury goods by the government should be laughed at in todays economy.

If you want to see a vision of the slippery slope created by artificial pricing, read Atlas Shrugged by Ayn Rand or just take a look at the Soviet experiment.

I would hate to see the day when a company cannot make a reasonably good product, mark it up so much that it defies any logic, and then sell it to rich, greedy people for what they are willing to pay. When that day comes we are surely in for a Randian nightmare.

[Pugwash]

You are correct though, it is difficult to guage the long term effects of potentially removing price restrictions which is exactly the point.

He who controls the supply sets the demand.

[archibald]

Yes. No. it depends. If you just look at the ratio between cost and MSRP, yes. If you just look at supply/demand, no since people are apparently buying Mullers, etc. If a guy gets laid repeatedly or verifies his professional success to others or whatever other reasons people buy luxury goods, well..I guess it depends on how much he likes getting laid, verifying his professional sucess, etc.

The bottom line is luxury watch makers stay in business because there are many people who think they are not overpriced. But thank god there are enough people who think they are over priced to support the rep industry, 'cause I definitely fall into the later category.

BTW, if you absolutely have to have a gen luxury watch, look at JLC and Dubey & Schadelberand--I own gens of both because IMO they are the best values (if you can use that word in the same sentence w/ luxury watches) since the have all of the features the highest-end watches have (manufactured and/or highly decorated movements, near 100% high-quality hand craftsmanship, gorgeous design, and a respected name) for much less money.